The BigLaw Lawyers’ Guide to Financial Independence and Early Retirement

Whenever a large Powerball or MegaMillion jackpot comes around, conversations about “What would you do?” if you won the lottery abound.

But the prospects of financial independence don’t simply depend on your ability to be lucky enough to win the lottery, or have a great start-up idea, or have your Dr. Phil episode go viral.

A concerted effort of saving and investing can get you to “someday” much quicker than you probably think possible.

And, it doesn’t require fancy financial advisors or special investing know-how.

Particularly if you were fortunate enough to have won the proverbial lottery and landed what is known as a “BigLaw” job. It is for these people, specifically those in big markets like New York, that this post is particularly directed.

But the basic principles are applicable to anyone and I think this is worth reading for anyone looking to be financially free. I have provided links at the end of sections that allow you to skip around if you are not interested in reading the lawyer-salary-specific scenarios.

And, I apologize if this post turns out to have a lot of little errors. There are no copy editors or fact checkers on staff here.

Background of Financial Independence

In my browsing around the internet over the last year, I came across a community of bloggers and podcasts surrounding financial independence and early retirement.

The FIRE community (Financial Independence Retire Early) consists of a few people who were able to retire in their thirties and others who are looking to do so or otherwise accelerate their journey to the departure from needing a regular day job.

The blogs come with many different personalities.

The one with probably the highest profile is written by a guy who goes by the moniker Mr. Money Mustache. His shtick is more or less summarized by advocating that a person be punched in the face for ever spending money on something that is not absolutely necessary for survival. He spends something like $20,000 a year and retired in his mid-30s by never spending much money and saving and investing the rest. And, now lives comfortably on his savings (and his blog which generates hundreds of thousands of dollars per year).

Another blogger, going by the moniker GoCurryCracker, saved like crazy during his working years, retired in his late 30s, and now travels the world with his wife and child while blogging about his goal of never having to pay taxes again.

The basic principles of the community are to 1) avoid consumer debt, 2) only spend half or less of the money you take home, and 3) to invest the rest in low-cost index funds.

Then, following what is known as the 4% rule (an idea that grew out of the 1998 Trinity Study), once your total net worth is 25-times the amount of money you spend in a year, you can somewhat safely spend that much money per year forever (adjusted upwards for inflation) without completely drawing down your savings. This is what is deemed Financial Independence.

Many of the bloggers recommend following the advice of the elder statesman of the community, J.L. Collins. He advocates that during your working your years you invest solely in the Vanguard Total Stock Market Index Fund. This is an index fund with a very low expense ratio that invests in every publicly available US based company in percentages roughly proportional to each company’s market capitalization. It’s a pretty good bet to go up over the years, unless the battle of the buttons gets too out of control and the US is annihilated by nuclear war.

At any rate, you invest in that fund until you’ve gotten your F-You money. And then once you retire, you start mitigating risk of stock market falls by shifting some of your funds into the Vanguard Total Bond Market Index Fund. He made a not-suitable-for-work-or-children parody of a scene from The Gambler that humorously sums up his advice. He has a book as well: The Simple Path to Wealth.

There’s a blog for optimizing all of your tax strategies to retire earlier by a guy who goes by the Mad Fientist.

There are blogs for millennials hoping to retire early.

Blogs by Canadian Millennials who think you shouldn’t buy a house. That’s a pretty common theme among the bloggers actually.

And bloggers who don’t look at financial independence as early retirement, but rather as a “Fully Funded Lifestyle Change.”

Most of the big players in this world are interviewed on the ChooseFI podcast that started last year.

If I had to generalize the early retirees it would be as follows:

  1. A double-income couple;
  2. Who both have relatively well-paying jobs that lend themselves to efficiency and proficiency in excel (e.g., accountants, programmers, engineers);
  3. And didn’t come from money.

This is fairly in line with the description of The Millionaire Next Door from the popular book by Thomas J. Stanley.

But, the basic rule of thumb is, assuming an average growth rate of 8% in the stock market, it takes about 15 working years to reach Financial Independence if you save half of your money and invest it. The more you save, the less amount of time it takes. For a more in-depth look at saving rate and time to financial independence, you can read this.

