Paid off law school debt...savings goal now?

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legendary
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Paid off law school debt...savings goal now?

Post by legendary »

This week's thread on paying off law school debt got me thinking. Once a person has paid off that debt and assuming a biglaw salary, what should be their annual savings target? (with savings = taxable + 401k + backdoor roth + CDs + emergency fund)
ilmartello
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Re: Paid off law school debt...savings goal now?

Post by ilmartello »

Seeing at the end of law school, you're probably a few years behind others because you had time in grad school, and you needed time to pay off the debt, as much as possible. Given the effects of compounding, the more you save at a younger age, the more you will be pleasantly surprised.
Radman
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Re: Paid off law school debt...savings goal now?

Post by Radman »

While I am not a lawyer I assume that the salaries are near many physicians takehome pay. From what I have researched I plan saving 25% of before tax pay for retirement once my loans are completely paid off. I found finding a percentage was helpful as a goal.
Random Poster
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Re: Paid off law school debt...savings goal now?

Post by Random Poster »

legendary wrote:This week's thread on paying off law school debt got me thinking. Once a person has paid off that debt and assuming a biglaw salary, what should be their annual savings target? (with savings = taxable + 401k + backdoor roth + CDs + emergency fund)
At least half of their gross income.
gaucho20
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Re: Paid off law school debt...savings goal now?

Post by gaucho20 »

Random Poster wrote:
legendary wrote:This week's thread on paying off law school debt got me thinking. Once a person has paid off that debt and assuming a biglaw salary, what should be their annual savings target? (with savings = taxable + 401k + backdoor roth + CDs + emergency fund)
At least half of their gross income.
50% of gross income +40% state+federal taxes=10% of gross income to use for house, food, etc. Seems like a difficult goal.

I think the 25% is a good, and probably attainable, goal.
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market timer
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Re: Paid off law school debt...savings goal now?

Post by market timer »

gaucho20 wrote:50% of gross income +40% state+federal taxes=10% of gross income to use for house, food, etc. Seems like a difficult goal.
That 40% rate is only at the margin. Effective tax rate is probably around 25% if maxing out the 401K. 50% is certainly doable, especially if you cohabitate.
ChapMan
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Re: Paid off law school debt...savings goal now?

Post by ChapMan »

Biglaw starts at $160k. Depending on the city you live in, 50% gross is easily do-able. Not, however, if you live in midtown and go away to AC every weekend.
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ram
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Re: Paid off law school debt...savings goal now?

Post by ram »

As a specialist physician my real income started late in life (at least a decade behind the mean). We make decent money and have saved 50% of our "post tax" income in some years. With one kid in college and the next going this fall we still hope to stay at >33% and hopefully nearer 40%.
Ram
robocop
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Re: Paid off law school debt...savings goal now?

Post by robocop »

ChapMan wrote:Biglaw starts at $160k. Depending on the city you live in, 50% gross is easily do-able. Not, however, if you live in midtown and go away to AC every weekend.
Sure, Biglaw starts at 160k in big markets. But big markets are expensive to live in, even in the outer, cheaper neighborhoods. It is hard to not have at least 35% tax burden in state + local at these salaries. You are already in the 28% bracket at 160 even if you max out 401k.

You don't have to be a big spender at all to not be able to do 50% gross. Even assuming I did not have my loans paid off, at a 170k salary I have 115k in money to work with after taxes and all of the other deductions that are taken (LTD, health care, flex, etc.). Assuming the 17K in 401K counts as savings, your takehome is down to 98K.

I don't have kids and split rent with my BF on a 730 sf 1 BR condo in a cheaper area close to my work, and even with that I'm sure I couldn't keep my cost of living to 13K a year. We take zero vacations per year minus the mandatory trip to the parents' homes, eat out at Subway when we splurge, clip coupons, brown bag our lunches, don't have cable, only use $40 of gas a month, and have no kids. Add on the sales tax that accompanies most metro areas you can get a biglaw job in for an extra 5-10% cost on all of those goods. Even living very frugally, our costs are at least 35k a year (17.5K/person). Probably closer to 20K a year.

I would guess that while not impossible, the goal of saving 50% of pre-tax income is very, very difficult for most attorneys even if they are very frugal. You would have to forego some things many are not willing to sacrifice, such as health insurance, a car, being relatively close to work, having children, any food besides Ramen, etc.

