Thursday, December 31, 2009

Why 145K Is Often Not Enough Max Your 401k

In response to my recent post about Financial Choices As An Associate Determining Your Future, one associate left the following comment:
Thanks, I appreciate this post. As a new associate, it's good to be scared straight every now and then. This is high octane nightmare fuel. I cannot imagine earning biglaw money for five years and not managing to pay off my student loans and maximize 401(k) contributions.
First, congratulations to the associate on being employed in this tough job market!  You are no doubt a very smart and on-the-ball person - it further shows in that you are seeking financial advice early in the game.  Second, the sentiment that the associate mentions - that they can't imagine not paying off the student loans and maxing their 401k - is a pretty common sentiment.  However, as associates find out, it is all too easy to fail to accomplish this.  We will discuss some of the reasons why associates fail to accomplish this and what they can do to help themelves after the break.

First, with regard to earning biglaw money and not having enough to get by, associates almost always over-estimate just how far a biglaw salary goes, especially compared to their loans.  Here's an example.  Let's assume that the new associate starts out making $145K, which seems to be what many biglaw firms are going towards.
  1. Using this tax calculator, we find that the associate will owe $31,702 in federal tax. 
  2. Social Security and Medicare (FICA) tax is 7.65% on the first $106,800  for a total of $8170.
  3. Health Insurance payments are going to be much bigger than you expect.  Although most corporations subsidize a significant fraction of employee health insurance payments, most law firms only subsidize a little or do not subsidize at all.  I pay around $10K/year for health insurace on a family plan.  For an individual, it would cost around $5K.
  4. Don't forget state income taxes - that's 3% in Illinois, but ranges from zero in some states to as high as 12% in other states.  Let's use 4% as a national average.  That yields $5,800.  Additionally, if you work in New York or some other cities, you will have to pay municipal income tax in addition to federal and state.
OK, so the first thing that our associate notices is that instead of the full $145K that he was planning on, after all of the subtractions above only about $94,300 actually makes it to his paycheck.  That's still a lot of money, but it is significantly different from what he was expecting.  That's usually the first real wakeup call.

Now that we have a better idea of how much money is really coming in, let's take a look at four aspects of money going out:
  1. Living Expenses
  2. 401k max
  3. Loan Payments
  4. Extras/fun stuff
First, with regard to living expenses, we note that this expense is very highly variable depending on geographic area.  For example, rents in Chicago are far, far less than rents in New York or San Francisco.  In fact, you can use this cost of living comparison tool at Bankrate to determine comparisons between different geographic areas.

Let's assume that our associate is going to live a reasonable, professional lifestyle in Chicago.  Rent a reasonably priced apartment in a professional area.  Wear reasonable professional clothes, not $2000 suits.  Have the occasional Starbucks, etc.  A lifestyle where the associate is not really trying to to be especially careful with their money, but is overall pretty conscious about keeping the spending down - and is certainly not buying anything big.  Living this lifestyle in Chicago is probably going to cost around $3500/month.  You will be spending about $1500 on rent and the remaining $2000 on bills/food/clothes/entertainment, etc.  That's a total of $42,000/year.

In comparison, in New York, as you can see from the Bankrate cost of living comparison tool, you will be spending aroud $3500 in rent and probably about $2000 for other costs for a total monthly cost of $5500/month.  That's $66,000/year.

Subtracting our living expenses from the $94,300 that we has coming in leaves us with $52,570 to spend in Chicago and $28,300 to spend in New York.

Second, let's talk about maxing out the 401k.  There are two types of 401k, the traditional, pre-tax one and the Roth 401k which uses after tax income.  The benefit to the Roth 401k is that the income withdrawn from the Roth 401k will never be taxed again.  Consequently, the Roth 401k is probably the way for our associate to go.  The maximum contribution to the 401k in 2009 is $16,000.  Let's apply that to our numbers above and see how much we have left.

For Chicago, that leaves us with 36,570.  For New York, that leaves us with $12,300.  Uh Oh.  These balances are starting to get pretty low!