Click here to skip ahead to 401K savings

A Lawyer’s Path to Financial Independence

Having read these blogs, I decided to see what would have happened if, when I started my career as a lawyer, I had done nothing but try to achieve financial independence. (Instead of doing nothing but aggressively paying off my loans and then quitting my secure, high-paying job when I had no loans left and essentially no savings to start a law firm).

Lawyers who are able to get what are known as “BigLaw” jobs in cities like New York have the big advantage of a ridiculously high starting salary. When I came out of law school in 2008, that salary was $160,000. When you are making that much money, saving a high percentage of your income is easy, even living in NYC and paying off loans.

Lawyers with these jobs also have the benefit of having built-in raises every year.

Lawyers with a BigLaw job in New York from my law school class would have had the following salaries year-by-year (source AboveTheLaw).

YearSalary
2009$160,000
2010$170,000
2011$185,000
2012$210,000
2013$230,000
2014$250,000
2015$265,000
2016$280,000
2017$315,000

Clearly, someone making these salaries should be able to sock a fair portion of that away.

But, let’s start with the normal retirement vehicle most people use: the 401K

401K Savings

Pretty much everyone with a job has access to their company’s 401K program.
Many are given the option of investing in either with pre-tax money (traditional) or post-tax money (Roth).

For someone with a high-paying job living in a high-tax state like New York, you are almost certainly better off putting your money in a traditional 401K. You likely will be paying less tax once you stop working and will have a bigger nest egg this way.

That is unless you will spend all of the tax savings rather than invest it (savings are only savings if you don’t spend it on something else). Then you’d be better off keeping the money you wouldn’t have to pay in taxes away from yourself with the Roth. (IRAs will be a topic for another day).

Whether Roth or Traditional, the limits for 401K investing over the last 9 years have been as follows:

Year401K Contribution Limit
2009$16,500
2010$16,500
2011$16,500
2012$17,000
2013$17,000
2014$17,500
2015$17,500
2016$18,000
2017$18,000

For the purposes of this exercise, we’ll assume that the maximum each year was invested and that those investments were put into the Vanguard Total Stock Market Fund (VTSAX) in installments throughout the year.

For the period of 2009-2017, this would have been a very good thing with the benefit of hindsight. The stock market has essentially done nothing but go up over that time (which makes the appearance of all of the aforementioned blogs advocating this approach over the last few years unsurprising). Here are the yearly returns of VTSAX over that period.

VTSAX Returns

$10,000 invested at the beginning of 2009 would have grown to over $36,000 by the end of 2017:

source: Portfolio Visualizer

If you had maxed out your 401K over those years, you would have invested $155,500 over those 9 years.

That $155,500 would have turned into roughly $304,000. Almost double what you put in.

401K Investments and Returns

YearCumulative SavingsCumulative Portfolio Size (gains in parentheses)
2009$16,500$20,180 ($3,680)
2010$33,000$42,472 ($9,472)
2011$49,500$59,245 ($9,745)
2012$66,500$86,847 ($20,347)
2013$84,000$136,145 ($52,145)
2014$101,500$171,974 ($70,474)
2015$119,500 $190,594 ($71,094)
2016$137,500$234,829 ($96,789)
2017$155,500$304,038 ($148,538)

Using the 4% rule, that $304,000 would be enough to pay yourself about $12,160 per year (in 2018 dollars) forever. Probably not enough for you to quit your job, but it’s a good start.

Although, I just read on my commute this morning that “[m]ore than a billion people in our world today survive on less than $370 a year … .” Source: How the Irish Saved Civilization by Thomas Cahill.

Of course, money locked away in a 401K isn’t normally accessible until you are 59.5 years old anyway. But, the FIRE community has contrived some ways to access that money early (and possibly tax free).

And, if you weren’t planning on needing that money right away, assuming about 8% growth per year, that 401K money would be worth roughly $3 million in 30 years (closer to about $1.8 million in inflation-adjusted dollars, assuming 2% inflation) without investing another penny.

Regular Savings

Now, everyone earning a BigLaw salary should have been convinced by their HR departments to at least invest the maximum amount into their 401Ks.

But, you have your take-home pay to invest as well.

