The Financial Life of a Lawyer
Executive Summary
Over a lawyer’s career, they will face a multitude of important financial decisions. Traditionally, financial advice was for those with a high net worth or for people near retirement. The problem is that a lawyer will have to make a lot of financial decisions before they achieve a level of financial success where they can access traditional financial advice. The timeline highlights many of the most common financial decisions a lawyer will face over their life like paying off student loans, choosing employer benefits, starting a family, buying a home, and making partner. The blog also shares considerations to know when facing these decisions. The takeaway is to be thoughtful when making financial decisions because these decisions, especially early in a law career, can have positive or negative consequences that can compound over decades.
Traditional financial advice has historically served people with a high net worth. Naturally, that meant financial advice tended to disproportionately help older people nearing retirement because most young professionals did not have the assets or net worth to afford financial advice.
The problem with predominately focusing on pre-retirees is that young professionals do not have the access to financial advice that they need. Without financial advice, young professionals can make financial mistakes early on in life that will negatively effect their financial future.
Consider two professionals, one is 5 years out of law school (25 years from retirement) and the other is 5 years from retirement. Both make a financial decision that reduces the annual growth of their net worth by 2% each year until they reach retirement. Assuming a pre-decision average net worth growth rate of 8%, at retirement the professional who is 5 years from retirement would have a roughly 9% lower net worth than if they had not made the bad decision. The professional 5 years out of school will end up with roughly a 37% lower net worth than they would have if they had not made the decision that reduced their annual growth rate by 2%.
Making bad financial decisions when someone is young has an outsized effect on a person’s financial future. While financial advice should still be available to pre-retirees, the need for financial advice for young professionals is undeniable.
When you draw out the financial decisions lawyers will face over their lifetime, it becomes clear that most of the financial decisions happen at the beginning of their career. As shown above, once you account for the extra time for financial mistakes to compound plus a higher amount of important financial decisions, the need for lawyers to work with a financial planner is evident.
Financial Events of a Lawyer
Graduate Law School
A lawyer’s financial life starts after law school graduation. Upon graduation, the first financial decision a lawyer will make is regarding how to repay their student loans.
Typically, a graduate has 6 months to start repaying their student loans. While borrowers might have 6 months, it is not always advised to wait.
Lawyer’s need to consider all repayment options including:
Standard 10-year repayment
Income-Driven Repayment plans
Public Student Loan Forgiveness
There are pros and cons to each plan. Consult with a student loan professional to better understand your options.
First Job
The first job as a lawyer is where lawyers will learn many of the skills they will build upon throughout their careers. It is also filled with many first-time financial decisions.
Employer benefits
Employer benefits are a part of a lawyer’s compensation, so maximize their value. Consider taking advantage of healthcare benefits, retirement plans, insurance, and other employer-specific benefits.
Start retirement savings
The more time you save for retirement, the higher the chance of having enough money to retire. Starting a 401(k) or similar retirement plan provides you with a tax-advantaged account to put away your retirement savings.
A rule of thumb is for lawyers to aim to save 10-15% of their income for retirement. If lawyers can save more than 15%, then they should. Having more retirement savings is a good thing because it gives you additional financial flexibility later in life. If lawyers cannot save 10% currently, then it can be a goal to increase their savings rate when they can.
Negotiate Salary
It never hurts to ask for a raise. By taking time to research comparable salaries from similar firms, you will know how your salary compares to your peers.
Once a lawyer knows the salary amount that they think is fair, they need to ask for a raise and convey to their employer how giving a raise will benefit the firm. Always try to frame a negotiation as a win-win.
Lawyers should review their salary to benchmarks on an annual basis to ensure their salary remains fair.
Bonus Planning
Bonuses offer a strong financial incentive for lawyers to work hard. These bonuses can be quite lucrative and offer opportunities to invest or spend the bonus.
Bonuses are variable so the amount of bonuses paid can fluctuate. It is important for lawyers to control their spending so they do not rely on bonuses to pay for expenses.
Establish Spending Levels
Lawyers are likely financially behind their undergraduate peers who started working instead of pursuing law school. Lawyers may find themselves spending money to catch up to what their peers have. While this is common for lawyers, avoiding this mentality will go a long way towards having a better financial future.
