Financial Planning for Debt-Ridden Biglawyers Forum

[Tiago Splitter]

If the taxable income is
Over But not over Tax is Of amount over
$0 $14,248 $0.00 Plus 1.25% $0
$14,248 $33,780 $178.10 Plus 2.25% $14,248
$33,780 $53,314 $617.57 Plus 4.25% $33,780
$53,314 $74,010 $1,447.77 Plus 6.25% $53,314
$74,010 $93,532 $2,741.27 Plus 8.25% $74,010
$93,532 And over $4,351.84 Plus 9.55% $93,532

http://www.ftb.ca.gov/forms/2010_califo ... ions.shtml

[Anonymous User]

What's the tax rate like in CA for a family (husband/wife plus kids) making $160K?

Not sure on plus kids, but the married after-tax income is going to be around $8,700 per month. What's the married version of models and bottles? Diapers and Dishes?

[kahechsof]

It is a good idea to max out your 401k every year, even though it is coming out of your debt.
Do the math.
You save 40%, which will compound tax free for 40 years.
You pay 8% for a couple more years.

[Sup Kid]

A few things. First, the taxes will be higher than 40%, especially if you are living in NYC (NY State tax, NYC tax, Social Security, Medicare). Assume 97k after taxes for NYC. Second, you are not counting the automatic deductions your firm will take out for health insurance, flex spending, and automatic contribution plans (above and beyond your optional 401(k)). These obviously differ by firm, but are things people should think about.

[Bronte]

A few things. First, the taxes will be higher than 40%, especially if you are living in NYC (NY State tax, NYC tax, Social Security, Medicare). Assume 97k after taxes for NYC. Second, you are not counting the automatic deductions your firm will take out for health insurance, flex spending, and automatic contribution plans (above and beyond your optional 401(k)). These obviously differ by firm, but are things people should think about.

Yeah I'm kinda assuming non-NYC right now. But it also ignores any deductions you'll be able to take, which ends up overstating the rate.

[Sup Kid]

A few things. First, the taxes will be higher than 40%, especially if you are living in NYC (NY State tax, NYC tax, Social Security, Medicare). Assume 97k after taxes for NYC. Second, you are not counting the automatic deductions your firm will take out for health insurance, flex spending, and automatic contribution plans (above and beyond your optional 401(k)). These obviously differ by firm, but are things people should think about.

Yeah I'm kinda assuming non-NYC right now. But it also ignores any deductions you'll be able to take, which ends up overstating the rate.

The $97,000 figure is post-deductions (though it doesn't include a potential $2000 education tax credit that you'll get your first year from your last year of school). I hate to be a downer, but assuming $112,225 post-tax is just unreasonable (unless you're in Texas).

[FireNextTime]

What's the married version of models and bottles? Diapers and Dishes?

Eh. Crate & Barrel?

Or ... Duvets & Brunch Trays. Mugs & Rugs. Ladders & Platters.

[Bronte]

A few things. First, the taxes will be higher than 40%, especially if you are living in NYC (NY State tax, NYC tax, Social Security, Medicare). Assume 97k after taxes for NYC. Second, you are not counting the automatic deductions your firm will take out for health insurance, flex spending, and automatic contribution plans (above and beyond your optional 401(k)). These obviously differ by firm, but are things people should think about.

Yeah I'm kinda assuming non-NYC right now. But it also ignores any deductions you'll be able to take, which ends up overstating the rate.

The $97,000 figure is post-deductions (though it doesn't include a potential $2000 education tax credit that you'll get your first year from your last year of school). I hate to be a downer, but assuming $112,225 post-tax is just unreasonable (unless you're in Texas).

No the point of the thread is hash this stuff out. I'm gonna be in Chicago, which I think has a flat 5% income tax rate. But I'll increase it back to 40%. I think deductions for 401k and health insurance don't really count, because 401k is part of your savings (which I'm factoring in, and you can reduce according to how much goes into 401k) and health care is a living expense.

[romothesavior]

.