By my rough calculations, after taking into account taxes (for a single person with no dependents) and 401K withholding, a BigLaw lawyer would have had roughly the following take-home pay over the last 9 years:

YearSalaryTake-Home Pay
2009$160,000$91,500
2010$170,000$96,500
2011$185,000$104,000
2012$210,000$116,000
2013$230,000$125,500
2014$250,000$135,500
2015$265,000$142,500
2016$280,000$150,000
2017$315,000$167,500

Based on the take-home pay for 2009, someone spending all of their money would have been spending roughly $90,000 a year.

Someone following the FIRE community advice of saving half of their money would be spending roughly $45,000 per year.

For the purpose of this analysis, I looked at the range of yearly spending from $30,000 to $90,000 in $15,000 intervals.

I then increased spending from 2009 for each successive year in two ways:

  1. Spending inflates in proportion to yearly raises
  2. Spending inflates with inflation

In addition, to make this more relatable with a non-BigLaw audience, I also analyzed what would happen if you kept your yearly savings constant without regards to salary, whatever your salary may be.

Click here to skip-ahead to non-lawyer-specific savings.

Lifestyle Inflates With Yearly Raises

It’s easy to start spending the extra money you take home each year instead of saving it.

Whether it’s being more aggressive about paying off loans, finally getting an apartment on your own, buying the newest gadget, or giving nicer things to your children, there is something that might seem sexier about using your additional take-home pay than throwing it into an investment account.

For that reason, I first looked at what would happen if a given person kept spending the same percentage of take-home pay (after taxes and 401K) every year.

Using the above information about yearly salary increases and take-home pay, I calculated how much money a person at various spending rates would spend over each of the last nine years with a BigLaw job.

YearSpending 33% of Take-HomeSpending 49% of Take-HomeSpending 66% of Take-HomeSpending 82% of Take-HomeSpending 98% of Take-Home
2009$30,000$45,000$60,000$75,000$90,000
2010$31,639$47,459$63,279$79,098$94,918
2011$34,098$51,148$68,197$85,246$102,295
2012$38,033$57,049$76,066$95,082$114,098
2013$41,148$61,721$82,295$102,869$123,443
2014$44,426$66,639$88,852$111,066$133,279
2015$46,721$70,082$93,443$116,803$140,164
2016$49,180$73,770$98,361$122,951$147,541
2017$54,918$82,377$109,836$137,295$164,754

At those spending rates, those same people would have been able to save the following amounts of money over those nine years.

Savings Year-by-YearSpending 33% of Take-Home Spending 49% of Take-Home Spending 66% of Take-Home Spending 82% of Take-HomeSpending 98% of Take-Home
Total$758,836$573,754$388,672$203,590$18,508
2009$61,500$46,500$31,500$16,500$1,500
2010$64,861$49,041$33,221$17,402$1,582
2011$69,902$52,852$35,803$18,754$1,705
2012$77,967$58,951$39,934$20,918$1,902
2013$84,352$63,779$43,205$22,631$2,057
2014$91,074$68,861$46,648$24,434$2,221
2015$95,779$72,418$49,057$25,697$2,336
2016$100,820$76,230$51,639$27,049$2,459
2017$112,582$85,123$57,664$30,205$2,746

Someone saving roughly half of their money would have saved almost $600,000 over the last nine years. Enough to pay themselves around $23,000 a year forever, according to the 4% rule.

And that’s not including any gains they would have made in the stock market.

If those same people invested their money saved in equal monthly contributions throughout each year into VTSAX, their portfolios would have grown as follows year-by-year (the amounts in parentheses are the amount of the portfolio that is gains on investments):

