Working with attorney finances is like investing in the stock market – there are bears and bulls. Bears are too busy to focus on their family planning; they prefer to put their heads in the sand and hope the big wave never comes. Bulls are too busy to focus on their planning needs because they already know what they need to know and don’t think they need a trusted advisor– they are one!
Financial Planning: Life-changing Decisions
What scares us the most is when a client calls and says, “Chris, guess what I just did?” Why? Because impulsive decisions made out of fear and/or unsubstantiated information cause problems that are time consuming and often very expensive to fix.
There are so many important decisions that come into sound financial planning – personal and professional goals, finances, family, lifestyle, income taxes, Social Security, wills and trusts, life insurance, 401(k) contributions, regular versus Roth IRAs, college savings plans, deferred compensation, disability and long-term care.
And if your planning isn’t efficiently designed to work for you, the result is a plan with coordination gaps and missed opportunities.
For example, retirement planning can be a very complex analysis for attorneys because in addition to the traditional defined contribution plan, firms may offer defined benefit and non-qualified deferred compensation plans.
Which plan(s) to participate in must be carefully coordinated with other aspects of your planning, including income taxes, cash flow and liquidity needs. The popularity of mandatory retirement provisions is also on the rise with large firms, so you may not have as long to save as you think.
Retirement Planning: Types and Benefits
A defined contribution plan is a type of retirement vehicle where the firm and employee both make contributions on a regular basis. Many plans offer pre-tax and post-tax (commonly referred to as “Roth”) contributions where an employee can defer his or her salary and the firm may match up to a certain percentage of the employee’s contribution.
It is important to understand that the pretax and post-tax contribution options carry with them different rules that should be coordinated with your overall retirement planning.
A defined benefit program is similar to a traditional pension plan where the firm promises the employee a certain income stream in retirement that is determined by a formula. The formula is based on several criteria, including earnings, tenure and age. This is a common plan for firms looking to avoid payroll increases by promising to pay for something later. Some plans also allow for the employee to contribute. The concern for defined benefit programs is a potential deficit between the money in the plan and the pension obligations.
A non-qualified deferred compensation plan involves an employee voluntarily deferring income to be held by the firm and paid out later after the income is earned. The goal is tax deferral. The difference between this plan and a defined contribution plan is that the firm can be selective as to whom the plan is offered; and the deferred amount is greater.
The important thing to remember is that each plan offers specific and unique bene fits. As trusted advisors, it is our fiduciary duty and responsibility to educate our clients about their options and advise them on what is in their best interest.
For life’s financial decisions, it is prudent to talk with a qualified financial planner to evaluate your options and make the best decisions possible for you and your family. Christophe P. Dionot, J.D.