According to the Bureau of Labor Statistics, the median pay for lawyers in 2018 was $120,910 per year. At first glance, it would appear that lawyers should have no problem saving for retirement. But there are several reasons why lawyers need to be proactive about their retirement planning.
First, a good portion of a lawyer’s income for the first 10 years or so will often go toward paying off student debt. The most recent statistics from the National Center for Education Statistics found that the average law student graduates with $145,500 in student debt. And in Student Loan Planner® consults, the average law school debt has been closer to $200,000.
Also important to keep in mind is that you may earn less than the national average if you choose to work at a small, private firm as opposed to a BigLaw firm. And if you do work at a large firm, there’s a greater chance that it may have a mandatory lawyer retirement age.
For all of these reasons, lawyer retirement planning is important. If you’re a lawyer or will become one soon, it’s never too early to begin thinking about your retirement strategy.
Top 3 lawyer retirement planning strategies
If you want to make the most of your lawyer retirement savings, here are three strategies that may help.
1. Start with your 401(k)
If your law firm offers a 401(k) plan, that’s where you’ll generally want to begin your retirement savings. There are several reasons for this.
First, there’s a good chance that your firm may offer a match. Law firms have been known to contribute more to employee 401(k) plans than nearly any other industry. If your firm provides a match, that’s free money that you don’t want to leave on the table.
Second, 401(k) plans have higher contribution limits than traditional and Roth Individual Retirement Accounts (IRAs). For lawyers under 50 years of age, the employee 401(k) contribution limit for 2019 is $19,000. And there’s a combined limit of $56,000 for employer and employee contributions combined. IRAs, however, have a much lower contribution limit of $6,000 in 2019 for anyone under 50.
Finally, 401(k)s have higher annual compensation limits. Anyone making less than $280,000 a year can contribute to a 401(k). But Roth and traditional IRAs have a lower $203,000 annual compensation limit. Depending on your marital status, your limit could be even lower.
2. Contribute to an individual IRA if you can
Once you’ve maxed your 401(k) plan, you’ll want to begin funding a traditional or Roth IRA (as long as you’re not above the max income limits). One of the great things about IRAs is that they can be opened with virtually any robo-adviser like Betterment or discount broker like Vanguard.
The general rule of thumb is that young investors will benefit more from a Roth IRA. But if you think your adjusted gross income will be lower in retirement than during your working years, deferring taxes with a traditional IRA may not be a bad decision.
3. Open a low-cost, taxable brokerage account
If you’ve maxed out both your 401(k) plan (if available) and an individual IRA and you still want to save for your retirement, you may want to open a taxable account.
Again, you should only go this route after you’ve exhausted all of your tax-sheltered account options. You’ll also want to limit brokerage fees and expenses. Betterment, for instance, charges a modest 0.25% annual fee on its accounts.
And if you’re looking for low-cost index funds, Vanguard could be a great choice. According to Vanguard, its index funds and exchange-traded funds (ETFs) are 73% cheaper than the industry average.
Lawyer retirement planning when you own a private law practice
If you own your law firm, you won’t be able to take advantage of an employer-sponsored 401(k) plan. That may seem like a bummer at first. But being in this position also means that you can start a self-employed retirement plan.
Here are three self-employed retirement plans that you may want to consider:
Simplified Employee Pension (SEP) IRA
With a SEP IRA, you can contribute as much as 25% of your lawyer income each year, up to an annual max of $56,000.
But you’ll need to contribute the same percentage to your employees’ plans as you contribute to your own. A SEP IRA could be a great choice if you have a solo firm, but it could get expensive if you have several employees.
Savings Incentive Match Plan for Employees (SIMPLE) IRA
For firm owners who have a few junior attorneys on their payroll, a SIMPLE IRA may be a better self-employed lawyer retirement plan.
With a SIMPLE IRA, the 2019 annual contribution limit for lawyers under 50 is $13,000. You’ll also generally be expected to match at least 3% of your employees’ contributions.
Yes, the annual contribution limits are lower with a SIMPLE IRA than a SEP IRA. But the lower matching requirements could make this a more affordable choice overall.
With a solo 401(k), self-employed lawyers can make both “employer” and “employee” contributions.
On the “employee” side, you can contribute as much as 100% of your earned income, up to $19,000. And on the “employer” side, you can contribute up to 25% of your income each year. Combined, solo 401(k) plans have a total contribution limit of $56,000.
SEP IRAs only allow you to make employer contributions (25% of annual income). Because of this, you’ll need to make at least $76,000 in order to contribute $19,000 or more per year. If you’ve just begun your law practice, you may not make that much yet. If that’s the case, you might be able to contribute more each year with a solo 401(k).
Retiring from law practice with a plan
If you love what you do, you may not want to think about retiring from law practice. But whether you plan to retire five years or 55 years from now, it’s crucial to be prepared. Most importantly, make sure that you’re saving for retirement on a consistent basis.
Looking for advice on lawyer retirement planning when you have student loans? You may want to set up an appointment with one of our Student Loan Planner® Certified Financial Planners. Book a consultation today.