Third, now let's talk loan payments - we can use this calculator to estimate the student loan payments.  First, however, we have to know what our outstanding loan balance is going to be.  As we discussed in my earlier post here, the total loan balance might be as high as $267,000.  The actual numbers that the law schools put out with regard to loan debt at graduation are ususally laughably low.  They also often present the number as "average loan debt per student" where a number of students (sometimes as high as 25%) are trust-fund kids that have their tuition paid for.  Consequently, their "zero" of accumulated debt skews the average to an unrealistic number.

In today's day and age, even if you are going to a reasonably priced law school, if you are paying the full freight with loans then you are not going to graduate with less than $150K in debt, $200K is a more reasonable number, and $250K in debt is a real possibility.  Even in the mid-1990s when I went to law school, even with good paying summer jobs at law firms after my 1L and 2L years, I still had about $120K in debt when I got out.  Also, recognize that not all of the debt is going to have the low interest rates offered to federal student loans (6.8%) - private loans can be much higher, and you will need to take out plenty of private loans to get through.

For $150K in debt, assuming an average interest rate of 8% and a 10-year amortization schedule, the loan payment is $1820/month (21,840/year).  For $200K, it's 2427/month (29,124/year).

Yikes!  If we are in New York, we only have $12,300 left to spend after our 401k contribution.  That doesn't even leave us with enough to make the payments on our $150K worth of debt - we are about $9000 short.  Consequently, we are going to have to cut somewhere.  We might be able to squeeze our lifestyle down, but most of our monthly cost is rent, so pretty much the most we can squeeze out would be about $1000/month or $12,000/year.  Our other option is to not fund the 401k fully so that we can make our loan payments.

This is the real "rubber hits the road" situation that associates like the one that left the comment really don't fully appreciate until it hits.  They see the $145K and it seems like so much money that they will be able to pay for everything that they could possibly want.  In practice, however, the money really goes quick!

As opposed to living in New York, if our associate is living in Chicago they have 36,570 left to spend and can make their minimum loan payments at both $150K and $200K with some left over (either about $15K or about $7K.)

However, if you want to pay off the loans in 5 years as the associate mentioned in his comments (instead of the standard 10-year amortization), the payments are:  for $150K = 3,041/month ($36,492/year) and for $200K = 4,055/month ($48,660)

Woah now!  Living in New York and maxing out our 401k leaves us with only $12,300 left to spend, so there is NO WAY that we can afford either option.  Further, even if we did not contribute a dime to the 401k and lived in New York, we would only have $28,300 - we would still be short by at least $8000 - or even $20,000!

Frankly, as opposed to the optimistic comments expressed by the associate that left the comment, if you are living in New York and have at least $150K in debt, there is very little possibility that you can max out your 401k and pay off your loans in 5 years.  You just don't have the money.

Taking a look at Chicago, after maxing out the 401k, you would have $36,570K - that is just enough (barely) to make the payments to pay off the $150K in loans in 5 years.  It's possible, but you would have to be extremely careful with your budget - and no buying extras.  However, even in Chicago, if you had $200K in loans you would be about $12K short.  You may be able to live more frugally and cut your living expenses, but it's likely that you are not going to have enough to both fully fund your 401k AND pay off the loans in 5 years.

Finally, let's talk about extras.  Most associates run at least some of the numbers and often have some plan or goal to pay back their loans and max that 401k.  However, as we have seen above, that's a really difficult goal.  Further, most associates make it even more difficult on themselves by buying extras that they don't need and work against them meeting their 401k and loan goals.  These extras typically include:
  1. Buying/renting more house than they need
  2. Buying/leasing more car than they need
  3. Taking that vacation trip
  4. "Rewarding themselves" - this is especially dangerous.  For example, it seems like it has become fashionable for associates to "reward themselves" with an expensive vacation after taking the bar exam.  That's about the worst time in your career to buy an expensive vacation.
  5. Clothes, watches, status items
  6. Paying for food or drinks when out with friend because you are the one with the "good job"
  7. Being vulnerable to salesmen.  Did I mention that because your phone number is public and everyone knows you make a lot of money, that salesmen are going to be calling you constantly?  They will try to sell you just about every service known to man.  They will come to your office to fit you for shirts and pants, they will do your dry cleaning, take care of your house and errands.  They will even come to your office and give you a workout during lunch - using kettle bell weights seems to be this year's fashionable workout.  Always for a fee, of course.
This is just a sample of what you will try to be "sold."  New associates and those who have not practiced often wonder why lawyers buy so much stuff.  In reality, lawyers are under a lot more sales pressure than the normal person - and it works.  It especially works with young associates that do not have the thick skin that you develop after a few years.  Young associates in particular are very vulnerable to services and salesmen that cater to their egos - after all, in their minds, they are now "rich!"  they have "all this money" and it seems like more than enough for them to be able to do whatever they want.

