When doing attorney second career planning, I’ve found that some rigorous analysis can clarify things very quickly.
Questions such as, can I afford to switch now, how risky is this, and what are the long-term financial implications, all need to be uncovered and contemplated before the decision is made.
Indeed, if you’ve had a successful legal career and are looking to start something new, you need to think it through very carefully, get the timing right, and then plan it out with precision.
No attorney leaves a successful career lightly. However, the proper planning can lessen the uncertainty, reveal the range of possibilities, and give you more confidence when evaluating options.
Attorney Second Career Planning – It’s all in the timing
Some common second careers for lawyers are:
- Founding a start-up;
- Going in-house;
- Writing as a journalist or novelist;
- Teaching/academic writing;
- Consulting with non-profits or NGO’s;
- Politics, and;
- Becoming a mediator or arbitrator.
Whatever your dream second career, you should take time to plan out the move and fully consider the implications of:
- Cash flows;
- Investment and other risks, and;
The Dickens Approach to Financial Planning
One of the most powerful aspects of proper attorney second career planning is the ability to “see” into the future. We create bespoke, forensic-quality, Family Strategy Books for our clients that allow them to do just that.
Just as the Ghost of Christmas Future showed Ebenezer Scrooge a vision of his future in Dicken’s A Christmas Carol, a good financial plan can show you your financial future.
For most successful attorneys, their financial future will have many positive potentialities. However, the key point of the financial projection exercise is to judge how it looks to you now, when you still have time to make adjustments.
If the numbers don’t add up for an immediate second career, when will they, and what is required to get there?
Attorney Pension Plans – An example of getting the timing right
AmLaw 100 firms typically have one or more pension plans for their equity partners.
One may be funded by the partner and the other “funded” by the firm. (I’m using quotes here because firm pension obligation are often paid only from firm earnings, there are no assets set aside to meet those liabilities.)
There are many pension considerations when timing your departure.
Lump sum distributions may be possible from some pension plans, which eliminates the risk exposure to the firm. However, the length of service (“LOS”) could be a critical issue in determining firm pension cash flows. These aspects must be mastered and the actuarial flows analyzed to determine the tradeoffs.
Many firms will have an LOS threshold for partner pension eligibility. For instance, a partner may be eligible after 20 years of partner employment. However, there may be a second level of considerations that impact the payouts.
In some firms, retirement before the firm’s normal retirement age will result in haircuts to pension benefits. Also, some firms offer guaranteed payments for early retirement in lieu of an income stream for life. Cost of living adjustments (“COLAs”) and joint lifetime payouts are also complications.
Evaluating the various options requires analysis that goes beyond obtaining the actuarial calculations from the firms HR contact or CFO.
Evaluating Pension Cash Flows
When undertaking attorney second career planning, there are two ways to evaluate pension cash flows: on a present value and future value basis.
Present value calculations have the benefit of reducing future flows down to one number in today’s dollars. These give you an apples-to-apples comparison of your different options.
Present Values of Pension Flows
For example, assume a 50 year-old partner is contemplating a second career. Would she be better off leaving for the second career now and getting an assured severance package of $300k per year for five years, or taking a pension for life paying $100,000 per year that starts when she turns 65?
On the face of it, the $300,000 for five years is worth $1.5 million and the $100,000 pension starting at age 65 and continuing for 25 years (assuming a 90-year lifespan) is worth $2.5 million. On this basis, she would be $1 million better off waiting until the pension kicks in after retirement.
However, on a present value basis, the numbers are much different. The $300,000 for five years is worth $1.429 million and the $100,000 for 25 years is worth $1.304 million. (In both scenarios I’m discounting the flows by 2.5 percent per year as an assumed inflation rate and no cost of living adjustment.)
This is the effect of inflation on the value of future cash flows.
In my opinion, the partner would be much better off taking the first option, because the present values are slightly better and she eliminates the concentrated exposure to the firm.
Future Values of Pension Flows
Future value calculations look at how the cash flows would grow given certain assumptions. For example, using the same two alternatives from above, if we assume a 3.5 percent annual growth rate and that the partner lives to age 90 (40 years from her current age of 50), the assets would grow to $5.95 million and $4.28 million, respectively.
As with the present value analysis, she’s better off taking the upfront payments.
I’m using a simplified example here. In our planning work, we incorporate conservative growth rate assumptions, the effects of inflation, taxes, COLAs, and required cash flows to get to terminal values.
Both the present and future value methods can help you get a more nuanced understanding of your options.
For each attorney second career planning project, there are many nuanced factors that must be incorporated into the assumptions and modeled. Only then will a clear picture of Christmas Future come into view. Please see our full suite of business and financial planning services for attorneys.