To say it is simply a matter of not living in a swanky neighborhood and gambling every weekend is grossly under-representing the actual sacrifices that would have to be made to attain that level of savings.
Grt2bOutdoors
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Re: Paid off law school debt...savings goal now?

Post by Grt2bOutdoors »

robocop wrote: To say it is simply a matter of not living in a swanky neighborhood and gambling every weekend is grossly under-representing the actual sacrifices that would have to be made to attain that level of savings.
+1 Quote of the week.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
jlg
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Re: Paid off law school debt...savings goal now?

Post by jlg »

legendary,

I'm going to take a different tack here without knowing your full situation.

If you are in biglaw, there is a good chance that some aspects of your life kind of suck :) Knowing first hand as a husband (widow?) of a biglaw associate, I can see how demanding, stressful and soul-crushing the job can be. Practice group obviously matters, but billable hour requirements are a bitch. Add to that how bonuses have been lagging the past few years while profits per partner have been skyrocketing.

Having a savings goal is important. Doing all the good things of paying yourself first (401K to the max, IRA to the max etc ...) help seed your progress. Next is determining your fixed expenses and variable expenses. Now what do you have left over? What from the variable expenses can be diminished?

Frugality is a component to savings, but this can definitely come at cost. If you are in biglaw, your time is limited. Convenience expenditures like a housecleaner, grocery deliveries etc ... are not going to cause you to fail to reach your goal. Add to that the relationship between commute time and cost of rent. While you don't have to live in midtown, you don't want to be giving your entire life to BOTH biglaw and the subway/highway/train etc ...

Save what you can, but don't lose site of how valuable time can be. The question will be, when you become a Senior Associate, what percentage of your raise will you be saving? If the answer is 100%, you are doing it right.
Random Poster
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Re: Paid off law school debt...savings goal now?

Post by Random Poster »

robocop wrote:I would guess that while not impossible, the goal of saving 50% of pre-tax income is very, very difficult for most attorneys even if they are very frugal. You would have to forego some things many are not willing to sacrifice, such as health insurance, a car, being relatively close to work, having children, any food besides Ramen, etc.
Sure it is difficult. It is also quite possible, and you don't have to sacrifice health insurance, living close to work, or decent food. Saving 50% or more of gross simply requires making choices and prioritizing where your money goes.

--Former biglaw associate, who saved more than 50% of their gross income and paid off significant student loans well ahead of schedule.
robocop
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Re: Paid off law school debt...savings goal now?

Post by robocop »

Random Poster wrote:
robocop wrote:I would guess that while not impossible, the goal of saving 50% of pre-tax income is very, very difficult for most attorneys even if they are very frugal. You would have to forego some things many are not willing to sacrifice, such as health insurance, a car, being relatively close to work, having children, any food besides Ramen, etc.
Sure it is difficult. It is also quite possible, and you don't have to sacrifice health insurance, living close to work, or decent food. Saving 50% or more of gross simply requires making choices and prioritizing where your money goes.

--Former biglaw associate, who saved more than 50% of their gross income and paid off significant student loans well ahead of schedule.
I think the keyword in your response is former. I'm certain that many things are different for current/recent biglaw associates, so using this anecdote as an representative of an entire group of people in an entirely different set of circumstances doesn't work very well. The costs of living is different, health care is dramatically more expensive and not covered as much by employers, bonuses are different, the number of current biglaw jobs available and the compensation at those jobs is different, etc.

Additionally, it is important to remember that savings is a means to an end, not an end in and of itself. If you are making enough to support your current lifestyle, while saving a comfortable amount for your retirement goals and a rainy day, I'm not sure what the goal of saving a large percentage would be. I personally would rather enjoy some of my money (and support other jobs while I'm at it), or give to charity, instead of hoarding it for no good reason.

FWIW, I am aiming to max out 401K and Roth backdoor while saving 25% gross after I am done with the loan debt. Maybe more or less in a given period, based on what my particular goals and circumstance are (home, children, unemployment, illness, etc.).

I don't think there is any particular goal that will work for all biglaw associates, but 50% is certainly not necessary to achieve most people's goals, nor is it an easy "minimum" percentage to achieve.
2wolves
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Re: Paid off law school debt...savings goal now?

Post by 2wolves »

robocop wrote: I don't think there is any particular goal that will work for all biglaw associates, but 50% is certainly not necessary to achieve most people's goals, nor is it an easy "minimum" percentage to achieve.
Well said. I tried to say the same thing in the Retire by 50 thread and got lambasted for it.
ark43
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Re: Paid off law school debt...savings goal now?