In summary, your starting salary is really a lot less after taxes.  Further, when you toss the loan payments on there and the costs just to get by, you really don't have that much left over.  It is going to take a LOT of discipline and planning to be able to pay off your loans and max that 401k.  Even in a fairly good scenario, you are going to have to live frugally and pass up a lot of extras - and it is by no means guaranteed that you are going to be able to do even that.

Best advice, stop looking at the 145K number and start getting real with your bottom line costs.  You are going to need it to help you resist the budget-killing extras that are going to be constantly sold to you.  Good luck!

16 comments:

  1. I would add "getting married and starting a family" to the list of expenses.

    But anyway, I basically agree with you. Like many law students, I expected to pay off my loans pretty quickly but instead it took about 10 years, even with some help from my wealthy family and even though I tried to live a reasonably frugal lifestyle.

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  2. Hi nycsolo - About the family, you are so very, very right. It's wonderful, but expensive - especially if you are making a huge loan payment at the same time. Also, when the couple are first dating and have two incomes, they often spend both. Then they get in a real crunch when they are down one income and the child expenses (which are pretty big!) hit.

    With regard to paying off loans, your story is very, very common from what I can see. I am in practice with many attorneys that are more than 10 years out, earn top dollar, and still have not paid off their student loans. You are to be commended for paying yours off.

    It took me several years to pay off my loans as well - and I was living a lifestyle that most people would describe as "unreasonably" (or unpleasantly) frugal. My family was not in a position to help, but growing up in a neighborhood on the lower end of the economic curve gave me an advantage over most associates in that I was less attracted to status objects, more inured to a lesser lifestyle, and knew what happened when the money runs out, so I darn well kept track of it!

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  3. (Part 1)
    I hope you do not mind a lengthy comment.

    I am the associate who made the comment you quote. I am in fact living and working in NYC. Thank you for your kind words and, once again, I appreciate this blog.
    The short version: I think your numbers are unduly pessimistic. With planning and the right attitude towards money, it can be done correctly. After maximizing 401(k) contributions and IRA contributions, this plan puts me on track to have over $100K in retirement savings and be out of debt by my 30th birthday in late 2013-- a little over five years from graduating law school and, more to the point, less than five years after I started working.

    The longer version: Every situation is different, but my personal numbers show a different picture than the one you paint:

    -- NYC is still, for the most part, on the $160K scale for first years. Pre-tax, that is an "extra" $15K from your numbers.
    -- You state that "# Social Security and Medicare (FICA) tax is 7.65% on the first $106,800 for a total of $8170." This isn't quite right; Social Security has a wage ceiling of $106,800 but Medicare has no limit, taking 1.45% of all wages. My medicare for the year was $2,340.22 and my social security was 6,621.60 for a total of $8,961.82. Of course, that makes the numbers worse, not better.
    -- On health insurance you say, "For an individual, it would cost around $5K." My health insurance co-pay is $150/month, or $1800 a year. I am not sure if this is typical; I have not discussed it with associates at other firms.
    -- New York City income tax doesn't have to be paid by those who work in the city, just those who live there. I have contemplated commuting from NJ just to avoid the tax, but ultimately decided it wasn't worth it.
    -- You factor in state and local income taxes, but you don't account for them being deductible. That goes away once the AMT kicks in, but most associates don't have to worry about that right away. I haven't done my taxes yet, but I estimate that deduction is worth about $4,000 to me.
    -- You peg rent as $3500 a month in NYC. The choice on where to live and, consequently, what to pay for rent in NYC is a classic case of whether one wants to be rich or act rich. Yes, Manhattan buildings that charge $3500/month would approve me and I could live there. Some luxury buildings are so desperate for tenants I could probably find a place that charges $4,000/month that would lease to me. Nearly identical buildings in Brooklyn, offering a commute of approximately the same length and easy access to Manhattan by subway, charge significantly less. I am paying $2,325 which includes a place of my own, a washer/dryer, and a gym. Based on the NY real estate market, this is unlikely to increase when my lease is up; I anticipate, but am not counting on, being able to negotiate a lower rent payment. I know other lawyers who split a two bedroom and live farther out, and they pay even less in rent than I do. I'm not sure what the $2,000 in "other costs" is supposed to represent; more on that below.
    -- I'm contributing to a conventional 401(k), because I anticipate being in a lower tax bracket when I finally do retire; I'll also probably be living in a state that has lower or no income taxes. To diversity my retirement savings into roth and non-roth accounts (effectively, a hedge against the uncertainty of taxes), I'm also planning to pour $5,000 into an IRA for 2009 (the deadline is April 15, for some reason) in this coming month and convert it to a Roth IRA under the new rules, then do the same for 2010. I'll thus close out 2010 with Roth IRAs of $10,000 plus growth and a 401(k) of $33,000 plus growth. The 401(k) contributions are also deductible against federal, state, and local taxes.
    (continued)

