Retirement: Dare to dream

Retirement: Dare to dream
Illustration: Kyle Reed
Lawyer Norm Keith is 58 and laughs hard when asked about his readiness for retirement. “There’s an old adage that most good lawyers live well, work hard, and die poor,” he says, referencing the quote from American lawyer and statesman, Daniel Webster. “Many probably spend a little more money than they need to, for appearances sake, or life enjoyment or because they’re not thinking and planning ahead. As a partner in a law firm you probably think you should be living better than you are and for some that means going into debt,” says Keith.

For many lawyers in their mid-to-late career, he says, the inability to even consider retirement is very real these days as the profession gets squeezed by a number of competing forces generally acting negatively on their financial statements. And there are stark indicators the need for smart and early retirement planning is greater than ever before. The word on Bay Street is big firms are pushing partners out, in some cases in their late 40s and 50s in order to thin the ranks and make room for less expensive, younger lawyers.

“It’s a bleak prospect for the profession, bleak indeed,” says Keith, an employment and criminal defence partner at Fasken Martineau DuMoulin LLP in Toronto who plans to continue working indefinitely. He admits various factors over the years have made the prospect of retiring anytime soon pretty slim. “I think generally lawyers, once they’re past 15 or 20 years of practice, are like most professionals and start thinking about retirement. Unlike accountants and more organized people though, they don’t do a good job of planning for it,” says Keith. “I think by the time you realize you should have been saving, I’m not going to say it’s too late, but it makes it more difficult.”

Even the best-laid retirement plans can give way to chaos when a major life event takes place, such as divorce or job loss. As well, over the last five years, market forces have not always been kind to investment portfolios. The fact clients are pressuring lawyers to deliver lower cost services hasn’t helped either. “We tend to be very busy ourselves and tend to look after our clients’ interests better than our own. It’s also a high-risk profession for marriage failure. Typically, unless you have married another lawyer or a wealthy spouse it tends to be a reversal of fortune experience when you have a marriage breakdown,” says Keith. “The third reason is incomes have been stagnant or even in some cases declining for lawyers, even for partners in law firms.”

From a financial adviser’s point of view, Izhak Goldhaber says lawyers are typically pretty savvy about the need to save money. “In general lawyers are a higher income earning class and have been putting aside good sums of money, but the big issue is one of quantum — am I going to have enough? And many are discovering they are not going to have enough,” adds Goldhaber, a former adviser and vice president, insurance and financial services, with the Canadian Bar Insurance Association and CBA Financial Services Corp.

Goldhaber agrees with Keith that life events like divorce can affect financial outcomes over time, even when someone makes a good living. “When you talk about the impact of divorce alone — I can’t overstate how devastating that is emotionally, but also financially. Imagine you’ve been on track with a retirement and financial plan and then all of a sudden it all blows up because half your assets are gone,” he says.

While many may not have much sympathy for lawyers who haven’t had the foresight to plan for retirement, it’s pretty clear they have become somewhat of a high-risk group. With law firm profitability on the decline over the past six to eight years, some partners are working harder than ever but not necessarily making more money — in some cases less — which detracts from their ability to save and plan when costs remain the same.

“In this economy who is ready to retire at 55 to 60 years old?” asks Malcolm MacKillop, of Shields O’Donnell MacKillop LLP. “Lawyers aren’t any worse than any other profession, the difference today is the attitude about the profession itself. Many thought when they joined a firm, if they worked hard and became a partner they would work there until retirement and the firm would take care of you; now it’s all changing. I’ve seen people in their late 40s and 50s — the worker bees — getting pushed out.”

Most firms don’t have pension plans and even some of the firms that do and have amalgamated are grandfathering pensions going forward, says MacKillop, who represents partners who find themselves in battles with their firms over compensation or being let go. He’s handled 15 such cases in the last two years. “The treatment sometimes is very harsh. It’s about passing the work down to the younger lawyers so the firms can charge less. I’ve seen partners with 25 to 30 years of service who are told they have to leave and they’re like deer caught in the headlights.”

