Changes to your retirement benefits as a partner
As Equity Partners, attorneys experience a distinct retirement planning landscape as compared to when you were an Associate. Mandatory 401(k) matching and/or Profit Sharing contributions as well as complex pension options, such as cash-balance plans, play pivotal roles in shaping partners' retirement strategies.
Navigating Mandatory 401(k) Contributions
Mandatory contributions mean partners must direct a specified portion of their compensation into the firm’s retirement plan, reducing immediate cash flow but enhancing long-term financial security. This is due to your ownership of the firm as an Equity Partner, and comes from the matching and/or profit sharing features of your 401(k), rather than from the elective deferral that you’re used to. The elective deferral is still an option that you should likely be taking advantage of, but you need a bit more planning to make all the cash flows work.
Advantages: Forced savings, immediate tax benefits, and long-term growth.
Challenge: Reduced cash flow flexibility.
Strategic Tip: Plan your annual cash flow proactively to accommodate mandatory contributions without disrupting other financial goals, including your regular elective deferral into your plan.
Leveraging Cash-Balance Pension Plans
Cash-balance plans, hybrid plans blending defined-benefit and defined-contribution features, are common in BigLaw firms. These plans credit your phantom “account” (really just a liability of the firm) annually based on a formula involving salary and interest rate.
In contrast to your 401(k) plan, in which you bear the investment risk and make investment decisions, cash-balance pension plan balances are typically the liability of the firm and its owners, and therefore the investments are traditionally more conservative and designed to simply match a stated target crediting rate that is usually in the low to mid-single digits.
Another important decision is how much to contribute. Often, you are offered a one-time, non-cancelable choice of 1) whether to participate (although sometimes this is not a choice) and 2) how much to contribute based on a menu of options. This can be very difficult because in the first year of Partnership, your income and cash flows can be limited.
However, you know that in the coming years you will have substantially more income to work with and to deploy into this tax-advantaged plan. Therefore, it is usually wise to try to commit to a possibly uncomfortably high annual contribution that you work hard to achieve in the early years, so that you can grow your wealth rapidly in the ensuing years.
Finally, one critical thing for BigLaw Partners to understand, is that as an equity owner of the firm, you yourself may be on the hook to come up with any shortfall in your “account” in the event you are ready to cash in (retire, etc.) and the plan’s investments have not met the crediting rate. Although rare, this can happen in cases where a new Partner leaves shortly after first participating in the plan, and there happens to have been poor performance in the plan during that short time period.
Benefits: Significant tax-deferred growth potential, higher contribution limits compared to traditional 401(k)s.
Considerations: Complexity and long-term commitment required.
Action Step: Work with a financial planner to map out how much you can afford to contribute to the plan on a sustainable basis, and how to plan the cash flows for the first few years in which it can be a tight fit.
Whole Life Insurance Considerations
Some BigLaw firms require partners to participate in whole life insurance plans. While these plans offer permanent coverage and a cash value component, they may carry higher costs compared to term insurance.
When It Makes Sense: For estate planning and legacy goals.
Potential Drawbacks: High premiums and fees, reduced flexibility.
Recommendation: You may not have a choice when it comes to participating in these policies, but if you do, be sure to understand what the policy offers and costs and plan accordingly.
Strategic Planning Recommendations
Understand which retirement plan or plans you have access to.
Determine which contributions are mandatory, and what those mandatory contribution amounts are.
In cases where you have options about whether to participate and/or how much to commit, try your best to take full advantage of the plans even if that means tighter cash flows in the initial years. You will find yourself financially free earlier because of it.
Consult with a financial planner who understands the specific nuances of BigLaw partnerships if you are unsure how to make heads or tails of this stuff.
Conclusion: Understanding what you have
Mastering retirement planning as a BigLaw Equity Partner requires strategic decision-making and proactive management of mandatory contributions, pension benefits, and insurance obligations. By carefully navigating these options, you can significantly enhance your financial independence and retirement readiness.
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