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  4. (Part 2)

    -- There are other little things that help which aren't worth getting into in depth; for instance, I don't own a car. An unlimited subway/bus metrocard is $89 and I pay that through work and with pre-tax dollars (this is a very common employee benefit in NYC).
    -- Finally, it is still possible to get a great legal education for a relatively low price. My undergrad was essentially free through my state system, and another state's school in the top twenty offered me in state tuition plus a $5,000/year scholarship to attend; I turned down NYU to go there. Anybody who gets into a decently ranked law school can find a lower ranked law school that will give them a scholarship; unless the decently ranked law school is Harvard, Yale, or Stanford, I highly advocate scholarship hunting. I therefore already have it down to 'only' 90K with a blended interest rate of about 5.5%. I never had a student loan with an interest rate above 8.5%, and my current highest one is at 6.8%. About $2300 a month gets me out by late 2013. The guy in the office next to me, drawing the same paycheck, has to pay off seven years of private school tuition.
    (continued)

    (Part 2)
    The upshot of all this is that, early in the year, my take home is $7,000 and split into three: One third for rent, one third for debt service/saving, one third for current consumption. Any 'extra' money typically goes to debt. Once I hit the social security ceiling, I earn about $800 extra a month, which I set aside to fund the aforementioned IRAs.
    I therefore have $2300 each month to cover everything from food to dry cleaning to Broadway. After things like cable, electricity and groceries, I still easily have $1,500 that is purely disposable in any way I choose. Even in NYC, that goes a long way. If I take a lady to dinner and a Broadway show and pay for the entire night, I'm unlikely to spend more than $400 and I am unlikely to have those kind of expensive evenings more than twice a month. There are days when I barely spend any money at all-- I go to the gym, go to work, have an $8 lunch, work late, eat dinner on the client's dime, go home, sleep, repeat. I don't consume as much as my fellow associates, but I have plenty of fun.

    All of this assumes I won't get any raises or bonuses; some 'extra' money will be consumed, but most of it will go to debt until I'm out of the proverbial hole. There's no way to know what the future will bring, and I'll obviously have to stretch out my payment plan if I lose my job or get a pay-cut , but this is a relatively easy and painless way to get where I want to be. Due to the miracle of compounding, I'll have a decent-but-not-great retirement fund if I keep this up until 30 and never contribute to either account ever again.

    That being said, my comment that you quoted was poorly phrased; I can imagine people not paying off their debts within five years, because I work with some of them. For a profession notorious for being risk-adverse, I've been shocked how many have no plan for the future. A fellow member of the class of 2008 asked me what I was planning to do with my bonus (which came to almost exactly $5,000 after tax). When I told him I intended to purchase a self-directed IRA, invest in a broad range of index funds, and convert it to a ROTH and never touch it again until I reach at least 59 1/2, he looked at me like I was from Mars. I have been pretty surprised at how little regard my co-workers have for money; I know a sizable minority who don't contribute to their 401(k) at all.

