Financial Finesse: When Shrinking Assets Require New Fiscal Strategies
By Sarah Kellogg
As the economics of the legal profession have churned in recent years, attorneys have watched their personal fortunes fall and rise and fall again, the result of a fickle economy, law firm downsizing, and a convulsing stock market. There is no doubt the home mortgage crisis and the ensuing economic collapse have produced a financial climate that is marked by dread and skepticism. And the financial markets—difficult enough to maneuver when they are bullish—have become nearly impossible to forecast as a hiccupping bear.
For attorneys, the toll has been remarkably harsh. Between 2008 and 2011, the average net worth for attorney households declined by more than 30 percent nationwide, and the number of lawyers with a net worth of $1 million or more shrank by 22 percent, according to recent surveys. Meanwhile, attorney households saw the value of their primary residences shrink by some $200,000 between 2008 and 2011.
Attorneys who are reluctant to open their quarterly missives detailing the state of their investment portfolios can take heart—they’re not alone. The average American family’s household net worth declined 23 percent between 2007 and 2009, according to “Surveying the Aftermath of the Storm,” a March 2011 report from the Federal Reserve Board examining the effect of the economic collapse nationwide.
Financial experts believe that the decline in personal wealth in attorney households is obviously a factor of the current state of the economy, but it also suggests that attorneys may not be doing enough to manage their own wealth and would benefit from additional instruction and guidance from an outside professional, one with substantially more experience and success at dodging the landmines of a bad economy.
And that help might be arriving just in the nick of time. Money coaches believe there is no end in sight to the current economic rollercoaster ride, making it even more difficult for amateur investors—no matter their educational pedigree—to pick winners and avoid losers. The complexity of today’s erratic economy demands far more financial knowledge and nuance than the heady days of the 1990s when attorneys saw their personally managed investments shoot the moon.
“In a volatile and range–bound market like [the one] we have been in for the last decade, and perhaps will be in for the next several years, you obviously want to depend quite a bit less on the market’s direction for return,” says Robert S. Scherer, managing director at The Scherer Group at Graystone Consulting, a Washington, D.C., financial consulting firm. “Instead, it is never more important to be diversified and to have investment managers that exhibit skill and use that skill to be flexible, to employ a wide opportunity set, and to be equal parts opportunistic and risk–sensitive as prices and values dictate. There are many examples of portfolios that have been able to navigate the last decade successfully using these tactics and capabilities.”
Wealth advisors say the challenge today for lay investors managing their own portfolios is finding the proper balance, not necessarily of asset categories but rather of self–certainty in their decision making. Attorneys and other sophisticated professionals often fall victim to a fatal overconfidence when devising their financial plans because they are highly educated, entrepreneurial, and confident of their infallibility.
“With some attorneys, there’s the disease of hubris,” says Marvin H. McIntyre II, managing director of the Capitol Wealth Management Group at Morgan Stanley Smith Barney in Washington, D.C. “There’s a strain of that affliction that also tends to be in the medical profession and in the accounting profession. They’re making tough decisions in the workplace, and they figure they know all of the alternatives and the degree of risk they’re taking in their portfolios and strategies. I guess they’re fine until they’re not, but really, how do they keep up with everything they need to know as investors and still bill 80 hours a week?”
It’s a question for many attorneys as they look to manage their often–substantial portfolios while juggling hectic professional and personal schedules. Even for financial advisors, keeping in touch with ever–changing financial strategies influenced by the creaky world economy, the machinations of Congress, and the whims of other investors is difficult. Who can really blame skilled attorneys for trusting their own proven gut instincts and work ethic before seeking assistance from outsiders in guiding their portfolios? Yet logic demands careful consideration and an unbiased approach to creating a financial strategy for a lifetime.
“Professional service people, especially lawyers, are indeed different from other segments of the workforce in that [so many of them] generally bill by the hour,” Scherer says. “Thus, there is a more direct connection to the adage that ‘the harder you work, the more successful you are, and the more money you can make.’ That means you probably have less time to devote to looking after your own life, including money and retirement. Lawyers, if anyone, are the most logical candidates to have a professional advisor who pays attention 24-7-365.”
