Financial Planning for Debt-Ridden Biglawyers Forum

[quakeroats]

Do law firms do 401k matching of any kind?

It varies.

[ToTransferOrNot]

Do law firms do 401k matching of any kind?

It varies.

The only firm I know of with a match is Wachtell, but I'm sure there are others. Obviously, if your firm has a match, you contribute enough to get the match.

[birdlaw117]

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.

Except that you would be earning money on that tax-deferred growth and it would continue to compound, as opposed to the $0 you have from paying off your loans. $0 doesn't compound at a very favorable rate...

[meshtdagn]

Regardless of the specifics, I think everyone can agree that the prospect of 160k starting is exciting!

[Bronte]

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.

Except that you would be earning money on that tax-deferred growth and it would continue to compound, as opposed to the $0 you have from paying off your loans. $0 doesn't compound at a very favorable rate...

Interesting point. Still, does it make up for the fact that you're earning a 9% truly risk-free rate?

[okinawa]

.

[birdlaw117]

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.

Except that you would be earning money on that tax-deferred growth and it would continue to compound, as opposed to the $0 you have from paying off your loans. $0 doesn't compound at a very favorable rate...

Interesting point. Still, does it make up for the fact that you're earning a 9% truly risk-free rate?

Every scenario I have ever seen has turned out that way, and I did work in a in the financial planning division of a CPA firm (though, I didn't work on this type of thing even close to regularly).

The biggest factor to growing your wealth (when talking about a semi-fixed rate, which is an assumption which pretty much have to make here), is getting in first. Once the money starts growing, it grows exponentially. You would have to contribute a lot of principal in order to make up for the lost time.

The scenario I was always presented with was someone at age 20 contributing $2000 every year for 7 years, and then not contributing again until retirement (I think it was 65) vs someone contributing $2000 every year from age 27 until retirement. The first guy wins, and it's not even all that close.

Now, you could make the argument that your contributions early on in your career won't amount to much in the totality of your career, and that might be true. But I'm pretty confident you would be better off investing, rather than paying off debt. Plus, student loan debt is the most flexible debt you could possibly have, so that's a benefit as well.

[ToTransferOrNot]

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.

Except that you would be earning money on that tax-deferred growth and it would continue to compound, as opposed to the $0 you have from paying off your loans. $0 doesn't compound at a very favorable rate...

Except I now have the $50k in saved interest expense that I "earned" at the 6.5/7.9/8.5% rate, and I can now invest those "earnings" (via investment that I could not have done otherwise) in a way that will earn a return going forward. This is not the same as someone making contributions at 2000 from 20-on compared to someone making contributions of 2000 from 27-on. The person starting at 27 (or, more accurately assuming a $50k savings in interest) is investing 2400 or 2500. It is true that you can get to a point where the person putting in 2500 starts so late that they never catch up with the person putting in 20 - but that line is not at year 5, and that ignores the risk-free nature of paying loans vs the incredible risk involved with trying to get a >7/8/9% rate of return.

[Bronte]

Another question, that's probably difficult if not impossible to answer: What does the annual income curve of the person who starts in big law look like over the long term? For example, if the average person lasts in big law for three years, we know their income looks something like $160,000 for the first year plus, bonus $170,000 plus bonus for the next, $185,000 plus bonus for the next. I wonder what the average curve looks like over ten years.

Obviously, it depends on what you do. Some go into government, some go in house (which I suspect varies widely from say a Fortune 500 company to a bank to a hedge fund), some lateral to smaller firms, and some of course make partner at Vault firms. What do the income curves look like for these various tracks?

[birdlaw117]

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.

Except that you would be earning money on that tax-deferred growth and it would continue to compound, as opposed to the $0 you have from paying off your loans. $0 doesn't compound at a very favorable rate...

Except I now have the $50k in saved interest expense that I "earned" at the 6.5/7.9/8.5% rate, and I can now invest those "earnings" (via investment that I could not have done otherwise) in a way that will earn a return going forward. This is not the same as someone making contributions at 2000 from 20-on compared to someone making contributions of 2000 from 27-on. The person starting at 27 (or, more accurately assuming a $50k savings in interest) is investing 2400 or 2500. It is true that you can get to a point where the person putting in 2500 starts so late that they never catch up with the person putting in 20 - but that line is not at year 5, and that ignores the risk-free nature of paying loans vs the incredible risk involved with trying to get a >7/8/9% rate of return.

You're right. I honestly don't know which one would come out ahead. I would have to run numbers, and I'm too lazy. The scenarios are not perfectly analogous, I was just using it to illustrate the point I was making, not trying to say they are the same thing. There is the risk of getting a lower rate, but in my opinion that risk is far outweighed by the risk of paying off debt, rather than having funds invested that can be liquidated in the case of emergencies. In my opinion, that is the deciding factor, not the difference in growth potential (assuming there is one).

[ToTransferOrNot]

But you have to weigh the liquidity risk against the "you lost your biglaw job" risk. Yes, student loans can always be restructured in a way that you're going to be able to make payments each month but, if you're on the 10-year plan and lose/quit your job in year 3/4/5, you're in trouble in that you will have to extend out beyond the 10-year payment window - with all of the added interest that comes with that.

And if you're talking about having investment funds available to liquidate in emergency, then you have to account for the fact that that liquidation comes at great expense - early withdrawl penalties as well as immediate tax. Basically results in a growth of 0.