It is important that lawyers start their careers with good spending patterns. If lawyers focus on spending on important things plus saving an adequate amount consistently, lawyers will be able to enjoy today without sacrificing their future financial health.
Rent
Lawyers can now afford better housing than in law school but lawyers need to avoid spending too much on rent. A rule of thumb is that lawyers should aim to spend no more than 30% of their income on rent.
A lawyer making $150,000 a year should aim to spend no more than $45,000 a year ($3,750/month) on rent.
Car
Along with upgrading where they live, lawyers may also want to upgrade their car. When deciding on a new car, lawyers need to decide between leasing or buying & how much to spend.
This decision can come down to how long the lawyer intends to keep the car. Lawyers should also consider if they prefer to get a newer car often or if they are okay with driving the same car for many years.
Insurance
As lawyers make more money and increase their net worth, they must decide how to protect their assets from insurable risks. A list of insurances to consider as a lawyer are:
Health insurance
Homeowners and Renters insurance
Auto insurance
Life insurance
Liability insurance
Lifestyle Expenses
Whether it is going on weekend trips or just spending money on things you want, lawyers can now afford to spend more on their lifestyles than in law school.
While they may be able to spend more, lawyers should still keep in mind how much is being spent on lifestyle expenses.
Once the essentials expenses are paid for and savings have been taken out, the remaining income can be spent however someone wishes. It is important to prioritize the essential expenses and saving before spending any excess income.
Student Loans
After selecting a repayment plan, lawyers need to account for the monthly student loan payment. These payments can represent a substantial monthly expense that must be paid on time.
Emergency Fund
Life is full of uncertainties. We do not know when an emergency will happen but we should be prepared. Lawyers should aim to save between 3-6 months of essential expenses.
Marriage
After marrying, lawyers will experience some financial changes. Lawyers need to account for a second income in their spending levels. Spending patterns also change when there is more than one person spending for the household.
The financial decision process changes in marriage too. Couples need to have honest conversations around their finances and decide how to best spend and save their money together. Disagreements about money is one of the main reasons for divorce.
Start a family
The choice to start a family is a personal decision. Once the decision is made, then lawyers should consider the financial impact of that decision.
Decide between one or two working spouses
Once lawyers begin to have kids, they must decide how to care for the child. Some households will decide that one parent will stay at home and raise the kids. One parent staying home will save money on child care but it will also result in the household returning to a one income household.
Other households may decide to both continue working and pay for child care.
Childcare
All parents want the best for their children. Childcare is no exception. But childcare comes at a cost. Over 50% of families who pay for childcare pay over $10,000 per year.
This expense multiplies as families have more than one child.
Childcare does not end when the kids reach school age. Childcare for school children can include after school care, sports teams, tutoring, and other extracurricular activities.
Modify spending levels for children
Childcare is not the only expense when you have children. Expenses like food and healthcare insurance will increase. Entertainment expenses will change too.
Parents might also decide to work less hours to spend more time with their kids. This decrease in income will also affect the household’s spending levels.
Save for college
Whether you were able to pay for law school or you had to take out loans, you are aware of the significant cost of higher education. Most parents do not want their children to have to worry about paying for their education. So for many lawyers, saving for college can be a priority.
Saving early and often for college gives lawyers the best chance of keeping up with the rising costs of college. There are different plans to consider when saving for college including:
529 plans
Education Savings Accounts
UGMA/UTMA accounts
Traditional investment account
First Home
For many lawyers buying a home is a top priority that comes with some important financial decisions. Buying a home is usually a better financial decision for lawyers who think they will live at the home for more than a few years.
When financing a home, lawyers need consider how much they can afford to pay on a monthly mortgage payment. They also need to determine how much to save for a down payment. While you can buy a home with a low down payment, it may not always be the best decision because it may increase the total amount paid over the life of the mortgage. Then lawyers will need to apply for a mortgage.
Buying a home includes some additional costs that often exceed what lawyer’s previously paid in rent. All maintenance and repairs will need to be paid out of pocket. Lawyers should consider increasing their emergency fund savings to account for any large home expenses. Insurance will also change from renters insurance to homeowners insurance.