    (end)

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  5. Anonymous Associate - Thank you, thank you, thank you for your comment and data! I hope that you understand that my initial projection was based on what I perceived as an average financial position - nothing negative was meant toward you. Thanks so much for giving us a financial snapshot so that we can discuss the specific choices and conditions that you have made. First, before we even begin, I have to say that you seem far more on-the-ball and disciplined than the average attorney (and you seem to acknowledge this in your last paragraph when you mention your co-workers not comprehending you.) Frankly, in many ways it's very similar to my experience.

    OK, let's take a look at the specific aspects you mention.
    1) 160 rather than 145 - fine - I was going for average. We can start at 160 instead.
    2) FICA - whoops, my math was a little off. We can go with yours.
    3) Health insurance - that's the best deal out of anyone that I know, but I am more conversant with the Chicago market.
    4) Deductibility of state taxes and AMT - yep, state taxes are deductible, but the AMT is a monster. I didn't want to get too complicated.

    Now let's look at the specific ways that you are being more fugal than the projection that I discussed in the post:
    1) Living in Brooklyn rather than Manhattan - saves you the municipal tax and cuts your rent by about $1000/month.
    2) Does not own a car
    3) Much less loan debt - turned down a higher ranked school for a better financial package.
    In addition to taking out less debt, you probably substantially avoided the more expensive private debt.
    4) You are contributing the the traditional 401K (pretax) rather than the Roth (post tax) which saves you about $5K/year.
    5) You are contributing to an IRA - (although the $5000 for the IRA is about what you save by doing the traditional 401k instead of Roth.)

    Now let's take a look at some aspects that seem to be in agreement:
    1) With regard to monthly spending money, my initial estimate was $2000/month in lifestyle costs. You appear to be spending around $2300/month - which is pretty close. However, you admit that "you don't consume as much as your fellow associates" and that you really only have expensive nights out about twice a month.

    Now let's take a look at your budget. You mention that your initial take-home is about $7000. Your rent is $2325/month, your student loan payment is 2300/month, and your lifestyle cost is $2300/month. Adding those together yields $6925. Comparing that to your take-home of $7000 means that you only have about $75 extra per month. (Admittedly later in the year after SS stops you devote the extra money to your IRA).

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  6. So where am I going with this? Well, compared to the initial projection that I set out:
    1) You make 15K more
    2) You have taken several steps to be frugal - including living arrangement and not consuming as much as other associates
    3) Your loan debt is much less due to your good decisions
    4) You contribute to the regular 401k rather than Roth.

    However, even with all of this, you are running pretty close to the wire. You are making it, and you should be commended. However, you seem to be in a better financial condition than the average associate and seem to be much more disciplined than the average associate.

    Even so, you don't really have any money for "extras" - you have a budget and you are sticking to it, but you are not living the "high-life" that many people think making $160K/year will entitle them to live. For example, if you bought a new BMW because you "deserve it", it would totally trash your budget.

    Further, going back to the title of the post "why 145K is not enough" - Even with all of your frugal lifestyle choices and low loan debt, if you made 145K instead of 160K and wanted to fund the Roth 401k and pay off the loans in 10 years, it would look like you are pretty much out of luck, right?

    In summary, thank you again for posting your financial snapshot. My main purpose in this post was to make law students aware that $145K is really not going to go as far as their visions of expensive cars and opulence makes them think it will. Your financial snapshot really helps make that point - you are living far more frugally than the average associate (no car, limited going out, no extras, don't live in Manhattan), and you can swing the loan payments and 401k, but there really isn't anything left over. Getting a law degree is just not a ticket to big-time consumption and buying every toy that an avaricious law student could want.

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  7. I think your estimates are a bit unreasonable for a Chicago young associate. Your idea of frugal is not very frugal. I am paid $145,000, which equally roughly $9,000/month take home after taxes. I live what I would call a frugal lifestyle, but very comfortable (best example of my financial ethos is that I purchase most any food that I want, but I usually buy store-brand when available).

    I have a roommate and pay $650/month to live within a 30 min. door-to-door public transit commute of work. My apartment is very nice inside, not quite new-condo like, but very nice. My expenses, including occasionally going out to eat, treating myself or spending on others (holiday gifts), leave me with $7,000 per month to pay off loans with or use to invest.