YearSpending 33% of Take-Home PaySpending 49% of Take-Home PaySpending 66% of Take-Home PaySpending 82% of Take-Home PaySpending 98% of Take-Home Pay
2009$74,907 ($13,407)$56,367 ($10,137)$38,367 ($6,867)$20,097 ($3,597)$1,827 ($327)
2010$161,078 ($34,718)$121,791 ($26,250)$82,503 ($17,782)$43,216 ($9,314)$3,929 ($847)
2011$230,774 ($34,512)$174,488 ($26,094)$118,201 ($17,677)$61,915 ($9,259)$5,629 ($842)
2012$349,119 ($74,889)$263,968 ($56,624)$178,817 ($38,538)$93,666 ($20,092)$8,515 ($1,827)
2013$561,280 ($202,698)$424,382 ($153,259)$287,485 ($103,821)$150,587 ($54,382)$13,690 ($4,944)
2014$725,985 ($276,329)$548,915 ($208,932)$371,846 ($141,534)$194,776 ($74,137)$17,707 ($6,740)
2015$820,213 ($274,779)$620,161 ($207,760)$420,109 ($140,740)$220,057 ($73,721)$20,005 ($6,702)
2016$1,029,038 ($382,784)$778,053 ($289,422)$527,068 ($196,060)$276,083 ($102,698)$25,098 ($9,336)
2017$1,367,209 ($608,873)$1,033,743 ($459,989)$700,278 ($311,606)$366,812 ($163,222)$33,347 ($14,838)

For the above analysis, I reduced yearly returns by 0.5% to account for state and federal taxes that must be paid on dividends each year (which are roughly 2% of portfolio value). I admit that the above analysis has the limitation that you can’t actually invest in VTSAX until you have $10,000 and would rather need to invest in a fund with a slightly higher expense ratio initially. But I’m also probably overestimating the amount of tax you would pay, so that should make up for it. Maybe.

Anyway, at the end of 2017, our lawyers saving half of their pennies would have over 1 million dollars in their taxable investment accounts. Enough to pay yourself $40,000 (in 2018 dollars) a year forever (if you trust the 4% rule). And, with 2018 capital gains tax rates of 0% for someone earning up to $36,800, that money wouldn’t be touched by the federal government if you had no other income. If you move to a no-tax state like Florida or Washington or Texas, no government is touching your money. And, this doesn’t even take into account the additional $300K you have saved in your 401K.

Nonetheless, even including that extra $12,000 a year in possible spending, our 50% saver would need to drastically reduce their lifestyle if they’d like to quit working today. In 2017, they were spending over $82,000 per year.

If you had been only spending 1/3 of take-home pay, you would have almost $1.4 million in savings in taxable investment accounts. Enough to pay yourself over $54,000 per year. As that is roughly the amount of money you would have spent in 2017, you would no longer need any job to support your lifestyle. And, you likely wouldn’t even need to touch any of your 401K money. You’d be free to work for that non-profit you always liked or devote your life to political campaigns or travel the world or essentially do anything you want.

Our big spender, however, only has around $30,000 saved up. We’ll assume they spent all of that money on household services that allowed them to work hard enough to make partner.

It should be noted that most “BigLaw” lawyers I know are married to other “BigLaw” lawyers or have a partner with an otherwise high-paying professional job. These couples have double the income (or thereabouts), but their expenses should not be double. So, they should be able to save proportionally more than a single saver.

A summary of the total safe withdrawal rates compared to the 2017 spending in each scenario is provided below:

 Spending 33% of Take-HomeSpending 49% of Take-HomeSpending 66% of Take-HomeSpending 82% of Take-HomeSpending 98% of Take-Home
Spending in 2017$54,918$82,377$109,836$137,295$164,754
Safe Withdrawal Rate of Taxable Savings (4% of portfolio)$54,688$41,350$28,011$14,672$1,334
Safe Withdrawal Rate from 401K (4% of Portfolio)$12,162$12,162$12,162$12,162$12,162
Total Safe Withdrawal Rate$66,850$53,152$40,173$26,834$13,496

Lifestyle Inflates With Inflation

Of course, not everyone would just spend the extra money they take home.

So, I looked at what would have happened if someone kept their first-year-of-law-lifestyle roughly the same from 2009-2017.