[Anonymous User]

Alright let's try me now (and please don't quote this post, I won't leave this up all night... I just want some input, and I'm terrible with math/finances)


I dunno if we're gonna get married or not, but it is certainly possible, so let's assume yes.

How am I doing so far? What else do I need to account for? How much should I put into savings?

Account for the open bar, sir. Account for the open bar.

[BackToTheOldHouse]

Alright let's try me now (and please don't quote this post, I won't leave this up all night... I just want some input, and I'm terrible with math/finances)


I dunno if we're gonna get married or not, but it is certainly possible, so let's assume yes.

How am I doing so far? What else do I need to account for? How much should I put into savings?

Account for the open bar, sir. Account for the open bar.

[birdlaw117]

Secret Things

I'm guessing the take home would be more like $130k, maybe even a little higher. Not sure what state taxes would be, so that could change it a little I guess. I'm not so good on the budgeting side of things, but I can look at the tax side of things, so I'll just leave it at that.

Also, let me know if you want me to edit this post.

[Sup Kid]

Alright let's try me now....

The best way to figure out taxes is to use a paycheck calculator (try one like this: http://www.paycheckcity.com/calculators.htm). After you figure out the take-home for taxes, you want to put aside the max that you can in retirement plans (as someone mentioned, it's MUCH better to max out these plans and pay 8% interest in student loans for a little longer). Assume that you'll be putting between 10-15% into these plans. Then, figure out what you need to live on (including insurance, rent, food, entertainment, etc), put aside an additional few thousand in an emergency fund, and put the remainder towards student loans. If this involves paying more than the minimum, that's fine. I wouldn't recommend trying to pay down loans in a specific time period though, like 5 years, since the interest rate is relatively low and it's much better to max out savings plans that pay much more than 8% in the long-run. Pay as much as you can towards student debt as you go forward (making sure that you're always current on payments), and you'll be fine.

[romothesavior]

.

[Anonymous User]

..

[Williamford]

SPAM

[kwais]

SPAM

I think this guy makes a really good point.

[run26.2]

Alright let's try me now....

The best way to figure out taxes is to use a paycheck calculator (try one like this: http://www.paycheckcity.com/calculators.htm). After you figure out the take-home for taxes, you want to put aside the max that you can in retirement plans (as someone mentioned, it's MUCH better to max out these plans and pay 8% interest in student loans for a little longer). Assume that you'll be putting between 10-15% into these plans. Then, figure out what you need to live on (including insurance, rent, food, entertainment, etc), put aside an additional few thousand in an emergency fund, and put the remainder towards student loans. If this involves paying more than the minimum, that's fine. I wouldn't recommend trying to pay down loans in a specific time period though, like 5 years, since the interest rate is relatively low and it's much better to max out savings plans that pay much more than 8% in the long-run. Pay as much as you can towards student debt as you go forward (making sure that you're always current on payments), and you'll be fine.

Technically, this isn't always true. If the rate of return on the investment is low, as is likely at least for the next couple of years, it could be more prudent to pay off the debt faster. Which is better will also depend on the individual's expenses relative to income, in the sense that it affects the amount the individual is able to save. In other words, when that ratio is high, less can be saved, and the effect of a high interest rate is diminished because the compounding is operating on a smaller overall number.

Anyways, it is usually a pretty small difference where the return is low, and SupKid is generally right in most circumstances

Here's a spreadsheet which allows you to see how it plays out over 20 years. Look at the difference between cells J21 and U21 for the difference. OP, you can use this to input your likely monthly expenses and adjust the rate of return and interest rate on your loan to see the differences between 5-year and 10-year payback plans.

Note that these numbers are overly rosy because it is unrealistic to assume monthly expenses will remain constant as income rises. You should probably adjust that column for inflation and perhaps based on some fixed % of your income.
https://docs.google.com/spreadsheet/ccc ... E&hl=en_US

[englawyer]

I'm going for the 10 year plan. Keep in mind that you should balance financial responsibility with enjoying the best years of your life, especially for single peeps.

I personally plan on living in a major city, getting a pretty nice apartment/bachelor pad (2500-ish range) in a cool neighborhood, and partying it up. That said, if I were married already, I would probably try to pay more debt down immediately .