Post by ark43 »

I'm a first year big lawyer in Boston. I've got debt to pay, and am putting everything above emergency savings to it. Take home is about 9300 a month. Our living expenses are about 3250 a month. We splurge on rent (I really wanted to live close) at 2400 a month. Besides rent and cable, we live very frugally (rarely ever eat out, always take a lunch to work, no commuting expenses). It would be really hard to get up to 80k in 'savings' per year.
ChapMan
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Re: Paid off law school debt...savings goal now?

Post by ChapMan »

robocop wrote:
ChapMan wrote:Biglaw starts at $160k. Depending on the city you live in, 50% gross is easily do-able. Not, however, if you live in midtown and go away to AC every weekend.
Sure, Biglaw starts at 160k in big markets. But big markets are expensive to live in, even in the outer, cheaper neighborhoods. It is hard to not have at least 35% tax burden in state + local at these salaries. You are already in the 28% bracket at 160 even if you max out 401k.

You don't have to be a big spender at all to not be able to do 50% gross. Even assuming I did not have my loans paid off, at a 170k salary I have 115k in money to work with after taxes and all of the other deductions that are taken (LTD, health care, flex, etc.). Assuming the 17K in 401K counts as savings, your takehome is down to 98K.

I don't have kids and split rent with my BF on a 730 sf 1 BR condo in a cheaper area close to my work, and even with that I'm sure I couldn't keep my cost of living to 13K a year. We take zero vacations per year minus the mandatory trip to the parents' homes, eat out at Subway when we splurge, clip coupons, brown bag our lunches, don't have cable, only use $40 of gas a month, and have no kids. Add on the sales tax that accompanies most metro areas you can get a biglaw job in for an extra 5-10% cost on all of those goods. Even living very frugally, our costs are at least 35k a year (17.5K/person). Probably closer to 20K a year.

I would guess that while not impossible, the goal of saving 50% of pre-tax income is very, very difficult for most attorneys even if they are very frugal. You would have to forego some things many are not willing to sacrifice, such as health insurance, a car, being relatively close to work, having children, any food besides Ramen, etc.

To say it is simply a matter of not living in a swanky neighborhood and gambling every weekend is grossly under-representing the actual sacrifices that would have to be made to attain that level of savings.
Alright, let me break it down for you a bit better for when I was in biglaw in Manhattan.

Lived in the West Side around 112th or so. My share of rent/utilities was ~$1000/mo (for one room in a four br brownstone).

Didn't have a car. If I needed to go somewhere far away, I'd rent one.

Health insurance was a high deductible plan for ~$200/mo.

Food/entertainment/fun/Metro card/whatever the hell else I wanted spending came out to an average of $1800/mo and was much better than ramen everyday. Granted I didn't go to Per Se everyday, but considering that the firm (or its clients) basically paid for my dinner 4 or 5 days a week and I could have leftovers or go out on the weekends, $1,800/mo was more than reasonable. Also, there was at least 1-2 events every week for some random thing or other that the firm would pay for and I could go meet people, take a break from work, and get some free food. And recruiting season was just a mess of free food and booze...ah the good ol' days.

All this came to about $37,200 per year. Taxes suck, but assuming that takehome is $115k, that leaves about $79k. Now, I could've cut back on happy hours/drinks or whatever, but I didn't feel a need to. True, I didn't take a vacation, but for some reason that never bothered me that much (that's just me I guess). If a vacation is something you need, then that's something else you'll have to look into. My recent vacation to Puerto Rico for a week cost less than $2k. You may want $10k vacations, who knows.

Now, that's the Manhattan market, which I believe is the most expensive (competing with maybe SF). The big open secret about biglaw, however, is that there are 5-6 cities that all pay "market" but aren't Manhattan. Let me tell you about my biglaw time in Boston:

Rent/utilities - $700/mo for one bedroom in a house in Brookline on the green line.
Insurance - $200/mo for a high deductible plan
Other spending (transportation, bars, food (again, clients picked up the tab 4-5 days a week and some weekends)) - $1700/mo and I never denied myself ANYTHING.

Total Spending - $31,200

Now, here's the other side of the ledger. MA also has lower taxes than Manhattan (because someone had a bright idea to have a city tax in Manhattan), so my takehome was closer to $120-125k. That means I had almost $90k after all this. That leaves a $10k buffer before saving 50% of gross. Like you, I had no kids/spouse/alimony/whatever, but I easily saved 50% gross in both Manhattan and Boston.