Inflation in the US year-by-year from 2009 to 2017 was as follows (source inflation.eu):

YearInflation
20092.72%
20101.50%
20112.96%
20121.74%
20131.50%
20140.76%
20150.73%
20162.07%

That means for our hypothetical spenders, spending year-by-year would look like this:

Year$30K (in 2009 dollars)$45K (in 2009 dollars)$60K (in 2009 dollars)$75K (in 2009 dollars)$90K (in 2009 dollars)
2009$30,000$45,000$60,000$75,000$90,000
2010$30,816$46,224$61,632$77,040$92,448
2011$31,278$46,917$62,556$78,196$93,835
2012$32,304$48,306$64,408$80,510$96,612
2013$32,764$49,147$65,529$81,911$98,293
2014$33,256$49,884$66,512$83,140$99,768
2015$33,509$50,263$67,017$83,772$100,526
2016$33,753$50,630$67,507$84,383$101,260
2017$34,452$51,678$68,904$86,130$103,356

As a result, a person spending those amounts, would be able to save the following amounts each year:

Amounts Saved ...Spending $30K in 2009 DollarsSpending $45K in 2009 DollarsSpending $60K in 2009 DollarsSpending $75K in 2009 DollarsSpending $90K in 2009 Dollars
Total$836,968$690,951$544,935$398,919$252,903
Year 1$61,500$46,500$31,500$16,500$1,500
Year 2$65,684$50,276$34,868$19,460$4,052
Year 3$72,722$57,083$41,444$25,804$10,165
Year 4$83,796$67,693$51,591$35,489$19,388
Year 5$92,736$76,353$59,971$43,589$27,207
Year 6$102,244$85,616$68,988$52,360$35,732
Year 7$108,991$92,237$75,483$58,728$41,974
Year 8$116,247$99,370$82,493$65,617$48,740
Year 9$133,048$115,822$98,596$81,370$64,144

For purposes of this investment analysis, I assumed that all of the savings was invested in VTSAX in monthly contributions divided evenly throughout the year. Since this money would be in a taxable account, I reduced estimated returns by 0.5% per year to account for taxes on dividends. Under those assumptions, for a given spending level, the cumulative portfolio would look like this (again, the values in parentheses are the amount of the portfolio that is gains on investments):

Year$30K $45K$60K $75K $90K
2009$74,907 ($13,407)$56,367 ($10,137)$38,367 ($6,867)$20,097 ($3,597)$1,827 ($327)
2010$162,013 ($34,829)$123,193 ($26,417)$84,372 ($18,004)$45,552 ($9,592)$6,732 ($1,180)
2011$234,488 ($34,583)$180,059 ($26,200)$125,630 ($17,818)$71,200 ($9,436)$16,771 ($1,053)
2012$359,530 ($75,829)$279,585 ($58,032)$199,640 ($40,236)$119,640 ($22,440)$39,749 ($4,644)
2013$548,757 ($208,320)$459,599 ($161,693)$334,440 ($115,066)$209,281 ($68,438)$84,123 ($21,811)
2014$764,193 ($285,511)$606,227 ($222,705)$448,262 ($159,899)$290,296 ($97,093)$132,331 ($34,287)
2015$871,488 ($283,316)$697,074 ($221,315)$522,659 ($158,814)$348,245 ($96,313)$173,830 ($33,812)
2016$1,103,240 ($399,321)$889,356 ($314,227)$675,473 ($229,134)$461,589 ($144,040)$247,705 ($58,946)
2017$1,479,557 ($642,590)$1,202,266 ($511,314)$924,974 ($380,039)$647,683 ($248,764)$370,392 ($117,489)

A summary of the total safe withdrawal rates compared to the 2017 spending in each scenario is provided below:

 $30K$45K$60K$75K$90K
Spending in 2017$34,452$51,678$68,904$86,130$103,356
Safe Withdrawal Rate of Taxable Savings (4% of portfolio)$59,182$48,091$36,999$25,907$14,816
Safe Withdrawal Rate from 401K (4% of Portfolio)$12,162$12,162$12,162$12,162$12,162
Total Safe Withdrawal Rate$71,344$60,253$49,161$38,069$26,978

Savings Remains Constant

Sometimes it’s easier to focus just on how much money you are saving rather than how much money you are spending.

This makes the analysis independent of what job you have, but just dependent on how good of a saver you are.

