The funny thing about Stage Two Financial Independence is that it’s still a perfectly reasonable goal attainable by the majority of lawyers willing to work their entire career.
A lawyer that maxes out her 401(k) retirement account by saving $18,500 a year over a 35-year career (from ages 30 to 65) can expect a nest egg of $2,300,000 in inflation-adjusted dollars.
Many lawyers simply don’t want to work for 35 years but, if you’re willing to do so, it’s perfectly reasonable to expect to reach Stage Two Financial Independence. If you add a Backdoor Roth IRA to that savings plan, you’ll come out with $2,950,000 in total retirement savings, putting you at the upper range of Stage Two Financial Independence.
I think a lot of lawyers find themselves defeated thinking about Stage Two Financial Independence because the thought of working for 35 years seems like too much. Can you reach Stage Two Financial Independence earlier in your career?
If you’re willing to save $50,000 a year toward retirement, you could cut that working career nearly in half by working from ages 30 to 48 and you’d have an inflation-adjusted expected retirement account of $1,625,000, putting you in the beginning bands of Stage Two Financial Independence.
Saving $50,000 a year towards retirement is a “serious” savings mode, which may be too steep for many (keep in mind this in addition to any other saving you need to do for things like houses, cars, etc.). But it’s certainly possible to reach Stage Two Financial Independence in an early timeframe if you’re motivated.
If you have a combined household income of $200,000, saving about 25% of your gross income would put you on course to save $50,000 a year.
Stage Two Financial Independence gives you even more flexibility than Stage One. Once you reach it, you can do things like:
Stop working entirely, continue living in your current city and spending the same as you have been previously.
Move to a lower cost-of-living location in the United States or world and live like a king, never needing to work again.
Explore a risky side-project or business and use some of your capital to help get it off the ground.
Have one spouse stay at home permanently while the other spouse pursues other hobbies or interests.
Become an artist without ever being concerned about selling your work.
Stage Two Financial Independence is where a super-saver lawyer in Biglaw might find themselves as a junior partner. Or, for a household in Kentucky, it’s where they could find themselves after 35 years of saving $24,000 annually (expected inflation-adjusted portfolio at that savings rate would be $3,000,000). For that Kentucky lawyer, that’s simply maxing out a 401(k) and Roth IRA every year you work during a normal 35-year working career!
Stage Three Financial Independence: Ideal Expenses Covered
This is the level of Financial Independence that everyone wants to achieve. It’s also usually what someone has in mind when they first discover the concept of financial independence. A typical example is a lawyer that decides if they had $200,000 of annual income – without needing to work – they’d be all set. With $200,000 – $300,000 in income, you can live comfortably as a family of four in just about anywhere in the United States or the world.
It would take somewhere between approximately $5,000,000 and $7,500,000 in savings to reach Stage Three Financial Independence assuming you could withdraw about 4% of the portfolio without ever needing to touch the principal.
This level of savings may feel out of reach for most lawyers unless they’re willing to sacrifice a significant amount of current consumption for future consumption.
A lawyer saving $40,000 a year towards retirement that is willing to work a full 35-year career could expect to have an inflation-adjusted nest egg of $5,000,000. To bump themselves to the higher end of the range they’d need to save $60,000 a year.
Does this mean Stage Three Financial Independence isn’t attainable? I don’t think so.
The way many people reach Stage Three Financial Independence is through a combination of investment income and investment cash flow acquired later in life.
The thing about Stage One or Stage Two Financial Independence is that if you’re motivated enough to reach them fairly early in your life (i.e. before 45), you’re likely the kind of person that will find other ways to generate money in retirement.
Since financial independence allows you unlimited time to pursue whatever you want, many people move up the stages of financial independence once they’re unshackled from working on projects and tasks that benefit someone else more than they benefit themselves.
This article has been republished with permission from The Big Law Investor.