Financial planning isn’t a hobby for late nights or Saturday mornings before the kids’ soccer game while hunched over a laptop, experts say. Nor is it an activity that should be governed by pride or emotions. Money coaches recommend hiring a professional advisor, of course. But equally important is committing yourself to a lifetime of learning about investing and financial self–sufficiency. When financial well-being is at stake, for you and your family, it is better to set aside ego and bring the professionalism of the workplace to bear on the drafting and execution of an unfailing financial plan.
More Years, More Money
In this era of economic retrenchment and uncertainty, the time–honored principles of retirement planning and the philosophies that rule ambitious investors have evolved to reflect the reality of the 21st century—nothing is certain, except change and periodic bouts of investment grief.
Americans are living longer today than at any point in history, and that poses challenges for retirement planning. Where men once only lived into their sixties, improved education and health care have resulted in longer life spans. From 1980 through 2007, life expectancy at birth in the United States increased from 70 years to 75 years for men and from 77 years to 80 years for women, according to the Centers for Disease Control and Prevention. The gap in terms of race also diminished during that period, narrowing from eight years to six years between white males and black males, and from six years to four years between white females and black females.
And extreme longevity is more than a circus act these days. More Americans are living to 90 and beyond, and by 2050, there could be nearly 9 million people 90 or older in the United States, the U.S. Census Bureau reports. In fact, the number of 90–year–olds nearly tripled between 1980 and 2010, rising from 720,000 to 1.9 million. Of that figure, 74 percent were women.
Living longer, Americans also are deciding to work longer, both by choice and out of necessity. The seventh annual Retirement Survey by Wells Fargo concluded that 80 really has become the new 65. Setting a goal to retire at a specific age—the customary target of 65—is now a dated concept, due in no small part to the federal government’s decision to implement a retirement age that has been steadily creeping upward for the baby boomers. Social Security’s full retirement benefits kick in at age 65 for individuals born in 1937 or earlier, 66 for those between 1943 and 1954, 66 and change for those between 1955 and 1959, and 67 for those born in 1960 and later.
With the government pushing individuals to work longer, many Americans are complying and choosing work over retirement. Seventy–six percent of those polled by Wells Fargo said they expect to work until they have saved enough money to retire, regardless of their age. Only 20 percent believed it is better to retire at a specific age, whether they have enough savings or not.
Moreover, traditional retirement savings arrangements have evolved in recent years. The defined benefit retirement plan, a staple of major company benefits two decades ago, is in decline as employers try to limit their future financial responsibilities. Instead, they offer the defined contribution retirement plan, shifting the risk of prudent investing to employees. Between 2007 and 2011, the number of employers who offered defined benefit pension plans declined from 40 percent to 22 percent, while the number offering defined contribution retirement plans rose from 83 percent to 93 percent, according to the 2011 Employee Benefits report from the Society for Human Resource Management.
With many Americans looking at longevity and an extended work life, wealth advisors say financial strategies need to be adjusted to reflect these realities. When it comes to investing, despite flashy stories to the contrary during the boom years, slow and steady wins the day. Experts know that may not appeal to high–flying professionals who yearn for 20 percent annual returns, but it is a no-nonsense approach to financial planning—and it works.
“One reason we like working with lawyers is most of them are fairly bright and they catch on fast. Once you point out the logic of what you’re recommending, they usually say go ahead,” says Alexandra Armstrong, chair and founder of Armstrong, Fleming & Moore, Inc., a Washington, D.C., financial consulting firm.
“I’ve always said that the type of law someone practices really influences how they invest or at least view investing,” Armstrong adds. “Litigators are comfortable with risk, while estate planning lawyers, because they’re patient people, they want to move methodically through the decision–making process. A public utility lawyer is used to debating something for five years before it gets resolved.”
Putting off critical financial planning decisions until later in life may be human, but it can be risky. The hair–trigger market combined with high unemployment, debt troubles in Europe, government debt, and wage stagnation all contribute to an unstable climate where wealth can be wiped out in a flash. Grand slams in investing can happen with amateurs, but they shouldn’t be depended on to build family financial security.