For a given amount of savings a year, the amount you would have today is simply provided by multiplying the amount you saved each year by a factor. Rather than look at various scenarios hear are the factors you would multiply your yearly savings amount by to show how much money you would have accumulated as of a given year:

Cumulative Savings Multiplier

 Investment Growth Factor
20091.218
20102.557
20113.556
20125.168
20138.023
201410.056
201511.037
201613.461
201717.358

For example, someone who saved $10,000 a year and invested it in VTSAX from 2009-2017 would have about $173,580 ($10,000 * 17.358) at the end of 2017. And, they would have had $80,230 ($10,000 * 8.23) at the end of 2013.

The final factor (17.358) allows us to compute exactly how much you would have had to save relative to the amount you spend (assuming those amounts stayed roughly the same) over the years to be financial independent in 2017. We simply divide 25 by that factor to get 1.44 (25/17.358) to figure out that if you saved 1.44 times the amount you spent each year over the last nine years, you would have saved enough to be financially free today.

For example, if you spent $50,000 per year and you saved $72,000 every year ($50,000 *1.44), you would have a portfolio roughly large enough to support your lifestyle forever. That means if your salary remained roughly the same, you would need to have saved about 59% of your take-home pay (and, thus only spent 41% of your take-home) pay to have a portfolio large enough to support your lifestyle.

Of course, not everyone saves the same amount each year.

So, I also figured out what an investment in a given year would have grown to by the end of 2017 and provided a factor for those as well:

Year-by-Year Savings Multiplier

 Investment Growth Factor
20093.34
20102.666
20112.297
20122.112
20131.740
20141.440
20151.343
20161.306
20171.114

For example, if you saved $10,000 over the course of 2009, that amount would have grown to about $33,400 ($10,000 * 3.34) by the end of 2017. Or if you invested $20,000 in 2014, that amount would have grown to $28,800 ($20,000 * 1.440) by the end of 2017. Perhaps one day I’ll figure out how to make a calculator on the internet, in the meantime you can paste those numbers in to excel and examine how savings over different years would have added up.

The big takeaway from this chart is that you should save early and often.

Click here to skip ahead to how a different start year would have affected portfolio value

What about bonuses?

Another nice feature of a BigLaw job is that each year fairly generous bonuses are paid out.

These bonuses have little to do with how good of a lawyer you are or your personal contributions to the firm or your firm’s particular financial situation.

Rather, one firm (typically one of Cravath Swaine & Moore LLP or Simpson Thacher & Bartlett LLP) decides what the bonuses they will pay out will be. And, then largely every other big law firm in New York City pays the exact same thing.

The analyses above did not take bonuses into account. So, they are examples of what may have happened if you spent your entire bonus. Maybe you used it all as an extra payment on your loans. Or maybe all of your lifestyle inflation was taken into account by the amount of your bonuses.

But you could have saved those bonuses as well.

In the table below are the bonuses that were paid out to most class of 2008 BigLaw associates working in New York. For the purpose of the investment analysis, I conservatively assumed that half of that money would have gone to taxes. And, the other half was invested at the end of the year in VTSAX. Again, since this money would be in a taxable account, I reduced estimated returns by 0.5% per year to account for taxes on dividends.

YearBonus AmountAfter-Tax AmountCumulative Amount InvestedCumulative Portfolio (gains in parentheses)
2009$7,500$3,750$3,750$3,750 ($0)
2010$10,000$5,000$8,750$9,379 ($629)
2011$15,000$7,500$16,250$16,933 ($683)
2012$27,000$13,500$29,750$33,122 ($3,372)
2013$34,000$17,000$46,750$61,059 ($14,309)
2014$85,000$42,500$89,250$110,922 ($21,672)
2015$100,000$50,000$139,250$160,800 ($21,550)
2016$100,000$50,000$189,250$230,354 ($41,104)
2017$100,000$50,000$239,250$327,968 ($88,718)

Bonus Sources all from AboveTheLaw: 2009, 2010, 2011, 2012, 2013, 2014, 2015, 2016, 2017

The bonuses saved up and invested would be almost $330,000 by the end of 2017. Enough to pay yourself around another $13,000 per year.

Here is how that additional money would increase the total safe withdrawal rate of someone whose total spending was determined by their take-home pay.