Calgary tax lawyer Roy Berg agrees that as a profession, lawyers are probably more focused on their work than saving for the future. “Lawyers are in a tough spot because it’s really up to us, as people who don’t typically have pensions or stock options and forced retirement savings, to plan for retirement. A lot of times, as retirement planners we make better lawyers,” says Berg, a partner at Moodys Gartner Tax Law LLP. “Every practising lawyer knows dozens of guys who are the senior lawyer with kids in private schools, they have paid for university educations for their kids and take nice trips and really can’t afford to retire because they’ve consumed all their capital as they’ve gone along and have not properly planned.”

Moodys has a group RRSP for its lawyers, a rarity in today’s law firms. Many firms feel it’s too paternalistic to impose any kind of forced savings on their lawyers. But for both retirement and tax reasons, Berg says it can be hugely beneficial. “Lawyers often get into trouble because as partners there is no source withholdings. So at the end of the year, you owe a whack of money,” he says.

While it doesn’t have a pension plan, partners at Lerners LLP continue to receive some income during their transition into retirement, based on files they brought in while at the firm. “I think most firms say it’s the lawyer’s responsibility and not only should the partnership not want to interfere in your personal life but we don’t have any duty, obligation, or responsibility to do so,” says partner and executive committee member Lisa Munro. “Many people feel their firms already control too much of their lives.”

Many firms have a fixed retirement age at which time they get their capital investment back, so for some, like WeirFoulds LLP, that age is 70 but is in no way a hard stop. At age 70 the firm will often “reset” the relationship for those who want to continue working. “It’s that age for a reason,” says Lisa Borsook, executive partner at the Toronto firm. “Half of the lawyers here are litigators and in our view litigation lawyers have a longer runway. I have litigators reaching their prime at 65. I’d be insane to dump them overboard.”

Law firms are also no longer the stable homes of partners who would stay with the same firm their entire career. Opportunity, feeling more valued, or a sense of increased security elsewhere lead lawyers to move around more  — especially if they feel they are getting pushed out or into roles with lower compensation. With fewer big deals, an emphasis on mediation to avoid litigation whenever possible, and pressure from corporate clients to lower fees, law firms are feeling pinched and having to re-evaluate compensation plans for some lawyers. Partners are being pressured to bill more and older partners with big books of business want to stay longer.

MacKillop says firms often have a 10-year payout for partners, of say $75,000, which is based on how many years the lawyer has been an equity partner multiplied by their best year of income.
Often a judgeship can be an attractive second act for many lawyers in their 50s and 60s who are unhappy in their practice but have dreams of a solid pension plan dancing in their head.
Depending on your income level as a partner, however, your earnings could drop precipitously when joining the judiciary. In 2010-11, puisne superior court judges made about $271,400, according to the 2011 Judicial Compensation and Benefits Commission. A lawyer in a small town might see a salary increase by becoming a judge and realize the benefit of the pension, but in high-rent districts like Toronto and Vancouver it may not be quite as valuable a move — financially speaking.

Typically, for partners in large law firms their retirement has been based on selling their partnership interest, which the law firms would be obligated to do, but the payments come out of current billings. “So if now we have lots of mobility amongst junior and mid-tier and senior ranks, all it takes is a bunch of them to leave and the firm doesn’t have the capital to pay out. That’s the unfunded deferred compensation plan. I know legions of older partners in their 70s and if they retire they will expect the firm to buy their partnership interest back but the young guys might decide to go form their own firm instead,” says Berg. “That’s happened with scores of firms in the U.S.”

For the smaller firms in which 90 per cent of Canadian lawyers practise, there is a propensity to accumulate capital within their own private corporation, which is generally good planning, but they often ignore RRSPs as an effective additional tool. “They have one mindset — it works [the private corporation], it’s easy and is effective, but they ignore the RRSP and when they retire then they have all their eggs in the one basket,” says Berg. “The risk of having it all in one pot — especially the professional corporation, you don’t know how the tax law is going to change with respect to that. If all your capital is in your professional corporation and you decide to live outside Canada in retirement, you’re going to have to recognize the gain on your PC stock, which can be very substantial.”

