Maximizing Financial Success in Big Law: A Guide for Associates at Different Career Stages

As the compensation landscape for Big Law associates continues to evolve, new financial implications also arise, making it more important than ever to focus on practical planning strategies for associates at different career stages. With salaries and bonuses soaring to new heights, it’s crucial for young lawyers to make wise financial decisions.

The Current Compensation Landscape

Recently, Big Law firms have significantly increased compensation for associates. This trend began with Milbank and was subsequently adopted by Cravath and numerous other prestigious firms​​. However, while this increase in compensation offers immense potential for wealth accumulation, it also comes with its own set of challenges and responsibilities. Each stage of a Big Law associate’s career not only brings different financial considerations but may also intersect with various life events. It’s important to note that not everyone will experience these events, but there are some common considerations that can significantly impact financial planning.

Financial Planning for Early-Career Associates (Years 1-3)

For associates in their first few years, the focus should be on establishing a solid financial foundation. Considering that less than 10% of associates make partner​​, it’s crucial to prepare financially as if these early years are among the best in terms of compensation. So, what might that entail?

  • Budgeting and Expense Management: The key to financial success at this stage is controlling expenses and building wealth. It is possible for a first-year associate to save around $70,000 a year, a savings rate of ~30%​​. This requires a realistic budget that reflects your lifestyle and priorities.
    • Sample Budget:
      • Gross Income: $230,000
        • Less 401(k) Contribution (maximum addition in 2024): $23,000
      • Adjusted Gross Income: $207,000
        • Estimated Taxes (~41% combined Federal, State, Local, FICA): ~$85,000
      • Net Income after Taxes: $122,000
        • Less Student Loan Repayment: $18,000 (12 months x $1,500)
        • Less Living Expenses: ~$55,000 (calculated as ~$4,580/month x 12)
        • Annual After-Tax Savings (Excluding 401(k)): $49,000
      • Total Annual Savings (Including 401(k)): $72,000
    • Why This Matters: Effective budgeting and expense management in the early years can set the stage for your future financial stability. You are creating your own optionality and the ability to live the life you want on your own terms.
  • Managing Student Loans: Creating a plan to start tackling your student loans is essential. Associates should consider refinancing options and available payment plans to strategically fit their loan paybacks within the context of their larger goals​​.
    • Why This Matters: Student loans often represent a significant financial burden for young professionals. Addressing them strategically can reduce long-term interest costs and free up more income for other financial goals, such as home ownership or investment opportunities. Moreover, effectively managing student loans can reduce financial stress, allowing for a clearer focus on your career growth.
  • Retirement Savings: Prioritize contributing to your employer’s 401(k), especially up to the employer match, and consider the Roth option for long-term tax-free growth.
    • Why This Matters: Your early investments in retirement accounts can take advantage of your main current resource – time! Compound interest is an incredibly powerful tool, but it needs time to work properly. Contributing to a 401(k), particularly up to the employer match, is earning “free money” that can grow tax-deferred or tax-free (in the case of a Roth 401(k)). Starting retirement savings early can lead to a more comfortable and secure retirement, reducing the need to play “catch-up” in later years.
  • Life Stage Considerations: Early-career associates may be navigating pivotal personal and professional transitions including relocating for work, exploring significant relationships, or considering advanced education opportunities. While some might contemplate marriage, it is also a time for establishing individual financial independence and a foundation for your professional life. Managing student loan debt, creating a robust savings plan, and beginning to invest should be some of your key priorities. If you’re considering further education, exploring options for funding and understanding the potential return on this investment are vital. It’s also an ideal time to start thinking about long-term financial goals even if they seem distant, such as saving for a future home or beginning retirement contributions.
  • Engaging with a Financial Advisor: At this stage, financial planning is straightforward. While a full-service financial advisor might not yet be necessary, using online resources and attending financial workshops or brief consultations can be beneficial. While Wealthspire focuses on serving high and ultra-high net worth individuals and their families, we understand that financial guidance is helpful at every career stage, and our blogs, resources, and educational materials are designed to empower individuals at various levels of wealth accumulation.