    This would equal $84,000 per year for loans and investment. Deducting a maximum $16,000 for a 401k contribution, this would leave me with $68,000/year to pay off loans, maxing out my 401k and paying off ~$200,000 in loans in about 3 years.

    It can be done.

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  8. 8:51 - Yes! It certainly can be done! I think that I must have given people the wrong impression that I am saying that it is impossible - it's not. The point of the article is for the average person considering law, or law student, or young associate who is looking at 145K and thinking that they will be able to buy all kinds of toys, to get real about just how far their compensation will go.

    With regard to the average associate - it's not you! Congratulations! You are a super-saver and are far more frugal than the average associate. You are to be commended for exhibiting the discipline and planning that I mention in the post are going to be essential.

    Let's take a look at your financial snapshot as compared to the "average associate" that I talked about in the post. First, your rent is only $650/month. That differs significantly from the average rent of about $1500/month in Chicago set out by Bankrate. It also differs significantly from what I know associates are paying at my firm. You have done your homework and cut your rent expense to the bone - great job!

    You are also very frugal with your purchases, usually buying the store brand. Between your low rent and your frugal buying, you are only spending about $2000/month, instead of the $3500/month that was projected above.

    As far as your paycheck, you seem to suggest that you are paid at a $145K rate, but take home $108K - that seems like it might be a little high? We were looking at a take home of around 94K above.

    Regardless, using your numbers, after living expenses and 401K, you are left with 68K. Taking the numbers above for a 5-year payoff,
    for $150K = 3,041/month ($36,492/year) and for $200K = 4,055/month ($48,660). Consequently, even with your numbers, if you are paying off 200K in loans over 5 years, then you would only have 20K left to spend at the send of the year - about $1500/month. That's a bunch of money, but for a greedy associate-to-be, it's a lot less than the 145K they were thinking they had to spend on toys.

    Alternatively, If you want to pay off 200K in loans in 3 years, returning again to the calendar that I mentioned above and assuming an 8% average interest rate, that yields a payment of $6267/month or $75,204/year. That's greater than the $68K that you mention above that you have to spend, even using your numbers. Consequently, even living extremely frugally - as you are - it would seem like you would still need more than 3 years to pay off 200K in loans.

    Again, I wish you the best and it is certainly possible to budget and plan - and to be disciplined and frugal - and to pay off your loans. I did it myself. However, the average associate did not. The average associate did not appreciate that they needed to remain disciplined and frugal, and instead started spending as if they had $145K to spend (instead of the $20K your numbers indicate). You are to be commended for being super-frugal.

    I think your post and the earlier post are great stories of disciplined and frugal associates - and I would like to share your wisdom with other associates. In that regard, I am going to start a new post with regard to how to live frugally as an associate - I hope that you will comment there with your great suggestions! Alternatively, you can e-mail them to me at legal.dollar@gmail.com. Thanks again!

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  9. There's another option you didn't mention: going to law school part-time. The elite schools don't have night programs, but some quite good ones do, including Fordham where I graduated.

    I decided early on that I wanted no part of debt slavery, and I also didn't want to be forced into a biglaw job in order to pay the bank. So I went to both college and law school at night and worked every conceivable kind of job, which took nine years but kept me solvent. There were times when money was tight and I ate a lot of rice and beans, but the flush times made up for that.

    I went to a state school undergrad and didn't borrow a dime. Law school was a bit more expensive and I had to borrow 37K, but the military (did I mention I was a reservist?) paid back 20K and I graduated with 17K in debt. The payments on that were about $270 a month, which was an annoyance rather than a burden.

    Lifestyle: I got married soon after law school, I was making about 70K and my wife 30K. We bought a 2br co-op in Kew Gardens, Queens; the mortgage and maintenance totaled about $1500 per month, and of course the mortgage interest was pretax money. We both took public transportation to work - very common in NYC - and had dinner at home most days. We were able to save money every year, and now that I'm the owner of an appellate practice which grossed 400K last year, our expenditures aren't even close to our means. And I never once had to deal with big firm bullshit. I've got 550K in munis now with an aggregate tax-free return of about 5.8 percent - no IRA or 401K, because I plan on retiring well before 59 1/2.