 Spending 33% of Take-HomeSpending 49% of Take-HomeSpending 66% of Take-HomeSpending 82% of Take-HomeSpending 98% of Take-Home
Spending in 2017$54,918$82,377$109,836$137,295$164,754
Safe Withdrawal Rate of Taxable Savings (4% of portfolio)$54,688$41,350$28,011$14,672$1,334
Safe Withdrawal Rate from 401K (4% of Portfolio)$12,162$12,162$12,162$12,162$12,162
Safe Withdrawl Rate from Bonus (4% of portfolio)$13,119$13,119$13,119$13,119$13,119
Total Safe Withdrawal Rate$79,969$66,631$53,292$39,953$26,615

Of the scenarios above, only the lawyers saving around 66% of their money have portfolios large enough to support their 2017 lifestyle. But even, the lawyer spending, rather than saving, 66% of the money has a portfolio large enough to support a fairly substantial lifestyle. Especially one outside of cities like New York or San Francisco.

This is how the additional money would increase the total safe withdrawal rate of someone whose lifestyle stayed roughly the same over the years.

 $30K$45K$60K$75K$90K
Spending in 2017$34,452$51,678$68,904$86,130$103,356
Safe Withdrawal Rate of Taxable Savings (4% of portfolio)$59,182$48,091$36,999$25,907$14,816
Safe Withdrawal Rate from 401K (4% of Portfolio)$12,162$12,162$12,162$12,162$12,162
Safe Withdrawal Rate from bonus (4% of Portfolio)$13,119$13,119$13,119$13,119$13,119
Total Safe Withdrawal Rate$84,463$73,372$62,280$51,188$40,097

In the end, our lawyer who was spending around $60K in 2009 is pretty close to having a large enough portfolio to support their current lifestyle. A BigLaw Lawyer who has spent around $55K in 2009 dollars or less, would have had a large enough portfolio to sustain their current lifestyle without working for another penny in their life (again, assuming we trust the 4% rule).

What if returns were not as good?

The stock market during the Obama and Trump presidencies have pretty much done nothing but go up.

Here is how $10,000 invested in VTSAX at the beginning of 2009 would have grown over that time.

This is what the same $10,000 invested in VTSAX would have done during the Bush 43 presidency:

Someone would have almost done as well just investing in a high-yield savings account over that time.

For this reason, I also looked at how growth of investments would have changed if someone who started work in 2009, instead saw rates of return like someone who started work in 2001 (or 2002, 2003, etc.). In addition, I looked at what their portfolio would have looked like had they just invested in an account with Ally Bank’s current online savings rate of 1.25% (and discounting gains in that account by 50% to roughly account for taxes (long-term investing in mutual funds and stocks, etc. has a huge tax advantage over investing in savings accounts).

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For the BigLaw lawyer saving about half of their money, the size of their portfolio just from take-home salary would have looked like this:

portfolio size

Now, the curves wouldn’t have been quite this smooth because I only plotted year-by-year totals, but the basic trends hold.

The portfolio starting in 2009 does the best because it had 3 big years of gains (2009, 2013, and 2017) and no real losers along the way.

The portfolio starting in 2001 does so poorly because it suffered through the bad years of 2001 and 2002 and the terrible year during the financial crisis of 2008. The gains it made in the rebounds of 2003 and 2009 were enough however to bring the total back to a respectable size. And, assuming no money was taken out of or put into that portfolio, it would have nearly tripled over the years 2010-2017.

The cluster of four portfolios that end between $800K and $1,000,000 (starting years 2005-2008) experienced the jumps of 2009 and 2013, but also the downturn of 2008.

And then the cluster of three portfolios around $750K (starting years 2002-2004) experienced the jump of 2009 and the downturn of 2008.

The big takeaway is that you want your money in the market when the market is going up. The only way to ensure that you have it there is to leave it in even if the market is going down.

Savings Multipliers

Like I did earlier for savings starting in 2009, I calculated savings multipliers for savings starting in the years 2001-2008 and their average.