Mid-Career Associates (Years 4-6)

As associates progress, their financial strategies should evolve to reflect their growing income and changing priorities.

  • Investment Strategies: Continue maximizing retirement account contributions and explore other investment vehicles like Health Savings Accounts (HSAs) and personal brokerage accounts​​.
    • Why This Matters: Mid-career is the perfect time to diversify your investment portfolio. With a higher income, there is more capacity to invest beyond traditional retirement accounts. HSAs offer tax benefits and can be used for medical expenses, while personal brokerage accounts provide flexibility for goals outside of retirement spending.
  • Emergency Fund: Maintain a liquid emergency fund covering 3-6 months of expenses​​.
    • Why This Matters: An emergency fund is your financial safety net. In the face of unexpected events like health emergencies, job loss, or urgent home repairs, this fund can prevent the need to dip into long-term investments or take on high-interest debt.
  • Real Estate and Insurance Decisions: Consider the pros and cons of buying vs. renting in your market, and opt for term life insurance over more complex, expensive policies​​.
    • Why This Matters: Real estate decisions are significant at this career stage, especially in high-cost areas like New York City, Washington D.C., or San Francisco. Owning property can be a valuable investment and a step towards building equity, but it is important to weigh this against the flexibility and lower upfront costs of renting. On the insurance front, term life policies offer essential coverage without the complexity and higher costs of whole or universal life policies. As financial responsibilities grow, particularly for those with families, having the right insurance in place is crucial for financial protection.
  • Life Stage Considerations: Mid-career associates might be deepening their professional expertise while balancing significant personal commitments. This stage often involves growing family responsibilities, such as the birth or adoption of children, and potentially the preliminary stages of planning for their education. It is also a time when many consider solidifying their long-term living arrangements, whether through purchasing a home or investing in a more permanent community. For those purchasing a home, understanding mortgage options and how home ownership fits into their overall financial picture are key. Additionally, continuing to build retirement savings and diversifying investments remains paramount.
  • Engaging with a Financial Advisor: As your financial situation becomes more complex with increased earnings, property purchases, and family growth, the value of professional advice increases. This is a great time to consider whether to engage a financial advisor, especially for those who feel less confident in managing the finances on their own.

Senior Associates (Years 7-8)

For senior associates, the financial focus shifts towards maximizing wealth accumulation and preparing for potential partnership or other career transitions.

  • Diversifying Investments: Expand your investment portfolio to include backdoor Roth IRAs (Individual Retirement Accounts) and more diversified personal brokerage accounts​​.
    • Why This Matters: At this career stage, you have a strong financial foundation and can afford to take on more complex investment structures for potentially higher returns. Diversifying into vehicles like backdoor Roth IRAs allows for tax-free growth, particularly beneficial for high earners who might be phased out of direct Roth contributions.
  • Advanced Debt Management: Re-evaluate and optimize any existing debts, including mortgages, student loans, or personal loans.
    • Why This Matters: Senior associates often have the financial capacity to reassess and potentially refinance or pay down high-interest debts. Efficient debt management can free up more resources for investments and savings and can potentially improve cash flow. This is also an opportune time to consider whether taking on strategic debt (like a cash-out mortgage) aligns with your long-term investment goals.
  • Preparing for Partnership: If partnership is on the horizon, begin to understand the financial implications and requirements of becoming a partner, such as capital contributions and the shift from employee to partial owner.
    • Why This Matters: Transitioning to partnership involves significant financial changes. Awareness and preparation for capital contributions, changes in tax status, and new compensation structures are essential. This understanding aids in a smoother transition and better financial planning outcomes overall.
  • Life Stage Considerations: Many senior associates are established in both their careers and personal lives. This period may include managing the complexities of a dual-career household, supporting children in their teenage years, and beginning to think more seriously about their own retirement planning. It is also a time when some may start to experience the responsibilities of caring for aging parents, adding another layer of complexity to an already full life. Here, the focus shifts to more advanced financial planning techniques. This includes maximizing retirement savings, considering tax-efficient strategies for wealth transfer, and beginning to explore estate planning in earnest. If supporting elderly parents, understanding the financial implications and planning for potential long-term care needs becomes important. Additionally, as children approach college age, strategies for funding their education without derailing retirement plans should be a priority.
  • Engaging with a Financial Advisor: By the time you have reached senior associate status, your financial landscape often warrants the expertise of a financial advisor. Navigating investment strategies, tax planning, and potential partnership considerations, along with personal financial milestones, can be complex. This is the stage where the value of a comprehensive financial advisor becomes most evident, particularly for those approaching significant income changes or career transitions.

