Andrew Moss, The Daily Record Newswire
Graduating from law school with significant student debt is nothing new for young attorneys. But according to the National Association of Law Placement, starting salaries in the legal profession have fallen 13 percent over the past six years. At the same time the median debt for law school graduates has increased 54 percent.
This means today’s new attorneys are facing a new normal much exaggerated from what their predecessors experienced.
With some savvy planning and discipline, however, young attorneys starting their legal careers cannot only establish a solid plan for paying off their debt, but also a strategy to thrive and create wealth.
One thing in your favor may be your ability to take advantage of Roth IRA contributions. If you are single and your modified adjusted gross income (MAGI) is under $114,000, or married with a MAGI household income under $181,000, you may contribute $5,500 to a Roth IRA until April 15, 2015, for the 2014 tax year.
The reason to contribute now — even if you think your income will remain under the threshold for a few years — is that once the contributions are made, they are yours, and they stay in the Roth where the money continues to grow tax free. After age 59½, you can withdrawal whatever you wish and it’s nontaxable.
Let’s say you only contribute $5,500 for five years, then your income is too high and you can’t contribute anymore. That $27,500 you initially contributed could be worth about $150,000 in 30 years, assuming a 6 percent average return. That’s tax-free income.
Another must-do is contributing to a 401(k) plan, especially if you are with an employer that offers a match. Contribute enough so you max out the employer match.
Every plan is different. But say, for example, the plan you are in works out that if you defer $10,000 into plan for the year, and the corporation will match $4,000, the difference between contributing 10,000 a year for 30 years versus $14,000 a year for 30 years could be about $350,000, assuming a 6 percent return.
If you have funds left after contributing to the Roth and 401(k), buy stock. Buy excellent names and add to them consistently. Focus on companies with a strong history of raising their dividends and then — this is the important part — reinvest the dividends. Reinvesting the dividends is a proven strategy to increase returns over time.
Of course, you need to be able to save money to invest it. One way to cut corners is to assume a car lease through an individual instead of a dealer. Many people want to get out of their leases and offer incentives for you to take it over for them. These lease payments tend to be much lower than if you leased the same car at a new car dealer.
Another simple but effective way to save money is to pack your own lunch in lieu of eating lunch out every day or ordering carryout. You will save money and calories!
Now about that student debt. Many suggest paying it off quickly. I would argue that if you have a very low interest rate, are paying down principal and expect to have it paid off within a reasonable timeframe, use the money you would have allocated to additional principal pay down to a Roth IRA or an increased 401(k) deferral.
Paying off the debt is important, but not at the expense of your long-term prosperity.
And finally, find a good advisor and seek good financial advice at the start of your career.
Andrew Moss is a principal in The Frank/Moss Group in Bloomfield Hills, and a senior vice president-wealth management advisor within the Global Wealth and Investment Management of Merrill Lynch.
