As lawyers approach retirement age, it’s vital that they create a plan for transitioning. A law firm retirement plan can assist.
An effective attorney retirement plan can assist with recruiting and retention efforts while offering tax savings to your firm. Furthermore, it allows partners to save significant sums before having to withdraw from their partnership and pay taxes on it later on.
The type of retirement plan a firm chooses depends on its size and needs. Larger firms may use profit-sharing plans while smaller ones might utilize cash balance plans. Many of these plans offer vesting requirements to incentivize long-term employment while meeting specific goals such as succession planning or client recruitment.
An effective retirement plan can help a law firm retain key employees when one or more partners is ready to retire. This strategy is especially valuable in small or mid-size firms that rely heavily on individual skills for continuity in client services and want to attract younger workers.
Law firms can give both partners and staff members of a firm the option of contributing at levels within statutory limits, with typical partners contributing up to $24,500 annually while new hires up to $18,500 each year. Individuals over 50 can also make “catch-up” contributions of $5,500 annually.
Modern retirement plans typically use defined contribution strategies, in which money is contributed according to an established formula and invested. One popular such scheme is 401(k). A 401(k) allows partners to save tax-deferred, making this an excellent option for law firms as well.
Many law firms have moved away from conventionally defined benefit pension plans as they require significant commitment from businesses in funding employee’s retirement income over their working careers, making these costly plans vulnerable to investment returns and expense fluctuations. Some firms have chosen cash balance plans which offer greater flexibility but may be less appealing to young lawyers.
Lawyers approaching retirement should have an in-depth knowledge of their expected benefits and costs in order to make informed financial decisions. In addition, they should familiarize themselves with applicable ethical considerations and rules such as those found in ABA Rule 1.4 for handling sensitive client information. It would also be wise to draft both a will and durable power of attorney document so that someone will have access to things like bank information, safe deposit boxes or client files when necessary.