By James Mwombela, CFP®
As a mid-level associate at a large law firm, if you aren’t already contemplating the future of your career, you should be. Your marketability is at its peak, and your phone may already be ringing off the hook with opportunities. A common decision that attorneys face at this point in their careers is between staying in BigLaw and pursuing the partnership track or going in-house as a corporate general counsel. Many mid-level associates are also considering the government and nonprofit spaces. With so many options for such an important decision, making an informed choice is key.
If you want to stay the course at the firm, the first thing to do is realistically evaluate your shot at partner. How are your performance reviews? This is a good time to look closely at past reviews, assessing them with a critical eye and reading between the lines of all written feedback. Have you made strong connections with any of the partners? Ask yourself if you have trusted firm leaders whom you can count on to advocate for your candidacy. Also, find out how much business you would be expected to bring in as a partner, and start thinking now about how you would accomplish that goal. Besides considering your chances of becoming a partner, you should also be thinking about how well you fit in with the culture of your firm. As a partner, you have a greater stake in the overall work and reputation of the firm, so it may be harder to look the other way when those things do not line up with your personal values.
The topic of firm culture can be especially important for attorneys of color. The 2018 Vault/MCCA Diversity Survey report states that nearly 91% of equity partners at the nation’s largest law firms are white. Besides the fact that there will be few, if any, other partners who look like you, also ask yourself if the firm has a serious commitment to diversity, equity, and inclusion in recruitment and retention. Regardless of your race, if your firm doesn’t have resources like affinity groups for attorneys of color, women, and LGBTQ+ attorneys and other strategies dedicated to improving the lives and well-being of all of its employees, you will need to decide if you want to stay to try to improve that environment or go somewhere else that is a better fit for you.
Another option in BigLaw is becoming non-equity partner. Non-equity partners earn $371,000 a year on average and you could still eventually become an equity partner and bring that average up to a little over $1 million. Are you prepared to set aside money for your buy-in? If so, from which account(s) would that money come? If you are serious about making a run for partner, now is a good time to make a plan. Break out your firm’s salary scale and see how much money you could save by banking your raises for the next five or more years. It is difficult to miss money that you are not used to receiving, so take the opportunity to devote it towards your goals. After making the maximum allowable contributions to your 401(k) plan ($19,500 in 2020), consider regular contributions to a brokerage account, high yield savings account, or CD.
As an in-house attorney, you can reasonably expect to earn in the $200,000s on average, albeit with lower long-term earnings expectations than BigLaw salaries. However, the pay cut may be worth it in exchange for having a less demanding work environment, especially if you want more time for family or other interests. Keep in mind though that, because companies are demanding more from in-house counsel in an attempt to minimize legal costs, your workload may be greater than expected. In addition, you would probably be working with a much smaller legal team than you are used to (or no team at all). The nature of your work would revolve around the industry and company you are working in, so you should choose one that interests you. When researching potential landing spots, look back on the connections you have made over your career thus far. Perhaps someone who was opposing counsel to you or a favorite client who would love to bring you in-house can give you the lay of the land.
Prior to the aforementioned pay cut, put a plan in place for saving, investing, and paying off debt. What adjustments will you need to make with a lower income? If you have not yet paid off your student loans (and credit card debt if you have it), now may be the time to be more aggressive in your debt reduction strategy to lessen your future financial burden. Consider refinancing your student loans, if you have not already, to potentially save thousands per year in interest. Although you would lose the protections that come with federal loans, they are not as important if you plan to repay the loans in a relatively short period of time.
You can also stay on track with your financial goals by dialing back your lifestyle in a way that minimizes pain. Focus on your biggest expenses – housing, transportation, student loans, and taxes. Perhaps you could:
Move to an area in an up-and-coming, less expensive side of town
Move closer to work so that you can walk or bike (assuming that the savings in transportation will offset a potential increase in expenses from moving closer to a city center)
Pay off your car note, or, if you lease a car, buy a reliable used car with cash after the lease term ends
Take full advantage of your company benefits to lower your taxes
If you want to be even more ambitious, you can also target smaller expenses that add up quickly. For instance, having one weekly $80 meal at a nice restaurant instead of two plus Sunday brunch would free up between $5,000 and $6,000 a year. Ask yourself if you need top-shelf alcohol for every drink. Consider the monthly subscriptions that you do not use. You can approach this as if you are Marie Kondo cutting habitual expenses that do not bring you joy. Cutting expenses amounts to an even larger “raise” than the amount of the expense, because it is tax-free. In order to bring home an extra $10,000 of income, you would need to earn $16,666 to account for taxes (assuming 40% goes to federal, state, and payroll taxes). So think about cutting expenses by $10,000 as if you are earning an extra $16,666.
Another important decision is whether to roll over your 401(k) into the new company’s plan or into an IRA. Although an IRA may give you access to more investment options, it could inhibit your ability to make backdoor Roth IRA contributions. This backdoor Roth strategy requires that you convert annual Traditional IRA contributions into Roth contributions. That allows you to take advantage of an immense benefit of tax-free investment growth through a Roth while getting around IRS income limits. If you roll over your 401(k) into an IRA and you attempt the backdoor Roth strategy, you could end up owing taxes due to the IRS’ IRA Aggregation Rule. If you plan to take significant time off, it could make sense to convert your 401(k) into a Roth IRA. You would have to report the converted amount as taxable income, but your tax rate would be lower than usual in a low income year.
Finally, if you are an attorney of color considering the in-house counsel route, check out the Minority Corporate Counsel Association (MCCA) to gain access to valuable resources.
Working for a government or nonprofit agency
Although career government attorneys with long service records usually cap out around $250,000 in compensation, you could enjoy a significant bump in pay by gaining some government experience and then returning to the private sector. Government and nonprofit agencies also often have generous benefit packages that make the pay cut not as big as it initially seems. If you are passionate about a particular cause or looking to escape the stress of BigLaw, keep in mind that the government and nonprofit space has its own set of challenges. You would have fewer resources such as administrative support, technology, and money for expert witnesses. You must be prepared to navigate red tape, bureaucracy, and long-standing practices and norms that you cannot change. Also, depending on the practice area, you may have fewer minority colleagues than you have at your firm.
The Bottom Line
With all of these different options and pros and cons to consider, it’s easy to lose sight of an important question - how much money do you actually need to live a life that you love? Do you need a large house where half of the rooms are usually vacant? Does your household need two cars, two car payments, two insurance premiums, two sets of maintenance and repair costs, and double the stress about traffic and parking? How many large purchases have you made or plan on making simply because everyone else does?
Once you commit to spending your hard-earned money on things that you truly value and nothing else, you may be surprised to find that you do not need as much money as you originally thought. If the prestige of your BigLaw job is truly important to you, then stick around and give it your all. If time for yourself and/or family is more important, think about making a change after identifying the amount of money you actually need to be happy.
What you ultimately decide to do boils down to reconciling your personal, financial, and career goals. Only you can determine which work environment would make you the happiest. You know that you should be saving for retirement (or long-term wealth) and paying down debt if you have any. You also may need money for a wedding, honeymoon, fertility treatments, children, or purchasing a home. If you have not yet written down a funding plan and timeline for these goals, now is the time. These decisions may seem daunting, which is why we are here to help. Feel free to schedule a no-cost consultation to figure out how we can assist.