For example, Michael J. Johnston, who recently retired as executive vice president of The Capital Group Companies, Inc., a Los Angeles–based mutual fund manager that is second in size to Fidelity, says a savvy investment advisor could find new prospects in the market now and next year, taking advantage of opportunities that will emerge from pent-up consumer demand for houses, cars, and appliances. However, he notes that monetary gossip or risk-averse tactics that often drive market whims and deflate portfolios might more easily influence an inexperienced hand.
“At times like this, when there’s so much bad news, any scrap of bad news is amplified and people react,” Johnston says. “If we were not depressed but manic instead, any scrap of good news would be amplified and people would react.”
Early Career Years
Understanding the life cycle of financial planning for attorneys is critical to developing a foundation for wealth management across a lifetime. At each career stage, individuals must set financial goals that are practicable and aspirational, always with an eye toward guarding against unforeseen events while preparing for retirement.
First, young lawyers must save money. Newly minted attorneys, fresh from law school and eager to embrace a legal career and their new salaries, may be impatient to spend their much–deserved earnings, but wealth coaches counsel moderation and sacrifice. Retirement might seem like a distant shore, and contingency planning seems frivolous for those in full health with nary a cloud in the sky, but everyone needs to start somewhere.
“It’s all about balance in your twenties,” says Steven Thalheimer, a certified financial planner and owner of Thalheimer Financial Planning in Silver Spring, Maryland. “Hopefully, right out of school, they’ll start earning a decent salary. They’ll have to live frugally for a few years to concentrate on the repayment of their college loans, but they should not give up saving for the longer and shorter term. At this age, the balance is between living, saving, and paying down debt.”
Money coaches say the most important factor in financial planning at this stage is establishing good financial habits. After years of financial deprivation, a spending spree is quite naturally in the offing, and young lawyers could spend their first few months of financial solvency buying cars, clothes, and homes to decorate their new lives. Even less lavish spending can drain checking accounts as new lawyers in pricey Washington try to live within their means, more or less.
Thomas A. Haunty, coauthor of Real Life Financial Planning for Young Lawyers: A Young Lawyer’s Guide to Building the Financial House of Their Dreams, encourages young attorneys to restrain their desires to spend excessively on the trappings of the lawyer lifestyle—rich dinners, high-priced tech devices, and trendy vacations—even if they balk at his staid advice. “When they get out of school, I encourage them to live on 80 percent of what they make and park away 20 percent,” says Haunty, a senior partner at North Star Resource Group, a financial consulting firm in Madison, Wisconsin.
It’s at this stage where the much talked about magic of accumulation really begins. If the goal is to have $1 million at retirement—a conspicuously modest goal for most professionals today—then a young attorney with more than 30 years to save can reach that goal by putting aside $158 a month, benefiting from compounding interest and a lifetime of disciplined saving. If attorneys delay their monthly savings strategy until they reach 35, that monthly nut becomes $442, and at 45 it jumps to $1,300. If an attorney fails to lock into a retirement savings plan until he or she reaches 55, the monthly savings rate is more than $4,000. When contemplating a lifetime of savings, the earlier the better.
At an earlier point in their financial lives, young attorneys should be fully participating in their employer’s tax-deferred saving plans, a qualified 401(k) or 403(b). For 2012 the Internal Revenue Service set the maximum amount an employee can contribute to one of these plans at $17,000. For those 50 or older, the catch-up contribution in 2012 is $5,500. These plans provide the foundation for a strategy of aggressive investing and saving for the long term.
Financial advisors suggest that one easy tip for increasing savings contributions over time is setting aside a portion of annual salary increases for savings. The best candidate for those dollars is a cash account for contingencies where individuals should set aside between three to six months of their annual earnings.
Next to adopting a two-pronged savings strategy—one line of savings for retirement and another for contingencies—a critical component of financial management for young lawyers is managing debt. Student loans are an emotional and financial burden, with many young lawyers carrying a load between $100,000 and $150,000 in law school and undergraduate debt. Financial advisors debate whether recent graduates should race to pay off their loans quickly or leverage the low interest rates and liberal repayment schedules. Often a young lawyer’s tolerance for carrying debt is a determining factor.