In practically all private-practice environments, it’s largely up to the individual to fend for themselves or enlist a financial adviser to help map out a solid financial future. But with investment performance being mediocre over the last few years, it makes the challenge even greater. “When some people start to realize that retirement is looming it’s almost scary for them — maybe because they’ve had a divorce or they are no longer a partner at a firm or are just at an age they should start looking at it,” says Virginia Engel, a partner at Peacock Linder Halt & Mack LLP and chairwoman of the CBA Financial Services Corp. board. “The realization you need to figure out where you want to be in retirement can be very scary. Then combine that with how much money do I need to live on and what am I going to do when I don’t go to work, or do I want to work part-time or do something else full-time?”

Scotiabank senior wealth adviser Andrew Pyle says, like doctors and dentists, lawyers share similar traits in that they are highly focused on what they specialize in, which means they tend to not be very focused on their own personal issues, such as finance. “It’s common to find professionals who focus so much on their practice and neglect to look at financial management,” says Pyle. “If we start layering in on top of that the need to do comprehensive cash flow and retirement planning, and estate planning, they just do not have the time to spend on those things.”

Making a plan

Even if virtually no retirement planning has taken place, it’s important to take stock of where you are right now. What is the realistic timeframe between now and when you think you will retire? Consider a couple of timeframes, and even consider whether you might want to work part-time and what that income level might be.
Since few lawyers look at a hard stop date where all work will cease, Pyle suggests part-time practice or other kinds of work is a good way to approach the plan. He says once a timeline is in place, take stock of what is saved and where there is capacity for additional contributions to RRSP plans and other tools. “They need to really do a bottom-up analysis of their cash situation and project it forward. As opposed to just throwing out numbers — if you don’t have $1 million in X number of years, too bad. You have to approach it from the ground up and be realistic.”
For lawyers who have their own corporation they have some powerful tools that will afford them things average Canadians cannot do. “Regular Canadians who don’t have a corporation can’t hold their life insurance strategies in the corporation, which is a very tax efficient thing to do,” Pyle notes as an example.

Projecting cash flow and creating multiple pots of capital

“They have to get hold of their cash flow and a hold of what those cash-flow projections look like and make sure that they are not only tax efficient now, but tax in retirement,” says Pyle.
Projecting where work is going to come from and what revenue it will bring may be tricky, but practitioners should at least attempt to do the exercise. It may be surprising to find how much a solid amount of regular work comes in and can be projected out even up to five years.

The next step is to create “multiple pots of capital” so that when retirement does happen you aren’t drawing from one source. “The worst thing in the world is ending up in retirement and having limited choices in terms of how you fund that — an RRSP becomes a RIF and that’s all there is and now has a big tax issue,” says Pyle.

Lawyers can also investigate the use of an individual pension plan if they have a corporation. “An IPP is a very effective tool that a lot of professionals use in Canada because the size or the growth of wealth we can get from an IPP is greater than an RRSP. And it’s tax efficient, funded from within the corporation.”

And if a spouse is involved in the practice — for a lot of lawyers spouses are often involved in some way, which is great for income splitting — the spouse too could have an individual pension plan. “IPPs have been around a long time but we find a lot of individuals are just not up to speed on them and some of the accounting advice is not up to speed. For an incorporated lawyer it’s a very effective tool.”

There is also the need to re-evaluate life insurance coverage.

“From a tax point of view, when you do a plan for individuals and show them the tax bills that will occur at death, their eyes fall out of their head because they never thought of their RSP becoming income when they die, or the accumulated corporate assets getting taxed. It really is a revelation for a lot of professionals and that’s when you need insurance,” says Pyle. “The insurance policy covers taxes at death and provides a more tax efficient structure for the corporation because again, assuming a lawyer is successful and is pulling a salary to meet their day-to-day needs before retirement, they probably are building up a surplus within the corporation and investing the surplus. Because of the tax rules the investment earnings on those assets are taxed at the highest marginal tax rate — so investments in a corporate structure are not tax efficient thanks to the Tax Act. However by incorporating an insurance strategy within the corporation, we can siphon funds into that policy, which grows tax free,” says Pyle. “It’s like creating a large tax-free savings account — we can educate a lawyer as to how to use a corporation to create a TFSA of $100,000 a year depending on the surplus — it’s a very effective tool for wealth planning and tax planning.”

