As a BigLaw partner, the demands of client work often leave little time for your own personal financial planning, so it’s not uncommon to feel underprepared when it comes to retirement. The good news is, we can help. Just as your clients rely on your expertise to make critical decisions, you can rely on us to guide your own retirement planning. Through our experience working with many BigLaw partners preparing for or currently in retirement, here are six key areas to consider.
Clarify Your Ideal “Retirement” Timeline and Structure
Retirement does not look the same for everyone. To help you paint a picture as to what your actual retirement plan may be, it’s important to ask yourself the following questions:
- What does retirement actually mean to you? Do you want to fully retire or is the goal instead to become “financially independent?
- Full retirement implies an end to professional work, while financial independence implies having control over if, when, how long, and for whom you will work in the future.
- These are two ends of the retirement spectrum, with possibilities in between.
- When will you retire? Do you plan for it to be a gradual transition, a sharp stop, or somewhere in between?
- Be sure to review any firm guidelines concerning mandatory age-based retirement or withdrawal from partnership. Typically, the more lead time the better.
- Will you fully retire, or consider an Of Counsel role within the firm?
- Becoming Of Counsel can be an appealing option but aligning financial and non-financial expectations with those of the firm is important.
- It’s not uncommon for former equity partners to see their net pay be ~70%+ lower (sometimes there is also a discretionary bonus based on production).
- Put simply, there is a potential mismatch between financial renumeration and hours worked in the eyes of the former partner.
- Becoming Of Counsel can be an appealing option but aligning financial and non-financial expectations with those of the firm is important.
Understand and Incorporate Firm Retirement Plans/Benefits
Partners often have firm-specific deferred compensation, pensions, and/or capital accounts; each with their own payment timeline and tax treatment.
- Have you reviewed how the firm’s pension payments are calculated? How long will those payments continue?
- Many Am Law 100 firms offer an unfunded pension to partners, meaning it depends on the future earnings of the firm.
- While the duration and payment calculations differ, one common factor is that you become an unsecured creditor of the firm as a retiree.
- If you have paid-in firm capital, how and when will it be returned in retirement?
- Some firms treat firm capital as undistributed earnings, such that partners do not build a significant balance.
- Others have significant paid-in capital requirements, and partners build large balances over time.
- If you retire “early”, how will that impact the amounts of any pension, firm capital, or other expected inflows?
- Firm pensions will typically have a minimum age for the benefit to vest or be materially reduced if taken early.
Stress-Test Your Financial Plan for Market Volatility (and Other Risks)
Your retirement plan should incorporate all firm retirement plans/pensions, income sources and assets to stress-test different retirement scenarios. This type of modeling is at the core of how we help partners make retirement timing decisions. It is also a useful tool to help answer other important questions, like changing or re-affirming a portfolio allocation, purchasing a second home, etc. Consider the following:
- Have you accounted for sequence-of-return risk?
- Sequence-of-return risk is the danger that poor investment returns early in retirement, when starting to draw down a portfolio, permanently impair long-term wealth, even if subsequent returns are strong.
- The more the portfolio needs to support retirement spending, the higher the risk.
- Is there a mismatch between your current portfolio allocation and willingness to take market risk (i.e., exposure to stocks/risk assets)?
- Retirees must “flip the switch” from being a net saver to net spender from their portfolio, often for the first time. This can be psychologically challenging; it is easier to wait out market volatility while still earning a paycheck.
- However, retiring BigLaw partners receiving significant inflows at/after retirement (firm capital, pension payments, etc.) arguably have a lower initial sequence-of-return risk.
Confirm Health Care and Other Insurance Decisions
Check what firm-offered partner insurance benefits will and will not continue upon retirement, including health, life, long-term care (LTC), disability, and property and casualty (P&C) insurance, and work with an advisor who can perform an independent review to help ensure continuity of coverage.
- Does your firm continue to offer health insurance coverage to former partners?
- If health insurance is not offered to former partners and you are retiring before the Medicare eligibility age of 65, you should anticipate and plan for (likely) higher healthcare costs, whether through COBRA or the federal/state health insurance exchange.
- Are your other policies portable or offered at the same partner rate post-retirement?
- Life insurance: Some firms will pay the cost for a minimum amount of life insurance death benefit through a certain age (even for retired partners), while others will do not.
- Disability insurance: Partner coverage is usually a combination of individual and group policies but, it is worth considering if this coverage is still needed post-retirement.
- LTC insurance: Coverage can be a combination of individual/group policies. The decision to keep it hinges on many factors, including cost and whether self-insuring is an option.
- P&C insurance: Almost always portable, though firm-offered group rates might not be available.
Estate and Legacy Planning
Retirement is a natural inflection point to consider whether your current core estate planning documents should be reviewed. Some partners will have potentially taxable estates, where more significant gifts are prudent.
- Have you updated or reviewed your core estate planning documents in the past five years?
- This should include wills/revocable trusts, durable power of attorney, and healthcare proxy and living will.
- See here for a further discussion of core estate planning documents.
- Have you confirmed that your beneficiary designations for IRAs, retirement plans, and life insurance are in alignment with your current estate plan?
- These assets generally pass to the named beneficiary rather than what a will or revocable trust says.
- Do you have a large estate and/or wish to give larger gifts to children/grandchildren now vs. at death?
- Do you have significant charitable goals and are they incorporated in your estate plan?
- See here for a discussion of ways to give to charities in a tax-efficient manner.
Tax Planning: Do Not Forget About the IRS
Retirement can bring a lower annual income tax bill for retiring partners in the initial years of retirement, before Social Security and required minimum distributions (RMDs) begin in your early 70s. Those years provide planning opportunities to potentially reduce your lifetime tax rate.
- Have you (or your current advisor) considered if systematic Roth conversions make sense during the early years of retirement?
- Roth conversions “pull in” taxable income now in the current year but can help reduce future RMDs and increase the net inheritance received by your loved ones.
- If you practice charitable giving, are you doing so tax-efficiently?
- Strategies like using a donor advised fund and/or "bunching" charitable donations into one tax year can help further reduce your tax bill and can be planned around any charitable giving you already intended.
- Assuming you itemized deductions, charitable donations can also pair with and reduce the tax “bite” of a Roth conversion done in the same year.
- Do you plan to move to a different state in retirement?
- This brings up many planning considerations from when to execute Roth conversions to how to compliantly sever ties with an existing state.
- Some partners for NYC-based firms do not necessarily plan to leave the state but might consider leaving the city, which also must be done carefully.
Final Thoughts
Retiring from BigLaw is a major transition, but with thoughtful planning and the right guidance, it can be a rewarding next chapter. At Wealthspire, we help partners navigate this transition with clarity and confidence. Let’s talk about how we can help.
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