MML #019: Will Your Expenses Really Drop in Retirement? Good News for Lawyers

"How much do I need to retire?" That's the question I hear most often from attorneys in my office. Everyone wants a simple answer, but here's the truth: you probably need less than you think.

Forget that old advice about needing 70-80% of your current income. For lawyers, the math works differently, and usually in your favor.

Why Your Expenses Will Drop

When attorneys first look at their retirement numbers, they often get nervous. But once we break down the real costs, most find themselves pleasantly surprised.

You'll Pay Less in Taxes

Your tax bill changes big time in retirement. First, you wave goodbye to FICA taxes (Social Security and Medicare), which take 7.65% of your paycheck right off the top. If you own your practice, you're currently paying double that amount!

Social Security benefits get better tax treatment than your salary does. Depending on your other income, only 0% to 85% of your benefits might be taxable. This often means a much smaller tax bill than during your working years.

Many states also cut retirees a break. Florida and Texas charge no state income tax at all. Pennsylvania doesn't tax withdrawals from retirement accounts. Knowing your state's rules can save you thousands each year.

Work Expenses Vanish (Should You Choose to Fully Retire)

Think about all these costs that simply disappear when you retire:

• Malpractice insurance
• Bar dues and fees
• Required continuing education
• Professional clothes
• Daily commuting costs
• Business lunches and networking events

These expenses often add up to $10,000 or more every year for many attorneys.

The Mortgage Factor

Many lawyers reach retirement with their home either paid off or close to it. Since housing usually takes up about a third of your expenses, eliminating your mortgage payment makes a huge difference in how much you need each month. Even if your mortgage is scheduled to continue for the first 10 years of retirement, that’s a huge expense drop for your remaining years.

No More Saving for Retirement

This one surprises people. Those big chunks of money you've been putting into retirement accounts? That cash was never part of your spending money anyway.

Many attorneys in their peak earning years put away $50,000 to $70,000 annually for retirement. Once you retire, you can stop saving for retirement (obviously!), which means you need less income to maintain the same lifestyle.

Finding Your Real Number

There are two simple ways to figure out what you'll really need in retirement:

The Quick Method

I use this approach with most attorneys because, let's face it, most lawyers hate detailed budgeting. Just take your current income, subtract taxes, retirement contributions, and work expenses. Voila! What's left is your actual lifestyle spending.

For example, an attorney making $300,000 might be surprised to learn they only spend about $120,000 on their actual lifestyle. This method usually overestimates a bit, which gives you a nice safety cushion.

The Detailed Method

Some attorneys prefer listing every expense category. While this seems more accurate, people often forget small but important costs.

You'll remember your property taxes but might forget home maintenance. You'll include health insurance but overlook out-of-pocket medical costs. If you use this method, track your spending for a few months first to catch everything. Apps like Monarch Money can be helpful with this time of granular process.

Real Numbers in Action

Let’s take a look at an example: An attorney earning $250,000 discovers they actually spend about $110,000 on their lifestyle. With Social Security for themselves and their spouse providing $54,000 yearly, they only need their savings to generate $56,000 per year.

From a $1,000,000 portfolio, that's a 5.6% withdrawal rate. That's higher than the famous 4% rule suggests, but don't worry! Next week, we'll look at why this might work just fine for many attorneys. Understand that this is an over simplified example, but it should at least give you a framework of how this calculation should work.

What's Coming Next

Next week, we'll talk about finding and maximizing your retirement income sources. This will help you create a solid foundation for life after law practice.

Understanding what you truly need is the first step to knowing when you can retire with confidence. And for many attorneys, that day might be closer than you think.