Everyone agrees, however, that the first financial action to take with student debt is consolidation. By rolling the loans together into a single note with a low interest rate, young lawyers save money and hassles. “With younger lawyers, it’s about explaining the basics,” Haunty says. “When they come out of law school, they’re so freaked out with their student loan debt, they say they’ve got to pay it off immediately, but that’s not necessary. I try to tell them their biggest problem isn’t debt. It’s accumulating assets.”
For lawyers with young children, this is a prime time to establish a college savings plan to set aside money for their educational futures. Regardless of whether the children want to go to a public or private school, these types of 529 savings plans—the District of Columbia, Maryland, and Virginia all have college savings plans—frequently have tax benefits and provide a simple method for saving. As usual, it is key to consider personal financial goals and the expenses and risks associated with these plans before investing.
For lawyers at midcareer, financial planning should be more about growing their net worth than establishing a fiscal foundation. With large, successful law firms, partners have the opportunity to generate significant amounts of discretionary cash to finance their lives and channel into their savings. Of course, this is the time when prosperous attorneys also invest in boats, country club memberships, and vacation homes. Those purchases are reasonable, and even deserved by many accounts, as long as they maintain their commitment to savings, financial advisors say.
“Lawyers tend to live a really big lifestyle because they have this big income,” says Annette F. Simon, a principal with the Garnet Group, a Washington, D.C., financial consulting firm. “To sustain that lifestyle, they really need to do the math and start planning early. If somebody is making $300,000 today, which is not unusual for a D.C. attorney, and they want to live that way in retirement, they’ll have to put away close to $8 million by the time they retire. People don’t think that way. They just keep pushing off the hard work [of saving] until later on.”
This is an opportunity, however, to double down on the saving by putting off the purchase of a second or third home and earmarking those dollars for retirement. With the kids off to or out of college, this also might be the first time to consider how much it might actually cost to live in retirement. With a yearly 4 percent withdrawal rate the norm in retirement, it’s important to calculate how much annual income it will take, $100,000 or $300,000, to enjoy retirement.
For equity partners in a law firm, this period can be especially complex. Because equity partners contribute to the firm’s capital account, financial planning must take into account these contributions and disbursements. Required contributions can come as a one-time payment financed from personal savings or by a bank loan (often guaranteed by the firm), or they can come over time by making payments from salaries, draws, or withheld year–end profits.
“It seems like such a no-brainer to be an equity partner in a law firm,” Simon says. “Capital accounts are like an enforced savings program, and attorneys feel they have a greater stake in the firm. When they choose to retire, they know they’ll get that money when they leave the firm.”
During the recession, a number of firms issued capital calls to their equity partners, asking for increased contributions or requesting that they limit distributions to preserve the accounts. This delicate partnership dance requires attorneys to determine the impact of satisfying capital calls on their finances, such as ascertaining the effect mortgaging a home or pledging other assets as collateral would have on their goals for financial independence.
“When the economy was in trouble and law firms started going under, being an equity partner became a big risk,” says Simon, noting this is especially true for smaller firms where there are fewer individuals to share the pain. “Like a home mortgage, the loan follows you. People who have borrowed the money to fund their capital account contribution are in bad shape if the firm goes under, and they still have to pay back that loan.”
This midcareer period is often an ideal time to diversify investments. With more income, established attorneys can access sophisticated investment vehicles, branching out into novel stocks, bonds, real estate, and cash ventures. Once again, money coaches say it’s critical when determining asset allocations to consider the level of risk, the time horizon before retirement, tax implications, and long–term personal objectives.
Not everyone is positioned to take these kinds of risks in midcareer, however. Those who have done little planning before reaching middle age are true latecomers to the party, and they face challenges in building serious wealth in the time left before retirement. “Most people come to see us when they’re in their fifties,” Armstrong says. “It makes sense. The kids are through college, and they think their big expenses are over. They realize that it’s time for them to think about retirement. When you ask them when they want to retire, they usually say yesterday or never, but mostly they’re thinking sometime in the next 10 years, and they realize they should start planning.