The Path to Partnership

If you are fortunate enough to be among the 10% of associates who make partner, then your financial landscape may undergo a significant transformation. Understanding the nuances of your new role is crucial for continued financial success. Below are a few other pieces that some colleagues and I have written to help current and future Big Law Partners navigate the complexities of the profession and position.

  • Capital and Draw Accounts for New Law Firm Partners: As a partner, you will need to understand the financial mechanics of capital accounts and draw accounts. These determine your share in the firm and how you will receive your earnings.
  • Healthcare Plan Considerations: Partners often face different healthcare options. It is important to evaluate these choices in the context of your personal and family health needs.
  • Trust and Estate Planning: With increased wealth, estate planning becomes even more critical. This may involve managing your legacy and ensuring your assets are distributed according to your wishes.
  • Lifestyle Management: Avoiding lifestyle “creep” is essential to maintaining financial stability and growth, even with a significant increase in income.
  • Charitable Giving and Tax Planning: With higher earnings, effective tax planning and charitable giving can play a key role in your financial strategy.

As you navigate the various stages of your career in Big Law, from early strides to senior roles and potentially partnership, your financial planning needs will evolve and grow in complexity. Our team understands the unique financial challenges and opportunities that come with each career stage, as we work with many associates, attorneys, and partners at Big Law firms. Our expertise is not just in managing wealth – it is in building and nurturing it through every phase of your professional and personal life. Here’s some more information on how we can help you:

  • For Early and Mid-Career Associates: You are laying the groundwork for future financial success. Wealthspire can help you establish a strong financial foundation, whether through optimizing your budget, effectively managing student loans, or starting your investment journey. Our team offers the tools and advice to ensure you make the most of these formative years.
  • For Senior Associates and Beyond: As you approach significant career transitions, the need for sophisticated financial planning becomes more paramount. We’re here to guide you through complex investment strategies, tax planning, preparing for partnership, and aligning your financial plans with your life goals. Our advisors are adept at navigating the nuances of high-income scenarios and can provide tailored advice for your unique situation.

At Wealthspire, we pride ourselves on understanding and elevating each client’s unique financial circumstances. Our mission is to empower you – guiding you towards informed decisions and helping you realize your distinct financial aspirations. Whether you are just starting out or are preparing for the next big leap in your career, our team is ready to help.

Don’t leave your financial future to chance. Reach out to us today for a complimentary consultation. Together, we can build a financial plan that grows with you, every step of the way.

Wealthspire Advisors is the common brand and trade name used by Wealthspire Advisors LLC, Private Ocean, LLC, and ACG Advisory Services, LLC, separately registered investment advisers and subsidiary companies of NFP Corp.
Please Note: Limitations. The achievement of any professional designation, certification, degree, or license, recognition by publications, media, or other organizations, membership in any professional organization, or any amount of prior experience or success, should not be construed by a client or prospective client as a guarantee that he/she will experience a certain level of results or satisfaction if Wealthspire is engaged, or continues to be engaged, to provide investment advisory services.
Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the certification marks CFP®, Certified Financial Planner™, and CFP® (with plaque design) in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
© 2024 Wealthspire Advisors
Eric Dostal

About Eric Dostal, J.D., CFP®

Eric is a wealth advisor in our New York City office.

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