Through the Career—And Beyond

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Many attorneys don’t anticipate a time when they will no longer be able to work in their chosen profession. There is life beyond the career. That life could be retirement or simply work in another field of interest. The transition to either one requires having resources to be able to make choices. Wealth is a tool box. Having tools in the tool box opens the doors of possibilities.

I have spoken to attorneys who plan to continue working throughout their anticipated lifetimes. Statistics don’t tend to support this plan. At least 2/3 of the currently working population intends to continue working beyond age 65—less than 1/4 actually do according to the Employee Benefit Research Institute. The number one reason for this disparity is health problems. Continuing to work is a good plan—until it becomes physically impossible.

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LONG AND SHORT TERM SAVING

Saving throughout the working years makes it possible to deal with varied outcomes. Everyone should have an emergency fund capable of dealing with short-term emergencies. Longer term, savings help provide for educating kids or grandkids, retirement, and long-term care needs. In a way, both are emergency funds with different time horizons.

Living long enough may mean becoming the “sandwich” generation taking care of an older generation and a younger generation at the same time. Whether long-term care needs are anticipated personally, they may impact loved ones and suddenly become part of the plan by default. While planning for personal needs, consider the needs of the generations above and below.

Look beyond government benefits in retirement. Social Security benefits are capped. This means that those who make more, need to save more… and starting later only intensifies the problem. For the same level of pre-retirement income, a 25 year old may be OK saving around 10-15% of income while a 40 year old will have to save 25% or more. The earlier savings start, the longer the “time value of money” can work to build wealth. Starting later is no excuse for paralysis or thinking “it’s too late…” the need is even greater.

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TAX DEFERRED SAVING

Tax-deferred vehicles are ideal for long-term savings. Even when factoring in full tax and potential early-withdrawal penalties, the benefits are still powerful. For most people, the main tax-deferred savings vehicles available are geared toward education (such as the 529 plan) and retirement (such as 401Ks and IRAs). Business retirement plans often have an added incentive to encourage saving—matching contributions. If the employer matches contributions, that gives an immediate 100% return on those assets! Take advantage of such benefits in growing wealth.

Which is better: traditional IRAs (and 401Ks) or Roth IRAs (and Roth 401Ks)? One way to approach this question is with future expectations. If tax rates are expected to be higher in the future, taking advantage of tax-free retirement income in the future makes sense (Roth accounts). Another way to approach the question is considering current income. Generally, tax-deferral is the most powerful when deferring the most taxes. Therefore, high-earners may be better served using traditional accounts now. Since low earners will see a lower tax benefit now, they may prefer tax-free income in retirement. Alternatively, tax-free (Roth) income in retirement may subject less of the Social Security benefit to taxation and reduce the premiums for Medicare for higher earners. The “right” approach depends on individual situations.

MIX OF ASSETS

When saving, consider the asset mix of the investments. Emergency funds should be in cash-equivalent accounts so they are available when needed. Mid-term funds may have a balance between equities and bonds to reduce volatility while their use date approaches. Long-term assets should lean strongly toward equities to take advantage of long-term volatility in building wealth. Long-term wealth is built through the ups and downs of the markets, not in spite of them.

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So much here is general in nature, while financial planning is a very individualized process. Consult the services of appropriate professionals for answers to specific questions (financial planners, CPAs, and attorneys).

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