“We do our projections based on living to age 100, particularly because people who are more affluent seem to be in good health and do live longer. We also talk to them about having to support a parent or child while they’re in retirement. These are entirely possible these days, and they need to be prepared.”
Finally, a crucial step in this phase of the financial life cycle is protecting family, lifestyle, and wealth from unforeseen consequences of life. Most lawyers have purchased a variety of insurance products to address the events that mark middle age—parenthood, disability, and death. Life and disability insurance are essential if attorneys hope to protect their assets and their families, and those policies should be updated to reflect changes in circumstances, including growth in net worth.
“Everybody knows about life insurance, although for high–earning people, they need to make sure they have adequate coverage that will allow their families to maintain the lifestyles they’ve become accustomed to,” Thalheimer says. “We also encourage our clients to supplement their company disability policy, which tends to be fairly basic and wouldn’t be enough to live on for any period of time. Most importantly, this is when we encourage clients to look at long-term-care insurance for their retirement.”
Inching Toward Retirement
The final stage of a legal career can be exceptionally gratifying, with senior lawyers choosing new professional avenues or slowing down to enjoy a leisurely transition into retirement. For those attorneys who have planned well, these preretirement years should be relatively trouble-free, since much of the heavy lifting to ensure an ample income in retirement was done decades before.
McIntyre of Morgan Stanley Smith Barney says this is also a time when attorneys should consider adjusting their asset mix to reflect the current state of the economy or to proactively protect their assets for a lengthy retirement. “There’s always the possibility to rebalance and do what’s necessary to upgrade and get a higher income with more safety,” he says. “You have to be comfortable with your choices. Your head has to hit the pillow at night, and you have to be able to sleep.”
Many advisors recommend that individuals consider shifting everything from their Individual Retirement Account, or IRA, into an annuity upon retirement. That way, part of the money would be protected from the vagaries of the stock market and the kinds of losses experienced by retirees or soon-to-retire folks in 2007 and 2008. “I saw a lot of people get very nervous in 2008 and 2009 when they realized they had 100 percent of their retirement in a retirement account,” Armstrong says. “I never recommended annuities before 2008 because of the fees, but now that the fees have gone down and the market is so unpredictable, they’re a lot more attractive.”
For some attorneys, and not necessarily the ones who haven’t planned well enough, transitioning into a part–time status at a law firm or working in some other context might be helpful. It not only eases the transition from full-time work to a relaxed retirement, it also keeps money coming in to slow down the rate of withdrawal from their portfolios.
Another lesson of the last recession is to have a substantial war chest of cash assets when inching closer to retirement. Some advisors recommend having between two and three years’ worth of living expenses in cash to ward off any premature dips into retirement funds. With investment accounts fluctuating daily, no one wants to start withdrawing money from their accounts for living expenses and risk the long-term viability of their portfolios.
“A lot of the decisions you make going into retirement are one–time, irreversible decisions,” Simon says. “We recommend making these decisions slowly and with a lot of forethought. Too much is at stake not to.”
One of the critical activities that should have been completed at this stage in life is estate planning, experts say. Having an updated will—something that should have been executed decades before, of course—is essential, making sure it reflects current goals and wishes as well as addresses changes in tax laws. There is a laundry list of concerns that will be tackled in a comprehensive estate plan, including deciding how beneficiaries receive their inheritances, determining how assets will be directed, and naming the guardian for any minor children and the executors and trustees of the estate.
The conversations that surround the estate–planning process also will illuminate individual concerns about a business or personal legacy, opening the door for more vigorous donations to favored charitable organizations or alma maters. They also can lay the groundwork for the gradual transfer of wealth to the next generation.
Where Do I Start?
Not surprisingly, wealth management advisors say the most important step to take to prepare for retirement is to hire a financial planning professional—no matter what stage you’re at in the financial planning life cycle. They’re definitely biased, but that doesn’t mean they aren’t right.
“These are tumultuous times, and the idea of attorneys, no matter how learned they might be, managing their own wealth is not smart,” McIntyre says. “Unless they’re focusing on their investments all the time, the odds are that they will underperform a competent financial professional, and may be frighteningly so.”
