25 August 2016

Law firm partners face the perfect storm in retirement

The trend of earlier retirement for partners in law firms could put them in financial danger.

In order to preserve the economic balance of their firms and ensure sufficient opportunities for the younger generation, partners frequently impose mandatory retirement requirements on themselves. These are typically around the age of 65, but in recent years there has been a trend to incentivise or force partners to retire much earlier, sometimes as early as 55.  

Yet this could contribute toward later financial difficulty for partners, who may have accumulated substantial wealth over the course of their careers and feel a false sense of security. This difficulty can be seen as a ‘perfect storm’ created by the combination of earlier retirement with three other trends:

1)      Increasing life expectancy. Financial planning analyses should assume that retiring partners will live into their nineties, meaning that the retirement phase could last more than 30 years. Many partners simply don’t realise the challenges required to make their pool of assets last for such a long period or take into account the fact that potentially costly events such as health crises or divorce are statistically more likely to occur.  

2)      Capital markets assumptions are under downward pressure. Structural imbalances such as the unsustainable national debt combined with expanding entitlement programs suggest that assumptions regarding long-term returns must be revised downwards. These downward revisions may seem slight, but can have a dramatic impact over a period of decades and lead to dangerously unsustainable retirement projections when partners are assumed to be retired for 30 years or more.

1)      Healthcare, taxes and other costs are increasing. Retirement projections for must account for the likelihood of the rising price of healthcare, taxes and other costs of living. This is especially true for people who are considered wealthy and are therefore at risk of being asked to pay a larger portion of their own healthcare costs. Similarly, law firm partners need to assume that taxes will comprise an increasing portion of their annual spend.

Proactive planning becomes even more critical in light of these new norms and it is crucial that partners clearly define their long-term financial goals, accurately assess their current assets and implement the actions necessary to bridge the financial gap. The earlier in their careers partners begin planning under this new paradigm, the more likely they are to weather the storm effectively.

Source: Financial Advisor