Buying a first home is an important financial milestone for many Americans. Since mortgages can last between 15-30 years, it is important that lawyers are buying homes for the right reason.
Make Partner
For lawyers who work up through their firm, they eventually face the choice of becoming a partner. When a lawyer decides to become a partner, there are some important considerations they should be aware of.
Financing the Buy-in
Law firms typically have buy-ins for new partners. By buying into the partnership, the lawyer owns a portion of the law firm and its profits. If a lawyer has saved enough for the partnership buy-in, they may consider paying for the buy-in in cash. If the buy-in is more expensive than the lawyer can afford, they can finance the buy-in through a loan. These loans can be acquired from a bank or some firms have buy-in loans through a certain bank. Lawyers should understand all of their financing options as well as the partnership terms before agreeing to joining.
Tax Planning as a Partner
Once a lawyer becomes partner, their tax situation changes. Instead of being paid a salary, the partner will begin to be paid as an owner. Taxable distributions come from the partnership hopefully each year. These distributions can fluctuate from year to year depending on the performance of the firm.
The complexity of a partner’s taxes will also increase. Additional tax documents will need to be filed for the partner. It can be advantageous for partners to seek out tax professionals who can assist with their tax preparation and tax planning.
Changes in Insurance Coverage
A lawyer’s insurance needs also change when making partner. Now there is more liability for the partner to insure against. Lawyers should review their liability coverage upon becoming a partner to ensure they are adequately covered.
Lawyers should also consider their healthcare options. The health insurance options may change upon becoming partner, but the need for coverage is still there.
As a partner, future earning potential also increases substantially. Lawyers should consider updating their life and disability policies to reflect this increase.
Life Changes
Lawyers will experience many life changes throughout their lives. These changes can happen any time and sometimes without warning. Many times these life changes can be emotionally intense and lead to further financial decisions. Lawyers need to be aware that emotions can influence financial decisions, sometimes resulting in less than ideal outcomes. It is important to be aware of these possible changes and their financial consequences.
Change Jobs
Turnover can be high at law firms. Whether it is burnout or the desire to try something new, most lawyers will change jobs over their career. In between jobs, lawyers need to still pay for their essential expenses. Lawyers should ensure they have an adequate amount of emergency savings to pay for this gap in income.
Open Own Firm
For lawyers with an interest in entrepreneurship, starting their own firm can be a big decision. Lawyers need to be aware of the costs that go into opening a firm. They will need to ensure they can pay those business costs plus household expenses while they have low or no income.
If the firm is being opened with other partners, lawyers need to consider the risk of liability from other partner’s decisions. Updating insurance coverages and adding professional liability insurance should be considered.
Divorce Planning
Divorces are common in the United States. While no marriage intends to end in a divorce, many people will have one over their lifetime. Divorces usually include more than one important financial decision. These decisions include:
How the assets are split between the spouses
Child Support
Alimony
Payment of legal fees
Lawyers will also have to account for the loss of a second income and any decreases in household expenses.
Second Marriage
Remarrying is also another common life event for Americans. Lawyers who remarry have to consider changing their spending levels. This includes accounting for the new spouse’s income and spending.
Just like in the first marriage, lawyers will have to change the household’s spending decision process.
Second marriages with kids need to consider the estate consequences of their new spouse and other heirs. Lawyers should decide how they would like their assets to be distributed and then consult with an estate attorney to implement the decision.
Taking Care of Parents
As parents age, they may need additional support. Sometimes they cannot afford to support themselves so family members offer to support them. Deciding to financially support a parent and help take care of them is a decision that some lawyers will have to make over their life.
When caring for a parent, lawyers should be aware of the additional costs incurred. You cannot care for your parents if you cannot afford your own lifestyle. Adjusting spending levels may be necessary.
Kids go to College
When kids graduate from high school, they must decide to start working or go off to college. For households where the kids go to college, this can be a significant expense. Parents need to decide how to pay for this expense. If the parents saved for college, then either part or the full amount of tuition may be paid off.