[ToTransferOrNot]

Good luck with that 10-year plan when you flame out of the firm after 4.

On to the not--completely-insane-but-merely-misinformed posts:

First, people are completely misunderstanding the "benefits" of maxing out 401k before paying down the debt. First, only Roth IRAs grow tax-free - and biglawyers are far beyond the income cap on those. 401ks are only tax-deferred. Even ignoring the very real possibility that tax rates will be much higher by the time we retire (frankly, I would put a significant amount of money on that prospect), that tax-deferred growth is no different than the tax-free 8.5/7.9/6.8% rate of return on paying off the loans.

Second, people talk about compounding. Paying off loans faster results in negative compounding, too. Assuming you catch yourself up with your retirement contributions after you pay your loans off (which, of course, you should), you will end up with the same retirement nest-egg but having saved considerable interest expense on the loans.

Third, you're probably not going to get 8.5/7.9% rate of return on your 401k. You might manage to beat the 6.8%. But 6.8% is an absolute risk-free rate. To get an extra 1/2/3%, you're taking on extensively more risk - far more than the extra 1/2/3% justifies. You're talking about going from the same level of risk as US Treasuries (though admittedly without the liquidity - but liquidity alone doesn't account for the gap) to what amounts to junk-bond investing for a nominally higher rate. Stupid.

Fourth, before anyone brings up the student loan interest deduction - biglaw lawyers aren't eligible after their first stub year.

[Big Shrimpin]

Good luck with that 10-year plan when you flame out of the firm after 4.

On to the not--completely-insane-but-merely-misinformed posts:

First, people are completely misunderstanding the "benefits" of maxing out 401k before paying down the debt. First, only Roth IRAs grow tax-free - and biglawyers are far beyond the income cap on those. 401ks are only tax-deferred. Even ignoring the very real possibility that tax rates will be much higher by the time we retire (frankly, I would put a significant amount of money on that prospect), that tax-deferred growth is no different than the tax-free 8.5/7.9/6.8% rate of return on paying off the loans.

Second, people talk about compounding. Paying off loans faster results in negative compounding, too. Assuming you catch yourself up with your retirement contributions after you pay your loans off (which, of course, you should), you will end up with the same retirement nest-egg but having saved considerable interest expense on the loans.

Third, you're probably not going to get 8.5/7.9% rate of return on your 401k. You might manage to beat the 6.8%. But 6.8% is an absolute risk-free rate. To get an extra 1/2/3%, you're taking on extensively more risk - far more than the extra 1/2/3% justifies. You're talking about going from the same level of risk as US Treasuries (though admittedly without the liquidity - but liquidity alone doesn't account for the gap) to what amounts to junk-bond investing for a nominally higher rate. Stupid.

Fourth, before anyone brings up the student loan interest deduction - biglaw lawyers aren't eligible after their first year.

Nice, TToN. My favorite point is #3. I was sort of banking on this too. Bears, ftw.

[Tiago Splitter]

First, only Roth IRAs grow tax-free - and biglawyers are far beyond the income cap on those. 401ks are only tax-deferred.

Except if your 401(k) plan allows for Roth deferrals, you can save $16,500 a year in Roth money. Add in another $5,000 if you want to make a non-deductible IRA contribution and then convert it, as there is no longer an income cap on Roth conversions.

Whether or not someone in the top tax bracket should go the Roth or traditional path could be a whole different discussion, but putting away $21,500 in Roth money in your late 20s is a hell of a deal.

[quakeroats]

There's no need to rush. If you can find a more favorable interest rate, go ahead and move your debt, but otherwise there's no need to hurry. If you keep it on the 10-year plan, you've minimized it as much as is reasonable.

[Bronte]

Do law firms do 401k matching of any kind?

[Anonymous User]

I think the GradPlus loans have higher interest rates, more compounded interest (compounds during school), and possibly fewer interest reduction incentives for timely payment. My plan is to make standard payments on the Stafford loans and eliminate the GradPlus loans ASAP.