    (continued)

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  10. (part 2)

    It probably helped that neither of us much cares for toys. We like to go out for a nice dinner a few times a month (nice dinner: $30-60/person), to treat our friends on occasion, and to travel twice a year (our only real extravagance: $5-10K), but neither of us needs much stuff. We don't have a budget and buy whatever we want, but it seems like that's never a hell of a lot.

    I realize that law school is more expensive now than when I went (93-97) and that graduating with 37K in debt may no longer be feasible. I also realize that I probably come out of this comment sounding like an arrogant ass. Nevertheless, I think the non-traditional study route is still something worth considering for those who have the discipline to deal with it.

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  11. Hi 4:42, 4:43 - Yours is a great tale of victory and dedication - 9 years of part time school is a great accomplishment. You are also right that we should mention more often that the part-time option is available. However, it is not available in all locations - and may not be available in your specialty.

    You are also right that law school is much, much more expensive now. Check out this post for an example : http://thelegaldollar.blogspot.com/2009/10/changing-cost-of-law-school-and-impact.html

    You should also be commended for your (and your wife's) frugal lifestyle - you are truly in the top percentages of attorneys in being as disciplined as you are. Here's a question that I have been curious about - do you think that your time in the reserves has helped improve your discipline with regard to financial matters?

    Finally, I will probably do an upcomming post on this, but I noticed from your language that you are not contributing to an IRA or 401K because you believe that you can't tap them before 59 1/2. However, this is not true - you can annuitize your IRA penalty-free at any age with a 72(t) plan. Here's a first link, search google for more:
    http://www.investopedia.com/terms/r/rule72t.asp

    This would work especially well with your tax-free income from munis and would allow you to save more because you could save on a pre-tax basis in your 401K (and later roll it over to an IRA at retirement).

    It also seems like you own a solo or small office, so you may want to look into establishing a small defined benefit plan (a traditional pension plan). This would potentially let you save huge amounts tax-free that would later be paid to you as a pension. See this link for an example:
    http://www.onepersonplus.com/onepersonplus/index.html

    Thanks again for your post and good luck!

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  12. Thanks, Managing Partner. My time as a reservist definitely contributed to my financial discipline, and I would also credit three other things. First, I was raised by conservative parents who were careful with money and not obsessed with status symbols. Second, I moved out of my parents' house at 17 and had to survive in a recession, sometimes on $140 a week, and when you live on that kind of money (even off the books) you learn what really counts. And finally, I've always been the kind of person with one eye on the long term. I don't know if I'll end up celebrating my 50th birthday by selling the practice to my associates and traveling the world for a year (or, alternatively, going back to school for environmental engineering and saving the planet), but I'd like to have the option.

    Rule 72(t) looks interesting. The interest rate restrictions are potentially tricky, but given the kind of money I'll hopefully have by age 50, the thresholds are very realistic. Obviously there's no advantage with respect to munis, which are tax free to begin with, but it could be a vehicle to invest in BABs or corporate bonds on the anticipation that I'll be in a lower tax bracket when I start withdrawing. I'll also check out the defined benefit option and see if it makes sense for me, although I'd probably want professional advice before making any decisions.

    (continued)

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  13. (part 2)

    I'll look forward to your post on early retirement options and (if you choose) on part-time education. Thanks again for the advice.

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  14. Never mind, I see that Rule 72(t) _does_ provide an advantage even as to munis, by allowing me to buy them with pretax money. I really need to stop being my own accountant.

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  15. 1:33 - Yeah. There are so many little nuggets like this that could be great to take advantage of, but word does not get out to people. Even some accountants vary widely in competenecy and knowledge and some really don't know a whole heck of a lot. The top ones do, but they are often too expensive and only serve the really loaded people. We need some sort of different service delivery model so those of us that make good money, but not that great can still get access to the best services.

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  16. Let's believe that our affiliate is going to stay a affordable, expert way of life in Chi town. Lease a reasonably cost residence in an established place. Use affordable expert outfits, not $2000 matches. Have the periodic A coffee house, etc. A way of life where the affiliate is not really trying to to be especially cautious with their cash, but is overall fairly aware about maintaining the investing down - and is certainly not purchasing anything big.

    buy and hold

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