Certainly a smart attorney can excel at making any number of the key decisions involved in financial planning, but after 14 hours in the office, how many attorneys have the energy and focus to dedicate additional hours to the hard work of understanding the markets and investment strategy? That’s why it makes sense to take advantage of the wide variety of services available from individuals, companies, and major financial services institutions that cater to professionals, and specifically attorneys.
“Only about 10 percent of the people I meet with are really good at taking information and acting on it appropriately,” Thalheimer says. “The vast majority of people either procrastinate or are too busy to keep an eye on their investments. They say they are, but from my perspective, they’re just not adequately doing it.”
Banks have created divisions that exclusively serve attorneys, including Citibank and SunTrust Banks, Inc., and they provide trust and investment services designed around the particular needs of lawyers. With a keen understanding of the pressures in the legal profession, these types of services provide individualized solutions.
Experts say that selecting a wealth advisor is much like selecting an attorney, so due diligence is required to ensure that the individual or company can be trusted and has a good track record in managing investments. One of the critical questions to ask is how the person is compensated. Most financial planning consultants in the business are compensated based on commission for selling specific products to their clients. Top–notch investment counselors, for the most part, work on a fee–only or hourly basis, and they are generally certified and accredited by the National Association of Personal Finance Advisors.
“An attorney should have a relationship with a financial advisor and be meeting with them once a year to review the plan,” Simon says. “Too much can change in a year for clients not to have regular contact.”
Money coaches say that this is a particularly vital time for attorneys to look for outside assistance. The instability of the markets makes it difficult to plan for the future, even for the experts, and that means amateur investors will face even bigger hurdles as they look to create wealth and secure their retirement.
“There are only three things you can do in a market that is essentially range–bound and return–starved like the one we are in: save more, spend less, or work longer,” Scherer of Graystone Consulting says. “The market right now shows no sign that it will cooperate in terms of delivering big investment returns, especially without taking an inordinate amount of risk.”
A layperson investor may still be dreaming about the big returns from the 1990s and be trying to outsmart the market, a very dangerous proposition, Scherer says. “I don’t think people should be reaching for big returns. It’s a market of mid–size returns, low growth, and high volatility. The only way to make up for that is to put more money away, or if you don’t, then be reconciled to work longer or spend less in retirement. There’s no other way to make the formula work.”
Whether attorneys decide to take a do–it–yourself approach to financial planning or work with a wealth advisor, they always must keep their eyes on the ultimate prize. “The No. 1 goal for everybody is not running out of money,” Haunty says. “When you do financial planning well, you are able to look back on your life and be happy. You’ve had a great life. Houses. Cars. Got married. Your kids are awesome. And in the end, you didn’t have to continue working forever to be comfortable. That sounds like a great retirement.”
Financial Strategies for a Lifetime
Financial planning is a lifetime pursuit with critical milestones for attorneys at various stages of their careers. Generally speaking, these are critical steps to take to secure your financial future:
New to the Workforce
- Determine life goals, set financial milestones,
and develop a financial plan
- Save at least 10 percent of your annual income
- Participate in your firm’s 401(k) or 403(b) program, saving the maximum amount allowed by law annually
- Seek financial planning assistance from a certified advisor
- Consolidate student loan debt into a single,
- Create a contingency fund for unexpected events
- Create a plan that sets goals for retirement finances
- Build wealth by doubling down on savings for
short– and long–term goals
- Pay down debt
- Take advantage of IRS rules allowing catch–up payments
to retirement funds
- Purchase or extend life, disability, and long–term care
- Work with a wealth advisor to manage investments
and retirement funds
- Pursue home ownership if you haven’t purchased
one at this point
- Adjust retirement strategy to reflect the effects of
health care costs, the stock market, aging parents,
and paying for college
- Refine retirement goals for lifestyle and finances
- Consider working part time with the firm during
- Set aside two to three years of income in a cash account
- Develop a solid plan to manage investment
income throughout retirement
- Pay off any outstanding debt
- Contemplate next steps for preserving inheritance for children and supporting philanthropic pursuits