NOW, in DC, I make far less, and my spending is roughly split as follows:

Rent/utilities - $800/mo
Insurance - negligible (literally $0 most times)
Other spending - $1200/mo

I don't go out as much to really nice places (but still manage 2-3 happy hours a week now that I no longer have 80+ hour weeks) and I can't get clients to cover the cost of my food, but I spend roughly $24k a year now. Even at this point, I'm able to save about $30k a year.

Also, none of this includes bonuses which were perfunctory at my firms (and are largely still so in much of biglaw now, even though Cravath decided to screw the market) and all went into saves (my 50% gross number doesn't count the bonus, but it could I guess, it all went into my savings anyway). It also doesn't factor in that you get perfunctory raises for still being alive, which means I actually made more in BOS than NYC even though the cost of living was lower in BOS (yay for getting raises to be a "second/third/fourth year associate!").

-------

That said, I understand that everyone has different priorities and that everyone's situation is different. If I had $200k in loans, which some people do, I'd likely be saving nothing and putting it all against my 6.8% loans. If I needed to live in midtown or in the more trendy places of Boston, my budget would potentially be very different. But I didn't do that. It took longer to get home, and I lived in a smaller place, but I was never one of those people that needed much where I lived. Give me a bed, a tv (and cable), and a computer with internet, and I'd be fine. We all set our own priorities, but I found it VERY easy to save 50% gross without a second thought and not really denying myself much. Again, though, if you had a family/kids, it'd be very very different. For instance, I'd want to save a lot more for my child's education.

All that said, 50% certainly wasn't and isn't necessary by any means. It's something I wanted to do, especially since I saw the writing on the wall early in my practice group. And you're right, times are different now, bonuses are smaller, maybe clients aren't footing the bills as much, but talking to my cohort now (mid-level to senior associates), they're not hugely different in biglaw. You should, however, probably brace for potential changes in the legal market as a whole, which is why I saved 50%. Not necessary, and if you want go to on vacation, you definitely should, but that was the price of peace of (unreasonable) mind.
Last edited by ChapMan on Sat Mar 17, 2012 9:38 am, edited 1 time in total.
Radman
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Re: Paid off law school debt...savings goal now?

Post by Radman »

Earlier I said 25% of gross for retirement and that was aimed at starting saving around 35 after loans and emergency fund is in place and retiring at 65 (this is me personally as I won't be finished with training until 32). That really didn't include other things like saving for children's colleges etc (which also depends on private versus public etc). That could certainly push you above the 25% of gross in addition to any other savings you are perusing ( new car, down payment on home, whatever). You might be more in the 35-40% of gross or even higher if you want to send your 4 kids to private school.

I think what needs to be clarified for those saying save 50% of gross is for what purpose. If it is to retire by 50 then I think it depends if that is the OP goal. If it is because you are assuming that he needs to save for retirement, a down payment, emergency fund, and private college for 4 children starting at age 27 then maybe 50% is close but again depends on the OP goals. I would argue that certainly ChapMan is correct in that it is possible but certainly not necessary depending on your goals which only you can define.

The following is a completely non-financial statement from my physician viewpoint and may sound preachy. Keep in mind life is a journey, you have no true end point but death. And unfortunately for many that comes at 55 when they learn they have metastatic cancer or a massive heart attack. Plan like you may live until you are 95 I am by no means saying don't save, I am a boglehead after all. However, don't put all your effort into saving 60% of your gross income and completely delay having any fun because you could end up one of the unlucky ones who leaves this earth before age 65. Do your best to live life in moderation, eat healthy, exercise, and don't smoke. We talk about people's financial health all the time as that is the purpose of this forum. Just don't forget if you don't take care of your real health, having all the money in the world doesn't matter if you don't have your health.
Last edited by Radman on Sat Mar 17, 2012 10:17 am, edited 1 time in total.
Cash
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Re: Paid off law school debt...savings goal now?

Post by Cash »

The wife and I are both biglawyers (for now). We save a bit over 28% gross and 47% net. That's with a mortgage on a condo in a gentrifying area near our jobs. We take pretty nice vacations a couple of times a year and eat out frequently. Of course, we could save more, but I think we've achieved a nice balance between saving for retirement and having fun today. When we decide to have kids, I suppose we'll cut back on the "having fun today" part...
huntertheory
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Re: Paid off law school debt...savings goal now?

Post by huntertheory »

I really don't think a 50% of gross savings rate in at a Big law firm in NYC is doable or good for your sanity. But all of these choices come down to your priorities.