Goldhaber of CBAF recommends target date funds that become more conservative over time are a great way for individuals to invest their money without having to give it a lot of thought each month. “That’s huge no matter how sophisticated you are. We’re happy to have such a product and we continue to steer lawyers towards it so they don’t have to worry about investments — the mental energy should be on socking away as much as possible. You put away as much as possible and this investment engine will take care of the other side of it,” he says.

CBAF’s investment line-up includes retirement date funds — ready-made portfolios geared to a lawyer’s date of retirement. Each portfolio is allocated among a number of different segregated funds based on a split between fixed income and equity. CBAF’s program also shows lawyers their personalized rates of return so they can determine if they are meeting their investment goals.
“Monthly savings programs sound boring and dull but there’s magic in it because savings take place automatically and over time but it takes that money out of the household budget and enforces a discipline. They are tools that don’t get the respect they deserve,” says Goldhaber.

As for Keith, he is bullish on the future — he ran his fourth Ironman last June in Austria — and says he loves his work at Faskens and plans to keep working as long as he can — mostly because he loves what he does. While he has worked most of his career as a labour and employment lawyer in the health and safety practice, a few years ago he branched out into white-collar crime, investigations and compliance. “If you have good health and a vibrant practice, you’re probably never going to be obsolete until you’re beyond the point of which you should be advising clients. I could probably work as long as I want because I think clients see I do good work and I’m capable. I don’t lack for work and I like the interesting, challenging cases that I have,” he says.

“Even a small mid-course correction can refresh your interest in the profession as opposed to just seeing it as a daily grind. I think you need to take some responsibility for re-thinking and re-looking at the profession and firm you’re at and what you’re doing and listen to your clients,” he says.

Make a plan
The Canadian Bar Association Financial Services Corp. offers a number of services to help lawyers plan for retirement.  They include investment and savings products designed for and available exclusively to lawyers, their staff, and their families, RRSPs, TFSAs, individual banking services, and group RRSP plans for law firms. It offers licensed financial advisers available across the country to meet and help lawyers and their spouses develop and implement individual retirement goals, including regular monitoring.
CBAF’s investment line-up itself includes Retirement Date Funds — ready-made portfolios geared to a lawyer’s date of retirement. Each portfolio is allocated among a number of different segregated funds based on a split between fixed income and equity geared to the date of one’s retirement. The allocation is adjusted automatically over time to become more conservative as the lawyer approaches retirement. In addition, CBAF’s program also shows lawyers their personalized rates of return so they can determine if they are meeting their investment goals.

There are also Internet-based tools available from CBAF, including the following:

1) Steps program: a tool that helps lawyers to determine which set of variables are applicable to them (including retirement age, level of regular savings, future savings/inheritance, and investment style). Unlike other retirement projection programs, Steps does not require the lawyer to input the exact dollar sum needed for retirement (unless they want to), rather, one simply chooses one of the lifestyles depicted in the program and Steps then “costs” that retirement, inflation adjusted. Steps also help lawyers determine their appetite for risk based on a series of behavioural questions and then recommends an appropriate portfolio mix. Also, the lawyer’s progress towards his or her retirement goal is displayed on the first page of every investment statement so it can easily be determined whether one is on track and if not, what remedial actions should be undertaken.

2) Retirement Income Illustrator: this provides a detailed schedule showing legislated and variable withdrawals from a registered or defined contribution pension so the lawyer can determine how long their savings will last under different rates of return and withdrawal scenarios; and

3) Learning centre: an array of education tools, such as a “pay yourself first” calculator showing the benefit of putting money aside on a regular basis; a Retirement IQ Quiz; learning modules (some in video format); games and quizzes; many different investment calculators; and a new “Ride To 65” game that gives lawyers the opportunity to explore and learn smart money-management tips in an online virtual world.
— JB

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