For constant savings of a given amount year-by-year, the multipliers for a given starting year are shown below. I also calculated the maximum spending rate that would allow someone be financially independent after nine years while maintaining the same lifestyle (assuming their salary remains fairly constant over that time period):

Cumulative Savings Multiplier by Start Year

Investment Growth Factor200920082007200620052004200320022001Average (Std dev)
Maximum Spending Rate for Financial Independence After nine Years (assuming fairly constant salary)40.9%38.5%36.9%38.3%37.0%31.9%30.2%31.2%24.5%35.0% (4.5%)
Year 11.218.7531.0001.0831.0461.0871.185.896.976.997 (.147)
Year 22.5572.1841.3782.1382.2882.1942.4152.3581.6622.089 (.416)
Year 33.5563.6852.9862.0893.4043.6093.5973.7303.3613.476 (0.255)
Year 45.1684.6904.6223.8992.8804.7925.2244.9854.8554.570 (0.767)
Year 58.0236.4835.6325.6874.9143.7486.4896.8236.1735.971 (1.379)
Year 610.0569.7727.5746.7046.8736.0284.8098.1698.1908.095 (1.455)
Year 711.03712.01611.2248.8177.8978.1737.3895.8599.6059.402 (2.206)
Year 813.46112.99513.46312.87610.1989.2049.7638.7376.75710.714 (2.691)
Year 917.35815.65714.62015.49414.71411.71410.80311.3369.88913.613 (2.680)

Again 2009, is the clear winner and almost a statistical outlier among this small data set.

While 2001, on the other hand, is the clear loser and almost a statistical outlier in the other direction.

But on average, if you could save about two-thirds of the money you took home, you’d be on your way to financial independence after nine years.

And, for the sake of completeness I also calculated the factor for how large an amount invested over the course of a single year would have grown by the end of a nine-year period:

Year-by-Year Savings Multiplier for a Given Start Year

Investment Growth Factor200920082007200620052004200320022001Average (Standard Deviation)
Year 13.3402.1951.6251.8521.8381.5161.5981.573
1.1521.855 (.625)
Year 22.6662.7681.9571.6271.6521.3821.3081.5891.3481.811 (.551)
Year 32.2972.2092.4681.9601.4521.2421.1931.3001.3611.720 (.509)
Year 42.1121.9041.9702.4711.7491.0921.0721.1861.1141.630 (.525)
Year 51.7401.7501.6971.9722.2051.315.9421.0661.0151.522 (.453)
Year 61.4401.4421.5601.6991.7601.6581.134.936.9131.394 (.323)
Year 71.3431.1931.2861.5621.5161.3231.4301.128.8021.287 (.230)
Year 81.3061.1131.0641.2871.3941.1401.1421.422.9661.204 (.155)
Year 91.1141.082.9921.0651.1491.048.9841.1351.2181.087 (.076)

As a reminder of how to use this chart, you multiply the amount you may have saved in a given year by the savings multiplier to figure out how much it would be worth at the end of a given nine-year period. For example, if you started saving in 2005 and saved $10,000 in 2009 (year 5), it would have turned into $22,050 ($10,000 * 2.205) by the end of 2013 (year nine).

Again, one day I might make a calculator. But for now, you can enjoy using excel or your spreadsheet application of choice to play around with the numbers above for your own particular situation.

The Big Takeaways for Achieving Financial Independence

  1. Track your spending. It becomes easier to save if you know what you are wasting money on. An easy, free way to track your spending (and monitor your investments) is by using Personal Capital. If you sign up using that link, I may receive a commission. They will probably try to call you to get you to sign up for their paid service if you have a large amount of savings. I advise just ignoring numbers you don’t know from the 415 area code for a bit.
  2. Invest your money in low cost index funds and leave it there. You need your money to be in the market during the big upswings to make money. The only way you can ensure that is by not getting scared away when the markets crash. In fact, you’re possibly best off forgetting the money you stored away even exists. Studies, allegedly, show that the best investors are those that have forgotten their password or are dead.
  3. Don’t get too obsessed about saving all your pennies. You can have fun while getting rich too. And if you’re not having fun, what’s the point?
  4. But also, save a good amount of your pennies. The typical retirement advice is to save 10-20% of your take-home pay. But you can save more. And, if you don’t want to be tied to a specific job forever, you should.
  5. Having a partner that also is a saver and investor is a huge leg up.

So, is anyone coming to my 10-year law school reunion financially free?

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