[Editor's Note: I've been begging for more guest posts from attorneys for years, but rarely get them. This one is from attorney and blogger Joshua Holt (now best known as The BigLaw Investor.) For the attorneys (and even the doctors) who are reading this, be sure to check out Josh's blog too. We have no financial relationship.]
The White Coat Investor became a millionaire by the age of 38, about seven years out of residency with an average annual income of less than $180K. The parallels between this and the legal partnership track at the country’s largest law firms is pretty close to spot on, although you’ll make a little more money on average than WCI (good) but you’ll be doing it in a much higher cost-of-living locale (bad).
So where are all the millionaire legal associates? I’m not sure, but maybe a few will send me an email after reading this article. What I do know is that it’s perfectly possible to accumulate more than a million dollars before you’re up for partnership at your firm. Here’s the back-of-the-envelope way to get that done.
First, if you’re not familiar with legal compensation at the nation’s largest law firms (“Biglaw”), it’s amazingly transparent. All associates are paid along a standard Biglaw salary scale based on seniority. The Biglaw salary scale moves around from time-to-time. The latest shift in the industry occurred in the middle of 2016. We’re likely to see the same salary structure for the foreseeable future, which breaks down like
- 1st year – $180,000 + $15,000 (bonus)
- 2nd year – $190,000 + $25,000 (bonus)
- 3rd year – $210,000 + $50,000 (bonus)
- 4th year – $235,000 + $65,000 (bonus)
- 5th year – $260,000 + $80,000 (bonus)
- 6th year – $280,000 + $90,000 (bonus)
- 7th year – $300,000 + $100,000 (bonus)
- 8th year – $315,000 + $100,000 (bonus)
The good thing about transparent salaries is that it makes it very easy to discuss strategies such as budgeting and saving among lawyers working in Biglaw. Unfortunately, only a sliver of lawyers end up with “Biglaw” compensation. The vast majority of the legal workforce – including those that are busy prosecuting criminals – earn much less. This quirk in the industry is reflected in what’s called the bimodal salary distribution curve, a phenomenon where starting salaries are clustered around two mountain peaks.
Getting to $1 Million
If you’re making $180,000 as your starting salary in law, chances are good that you’re living in a high cost-of-living city like NYC or San Francisco. That will make it tougher – but not impossible – to accumulate over $1 million before you become eligible for partnership, typically during your 8th year as an associate.
As I’ve written about previously, a modest first-year associate budget allows for almost $69K in savings your first year. That’s even accounting for punishing NY state and city taxes and the reality that you’ll be spending a lot of your time unwinding at bars and restaurants. A frugal lawyer could do much better. Heck, I’ve even accounted for a $2,500 monthly rent. If you split a place with roommates much closer to work, you can save another $12K and probably be happier for it thanks to the companionship of living with people.
The key, of course, is starting your career on the best foot possible by hitting that $69K target in your first year. After that, if you can hold your lifestyle inflation in check during the associate years, you’ll have nearly $1.3 million after your 8th year. My calculations assume a nominal 7% investment growth each year.
Of course that’s napkin math and I assume there will be a few people who think saving so much isn’t possible (although probably not a lot of readers of this site).
Let me address some of the criticisms to get them out of the way:
1) You aren’t accounting for any lifestyle inflation.
True. I’m presenting the numbers and it’s up to readers to decide if the lifestyle inflation trade-off is worth it. If you’re interested in saving over $1 million, you could start off living more frugally (i.e. living with roommates) and eventually move into your own place after 3 years. You could also allow for some modest lifestyle inflation and end up with closer to $1 million. The point is to be conscious about the decision.
2) What about getting married? Kids? This would never work once “real life” starts happening.
There aren’t too many stay-at-home spouses in NYC. If you get married, you’ll likely have an even higher income plus the benefit of a permanent roommate, thus allowing you to save even more. Once kids enter the picture, it might be tough to save so much. But, if you’re a “straight through” lawyer, you might start working at a firm at 26. It’s not unreasonable to think you might not have kids until your early 30s, at which point you’ll have done the bulk of the savings anyway. If you do have kids, I’m told they are expensive and not much good for your taxes at a certain point. Adjust these calculations downward accordingly.
3) Your tax calculations are wrong.
These are my calculations and are based fairly closely on my actual taxable numbers. Your situation will be different, so run your own numbers and see. When you put the numbers in the calculator, make sure you’re backing out things like 401(k) and HSA contributions as well as accounting for large itemized deductions thanks to a hefty state and city tax bill.
4) A 7% nominal growth rate is outrageous.
Fine. Run the calculations with your own numbers.
5) People in Biglaw burn out in 2-3 years, so this won’t work.
Burnout is common in the industry and many people leave after 2-3 years. From my own anecdotal experience, after 5 years barely anyone from my class year was still around. However, if you’re going to walk down a path, it might as well be this path until such time as you exit the path.
6) I have student loans.
This is the biggest impediment to having the full million dollars before you become partner, but it won’t stop you from saving $1 million even if your net worth ends up being a little lower than $1 million. The White Coat Investor has been telling us for years to get a lower interest rate on your student loan. After refinancing, I’d first fill up the tax-advantaged retirement accounts and then go “nuclear” on the loans. You should be able to pay them off pretty quickly, especially if you decide to take a more frugal approach to your first three years in Biglaw.
The Benefits of Early Millionaire Status
Now that we’ve discussed and, I hope, answered why this plan wouldn’t work, let me tell you a few of the benefits.
The first is obviously that you’ll end up with $1+ million before you ever become partner. It makes the annual reviews a lot easier (the time when you could be told that “it’s not working out”) when you’re not relying on the paycheck.
Second, even if you exit Biglaw and step off this 8-year path, you’ll be in a great position to do so. The third year is a critical time for most associates. Do you want to be the associate in the nice 1 bedroom that still owes $100K on his loans or do you want to be the associate with no debt, a little savings and a low-overhead lifestyle? The first associate feels stressed and obligated to push themselves through the next couple of years. The second associate laterals to go work for Spotify. Give yourself the option to go work for Spotify, even if you never take it.
Third, as every WCI reader should know, it’s really not that hard to “live as a law student” for the first few years out of law school. You’re already used to being poor and living with roommates. You won’t be able to control the fact that your peers are now spending time at fancy restaurants and bars, but you can control whether you’re spending a lot on rent and cars. Take care of those big ticket items and a lot of other little things will fall into place.
If you’re a millionaire associate or on the path to millionaire status, let's hear from you!
What do you think? Do you think it's reasonable for a Big Law attorney to be a millionaire before making partner? Why or why not? Comment below!