By Guest Author, Anthony F. Prieto, Jr., CFP
According to Yahoo Finance, in 1998 59% of Fortune 500 companies offered traditionally defined benefit pension plans to new hires. However, by 2017 Yahoo reported that only 16% of those same companies offered a traditional defined benefit pension plan. Defined Benefits Pensions typically pay a retiring employee a percentage of their average earnings for the remainder of their life based on the years with a company.
However, Trial Lawyers are in a unique position to create their own “pension” backed by some of the highest rated life insurance companies in the world. A lawyer can do so by electing to enter into an attorney fee structure. In 1996, the 11th Circuit case Childs v. Commissioner was decided which rejected the Internal Revenue Service’s attack on attorney fee structure annuities. Since then, the IRS hasn’t again challenged a lawyer’s ability to invest their fees on a pre-tax and tax-deferred basis. As a result of Childs, like your 401(k) or IRA, an attorney can enter into a fee deferral program and defer the taxation until the funds are withdrawn. The real benefit is there is NO LIMIT on how much you can defer in a calendar year. You can defer $10,000 or $10,000,000 on the same pre-tax basis. So it is really a Super IRA.
Structured attorney fees work very much like a non-qualified deferred compensation plan. The taxes that would be otherwise paid on the fee earned at the time the case is settled are deferred, and that money grows without tax on the growth. When distributions are made, the entire amount distributed during a year is taxable for that year. Based upon a taxpayer’s tax bracket, there may be some distinct tax advantages to entering into this type of arrangement as opposed to being taxed on the entire fee in the year it was earned and investing it after tax.
Time is of the Essence
The most important factor in your retirement planning is time. The interest rate you earn on the funds is helpful but starting early is more valuable. At a recent state trial lawyer convention they were discussing membership and the host said 8% of their membership responded to a survey that they would retire in the next 5 years. That sparked our interest. We went to the Department of Labor and Statistics to see the workforce demographics reported in 2018 and extrapolated some data to make assumptions about the Trial Lawyer community.
For demographic purposes, you can make the estimation that about 90% of all trial lawyers are between 24 and 65 years of age.
Ages 25 to 34: 23%
Ages 35 to 44: 25%
Ages 45 to 54: 25%
Ages 55 to 64: 19%
If we assume that most attorneys will receive $30,000 from Social Security at age 65, you will need to create another $70,000 to reach six figures. Here is the cost to defer today and set up an annual payment of $70,000 a year at age 65 guaranteed for the remainder of your life.
Age: 33 Cost: $479,889.20
Age: 43 Cost: $659,381.80
Age: 53 Cost: $908,812.80
If you placed the amount above in a traditional attorney fee structure, you would receive $70,000 annually each year for the remainder of your life starting at age 65. For female attorneys, the costs would be slightly higher because females tend to live longer; however, the percentages are the same. If you wait until 43, you will need to invest 37% more to achieve the same payments at retirement age. If you wait until 53, you will need to invest 89% more to achieve the same result.
It is important to understand that regardless of the rate, the longer you wait to start the more you will have to invest to achieve the same benefits. The amount of money you need to invest to achieve your desired goal will always increase. Every delay in starting costs you more money.
The risk you take with the deferrals is very specific to your own personal market experience and tolerance.
Defer Fees on Your Terms
You can start to build your plan with $25,000 or $50,000. You can do it one time or one hundred times. You can defer one year and not the next. One partner in the firm can defer and the other can take their fee now. There really is no limitation to how you use deferral program. The options are endless.
Warren Buffet said, “The rich invest in time. The poor invest in money.” The most important thing to do is start now. Your age does not matter because every day you wait will cost you more for the same plan. The more time you have the less money you need to invest!
Jason D. Lazarus is the managing partner and founder of the Special Needs Law Firm; a Florida law firm that provides legal services related to public benefit preservation, liens and Medicare Secondary Payer compliance. He is also a founding Principal and Chief Executive Officer of Synergy Settlement Services, which offers healthcare lien resolution, Medicare secondary payer compliance services, pooled trust services, settlement asset management services and structured settlements.