I am still a "biglaw" NYC attorney, doing corporate work, at one of these top firms. For me, savings was very important, but so were the other things in my life: Paying off loans (done), paying for an engagement ring/wedding (done), living in a place that I was happy with, was clean, and was not too far from the office (done, as without children I did want to live in Manhattan). The trade-off there was to watch spending for other expenses as we cook a great deal and do not splurge on clothes, etc. Where the rubber really met the road was that I did not go to as extravagant of places as many of my friends did for vacations -- I tended to visit family domestically in different parts of the country, while they took more international flights. That is an uptown problem and I am not even sure it is the *right* choice (in what sense?) but it was part of the trade-off.

The important thing to remember with all of this is perspective. Having one of these jobs is a good problem to have, but the important thing about it to come out on the other side well set up for the rest of your career and life: A "biglaw" associate tends to enter the job in their mid to later 20s, often it is their first real job at all, they have substantial debt, and are now receiving surprisingly large paychecks in exchange for a stressful existence. Many fail to embrace the good parts of the job (the good and fast training and experience), spend money on frivolous things, don't pay down their debt, and, like many employees everywhere, don't get started on their retirement savings. If you can take the opposite approach -- and hey, this is Bogleheads I'm surprised many here don't take the opposite approach -- things will more than likely work out fine, whether your savings rate is 30%, 40% or 50%.

In any event, I tried to focus on the basic things and didn't stress out too much about my total overall savings rate: (1) Paid off debt quickly, (2) maxed out my 401k, (3) Set up automatic savings to withdraw money to various accounts (Vanguard taxable account, savings accounts, etc), depending on the goal, (4) always paid off credit card balances in full every month and (5) I have an envelope where all "extra" money -- rebates, reimbursements, cash back, gift checks, anything -- went into, and I always deposited that in savings (you'd be surprised how that adds up).

Like the law itself, saving money ain't rocket surgery.
Random Poster
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Re: Paid off law school debt...savings goal now?

Post by Random Poster »

robocop wrote:
Random Poster wrote:
robocop wrote:I would guess that while not impossible, the goal of saving 50% of pre-tax income is very, very difficult for most attorneys even if they are very frugal. You would have to forego some things many are not willing to sacrifice, such as health insurance, a car, being relatively close to work, having children, any food besides Ramen, etc.
Sure it is difficult. It is also quite possible, and you don't have to sacrifice health insurance, living close to work, or decent food. Saving 50% or more of gross simply requires making choices and prioritizing where your money goes.

--Former biglaw associate, who saved more than 50% of their gross income and paid off significant student loans well ahead of schedule.
I think the keyword in your response is former. I'm certain that many things are different for current/recent biglaw associates, so using this anecdote as an representative of an entire group of people in an entirely different set of circumstances doesn't work very well. The costs of living is different, health care is dramatically more expensive and not covered as much by employers, bonuses are different, the number of current biglaw jobs available and the compensation at those jobs is different, etc.
I'm not that former, and while some things are no doubt different for current/recent biglaw associates (and, in regards to the "recent" description, I believe that I would qualify), the cost of living is not that different, I rather doubt that health care is "dramatically more expensive" (I understand that insurance rates have increased slightly, but the increase is in line with what I'm paying in an in-house role), and compensation and bonuses are actually higher (based on my sources) now. The number of available jobs may be slightly down, but biglaw was never an "accept all applications" type of place.
robocop wrote:Additionally, it is important to remember that savings is a means to an end, not an end in and of itself. If you are making enough to support your current lifestyle, while saving a comfortable amount for your retirement goals and a rainy day, I'm not sure what the goal of saving a large percentage would be. I personally would rather enjoy some of my money (and support other jobs while I'm at it), or give to charity, instead of hoarding it for no good reason.

Well, money is security and having money provides options. For some, getting into biglaw is as much of a goal as is getting out of it. Having a healthy savings rate allows you to get out of it and into something else without hurting your financial future too much.
robocop wrote:I don't think there is any particular goal that will work for all biglaw associates, but 50% is certainly not necessary to achieve most people's goals, nor is it an easy "minimum" percentage to achieve.
The question isn't if saving 50% is easy. The question is whether it is possible.
Topic Author
legendary
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Re: Paid off law school debt...savings goal now?

Post by legendary »

Thanks, everyone. Appreciate your thoughts! I've budgeted for the next month and am aiming for a 40-50% savings rate.
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