[sunynp]

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.

I thought recent legislation eliminated any incentive for timely payment. And also it made it illegal to ever add incentive for timely payment.

[seespotrun]

Can't you deduct payments against interest?

[thickfreakness]

Can't you deduct payments against interest?

No. Go suck a bag of dicks.

[Tiago Splitter]

And if you're talking about having investment funds available to liquidate in emergency, then you have to account for the fact that that liquidation comes at great expense - early withdrawl penalties as well as immediate tax. Basically results in a growth of 0.

Not if it's Roth money.

Isn't the correct answer to find a reasonable balance? Throw some money in the 401(k) for the deduction, throw some in the IRA and then immediately convert it--using the Roth as an investment vehicle and emergency fund, and put the rest into loans.

[quakeroats]

And if you're talking about having investment funds available to liquidate in emergency, then you have to account for the fact that that liquidation comes at great expense - early withdrawl penalties as well as immediate tax. Basically results in a growth of 0.

Not if it's Roth money.

That depends on whether the withdrawal is principle or interest and several other things.

[Tiago Splitter]

And if you're talking about having investment funds available to liquidate in emergency, then you have to account for the fact that that liquidation comes at great expense - early withdrawl penalties as well as immediate tax. Basically results in a growth of 0.

Not if it's Roth money.

That depends on whether the withdrawal is principle or interest and several other things.

Yes but the point was that the Roth could be accessed as a source of liquidity. Since contributions come out of a Roth ira first, someone putting in 5k a year would build up a nice reserve of contribution dollars if they started funding it right out of the gate.

[birdlaw117]

But you have to weigh the liquidity risk against the "you lost your biglaw job" risk. Yes, student loans can always be restructured in a way that you're going to be able to make payments each month but, if you're on the 10-year plan and lose/quit your job in year 3/4/5, you're in trouble in that you will have to extend out beyond the 10-year payment window - with all of the added interest that comes with that.

And if you're talking about having investment funds available to liquidate in emergency, then you have to account for the fact that that liquidation comes at great expense - early withdrawl penalties as well as immediate tax. Basically results in a growth of 0.

Umm... I think if I lose my job I'm going to care more about having money to live than I am about not being able to pay my debt. So that's one more on the side of having some funds to dip into. And yes, it would come at great expense, but at least you could pay for some food and rent.

[ToTransferOrNot]

But you have to weigh the liquidity risk against the "you lost your biglaw job" risk. Yes, student loans can always be restructured in a way that you're going to be able to make payments each month but, if you're on the 10-year plan and lose/quit your job in year 3/4/5, you're in trouble in that you will have to extend out beyond the 10-year payment window - with all of the added interest that comes with that.

And if you're talking about having investment funds available to liquidate in emergency, then you have to account for the fact that that liquidation comes at great expense - early withdrawl penalties as well as immediate tax. Basically results in a growth of 0.

Umm... I think if I lose my job I'm going to care more about having money to live than I am about not being able to pay my debt. So that's one more on the side of having some funds to dip into. And yes, it would come at great expense, but at least you could pay for some food and rent.

You know what else would allow you to buy some food and pay the rent? Waiting tables. Which will give you enough money to survive on, if you aren't also having to make loan payments. That said, no one is going to dispute that having an absolutely liquid expense account set aside is important. That's a preliminary to both investing and paying off loans, and a 401k doesn't qualify. Accordingly, it's not really relevant to the debate here.

Admittedly, I am not familiar with being able to put money into an IRA and then convert it to a Roth regardless of whether you would have been eligible to contribute to a Roth in the first place. Assuming that is being discussed correctly, it could make a lot of sense.

[birdlaw117]

But you have to weigh the liquidity risk against the "you lost your biglaw job" risk. Yes, student loans can always be restructured in a way that you're going to be able to make payments each month but, if you're on the 10-year plan and lose/quit your job in year 3/4/5, you're in trouble in that you will have to extend out beyond the 10-year payment window - with all of the added interest that comes with that.

And if you're talking about having investment funds available to liquidate in emergency, then you have to account for the fact that that liquidation comes at great expense - early withdrawl penalties as well as immediate tax. Basically results in a growth of 0.

Umm... I think if I lose my job I'm going to care more about having money to live than I am about not being able to pay my debt. So that's one more on the side of having some funds to dip into. And yes, it would come at great expense, but at least you could pay for some food and rent.

You know what else would allow you to buy some food and pay the rent? Waiting tables. Which will give you enough money to survive on, if you aren't also having to make loan payments. That said, no one is going to dispute that having an absolutely liquid expense account set aside is important. That's a preliminary to both investing and paying off loans, and a 401k doesn't qualify. Accordingly, it's not really relevant to the debate here.

Admittedly, I am not familiar with being able to put money into an IRA and then convert it to a Roth regardless of whether you would have been eligible to contribute to a Roth in the first place. Assuming that is being discussed correctly, it could make a lot of sense.

The Roth stuff is correct, but it's not something I would anticipate sticking around. It's basically a backdoor into being able to do something they don't want people doing, so I would expect them to go back tot he way things were a couple years ago.

I'm just saying it's nice to some assets to fall back on, rather than being at $0. I would much rather have a net worth of $0 while having some assets that = my liabilities than simply having no assets and no liabilities. I don't think I'm the only one in this boat.

[Stanford4Me]

(unless you're in Texas).

Ohai