For parents without college savings, they must decide which student loans to borrow from and how much to borrow. Parents can choose from private student loans, federal student loans in the child’s name, and federal student loans taken out by the parents.
Taking on student loans for kids can add a large liability to the parent’s balance sheet and affect their own financial future. Parents should fully understand how these loans will be repaid before taking on loans on behalf of their kids.
When kids go off to college or move out of the house, parents also need to reconsider their spending plans and how they live their lifestyle. Without kids to support, it can reduce the spending of the household. It is also a time when parents can reevaluate how they spend their time. This can result in changing spending levels to spend on new priorities.
Buying a Second Home
At some point over their life, lawyers may be interested in buying a second home. When looking to buy a second home, lawyers should consider the use of the home. Is it being bought as an investment, a vacation home, or both?
This question helps determine how to finance the purchase of a home.
A second home also adds complexity to a lawyer’s tax situation.
Retirement
Retirement is no longer about reaching a certain age before quitting work. Instead, retirement is the point in time when the lawyer’s assets can pay for all the future expenses a lawyer will incur. This allows lawyers to live a life that no longer worries about finances.
But retirement does not always mean that lawyers stop working. Lawyers may actually love what they do and wish to continue that in some capacity after retiring.
Retirement Distributions
To pay for retirement, lawyers build up a nest egg of assets over their careers to sell over the rest of their lives to pay for their living expenses. Lawyers need to understand that their retirement savings may change over time and that the distributions may change too.
When making distributions, there are important tax consequences depending on where the distributions are coming from and how much is being distributed.
Lawyers also need to monitor their total savings so that they can avoid running out of money before they die. How much is saved and invested can be a significant factor in deciding when to retire.
Social Security
As early as 62 and as last as 70 is the age range for Americans to begin collecting social security. Deciding when to begin taking social security payments is a significant financial decision because the amount of each check is determined by how long you wait to start collecting. If the lawyer has a spouse, deciding how and when they will begin collecting their social security checks is important too.
Social security adds to the income of a retired household so lawyers need to understand how that affects spending in retirement. Lawyers should also be aware that these social security payments are taxable.
Healthcare
Unfortunately, as we age we are more susceptible to medical issues. Since retired individuals no longer have employer health care plans, retired lawyers need to obtain health insurance another way.
Medicare is a part of retired healthcare coverage but not everything is covered by Medicare. This may require lawyers to buy additional insurance to cover the gaps in medicare.
Lawyers should also consider long-term healthcare insurance because chronic medical conditions may be quite expensive if they last over multiple years. This will hopefully save the household from spending most of their assets at the end of their lives.
Death of a Spouse
The death of a spouse will change the lifestyle of a surviving spouse. End of life care can be expensive so it is possible the surviving spouse may face a financial hardship.
Following the death of a spouse, the surviving spouse may also have more time to spend on other priorities, which may affect their spending levels.
The surviving spouse must also consider altering their insurance coverage to only cover one person.
Updating beneficiary information and the will of the surviving spouse is also important for estate planning purposes.
Estate planning
Upon death, a lawyer’s assets will transfer to their heirs. Taking care of estate planning while alive allows the individual to have control over this distribution in an effective and tax-efficient manner.
Lawyers should have a will and updated beneficiary information even at a young age.
Adding trusts and other estate planning strategies can ensure that the estate avoids probate. Heirs will appreciate this.
The financial life of a lawyer is filled with various financial decisions. Each decision and its future financial impact is unique to the lawyer themselves. Consult with a financial planning professional before making a financial decision.
Developing Financial offers a comprehensive ongoing financial planning solution that offers anytime financial advice for young lawyers. As shown above, not only are there a large number of financial decisions for young lawyers to make in the early years of their career, but the potential future impact they can have highlights the importance of young lawyers considering financial planning early in their career. Schedule a Complimentary Meet & Confer through the button below to learn how the Developing Financial Process can help you navigate these financial decisions.
Disclaimer: Nothing in this blog should be considered financial advice or recommendations. Your questions are unique to you and your own personal financial circumstances. You should consult with a financial professional before making a financial decision. See full blog disclaimer.