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Financial Planning for the Transitioning Attorney

Contributor:  Matt Bisland, Morgan Stanley

Adjusting to a major career change can be complicated and may seem a little overwhelming at first, especially if you’ve worked in the legal field for much of your career. There are several steps you can take to help reduce some of the financial uncertainty when making such a change. Considering that each person’s situation is multifaceted with many unique variables, it is highly recommended that you develop a detailed financial plan before making any potential career change. The more time you can allot for financial planning before making a change, the smoother your transition can be.

Your plan should consist of a baseline analysis that details what your financial future could potentially look like if you remained in the legal field with your current employer and nothing changed, and a second analysis that maps out what your fiscal future might look like after transitioning into a new career. It will be important to compare these two analyses to ascertain the potential benefits and costs of taking the leap.

Arguably, one of the most salient changes to plan for would be adjustments to your compensation, which include both how much you are compensated and how you are compensated. Changes in compensation tend to have a ripple effect that impacts virtually every facet of your financial future, so developing a sound financial plan to examine the ramifications is paramount.

To better understand and plan for these potential changes, any financial planning should include a deep review of your annual expenses and what it costs to maintain the lifestyle you want.  Specifically, breaking down your annual expenses into the following categories:

  • Fixed Essentials: Mortgage payments, utilities, taxes debt repayment, and college tuition
  • Discretionary Spending: Travel, entertainment, dining out, and hobbies

Once you have a firm grasp on how you utilize your income, you should examine whether you’ll be able to maintain that same lifestyle or if you’ll need to make some alterations. If it looks like changes will be required, categorizing and prioritizing your expenses will help you identify which aspects of your lifestyle you’re most comfortable adjusting.

There are also non-monetary benefits such as participation in a corporate healthcare plan that must be considered as well. It is important to factor the cost of healthcare and whether that cost will change based on a career transition.

During your first year after leaving the practice of law, your compensation may decrease. Therefore, it is important that you have a clear understanding of your new compensation.  For many this initial sacrifice for a sense of purpose, workplace satisfaction and future compensation opportunities are well worth waiting for.

Certain occupations pay a lower salary with a heavier emphasis on a bonus which would impact your cash flow throughout the year and require budgeting of a prior year’s bonus throughout the current year. Certain sectors prefer to compensate more heavily in equity that could vest over several years. In this case, you won’t have immediate access to this portion of your compensation and must budget for the shortfall in your monthly cash flow. In my opinion, the structure of how you are compensated is equally important to the amount you are compensated.

Additionally, changes in your compensation require an evaluation as to whether you can still retire on your original timeline. If you have a reduction in compensation or your compensation is attached to a vesting schedule such as equity or a bonus that is paid out over several years, you may have to work longer than you currently anticipate to maintain your fiscal health in retirement.

Another important factor to consider is the corporate retirement plan such as a 401(k). You should have a good understanding of the new 401(k) plan’s parameters if one is offered.

Some important considerations are:

  • Percentage of contributions your employer will match
  • Investment options
  • Fees
  • Number of changes to your investments you can make in a calendar year
  • Ability to contribute on a pre or post tax basis

If you’ve never participated in a 401(k), prior to this career change, it could be beneficial to review the potential tax implications of participating with your accountant. If you’re not transitioning to an employer that offers a retirement plan or are going to be self-employed, you should evaluate whether you can set up your own plan such as a SEP or SIMPLE IRA. Due to the complexities of such plans, you should reach out to a financial advisor and your accountant to determine which plan is optimal for you.

                While there are many different variables to account for when putting together a financial plan, there are some that tend to be unique to the legal profession and could have a major impact on your overall net worth.

These factors include:

  • Partnership or equity stake in the firm, it is critical to understand how your career transition may impact the value of this equity
  • Unvested equity
  • Deferred compensation

There are many factors and variables to account for during a career transition no matter what stage of life you’re in.  Hopefully, I’ve been able to highlight some of the key questions that you and your family should be thinking about when putting together a financial strategy before making a career change.

In future columns, we will be taking an in-depth look at the following:

  • An introduction to financial planning
  • Planning a career transition with a young family
  • Retirement planning for self-employed professionals
  • Changing careers later in life
  • Budgeting for the intangibles

Matthew Bisland is a Financial Advisor with the Global Wealth Management Division of Morgan Stanley in Westport, Connecticut. Morgan Stanley and its Financial Advisors do not provide tax or legal advice. Individuals should seek advice based on their particular circumstances from an independent tax advisor.  The information contained in this article is not a solicitation to purchase or sell investments. Any information presented is general in nature and not intended to provide individually tailored investment advice. The strategies and/or investments referenced may not be appropriate for all investors as the appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.  Investing involves risks and there is always the potential of losing money when you invest. The views expressed herein are those of the author and may not necessarily reflect the views of Morgan Stanley Smith Barney LLC, Member SIPC, or its affiliates.  

Information contained herein has been obtained from sources considered to be reliable, but we do not guarantee their accuracy or completeness.

When Morgan Stanley Smith Barney LLC, its affiliates and Morgan Stanley Financial Advisors and Private Wealth Advisors (collectively, “Morgan Stanley”) provide “investment advice” regarding a retirement or welfare benefit plan account, an individual retirement account or a Coverdell education savings account (“Retirement Account”), Morgan Stanley is a “fiduciary” as those terms are defined under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and/or the Internal Revenue Code of 1986 (the “Code”), as applicable. When Morgan Stanley provides investment education, takes orders on an unsolicited basis or otherwise does not provide “investment advice”, Morgan Stanley will not be considered a “fiduciary” under ERISA and/or the Code. For more information regarding Morgan Stanley’s role with respect to a Retirement Account, please visit Tax laws are complex and subject to change. Morgan Stanley does not provide tax or legal advice. Individuals are encouraged to consult their tax and legal advisors (a) before establishing a Retirement Account, and (b) regarding any potential tax, ERISA and related consequences of any investments or other transactions made with respect to a Retirement Account.

CRC 5620598 04/2023

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