Pension/Retirement Plans for Lawyers

[hiccups]

What are some ways that everyone is saving for retirement? For those who are inhouse, government or DOJ, what are the pension like? For those who are working in private practice, what are some ways you are planning for retirement? I am a junior associate that just paid off my debts. What should I be doing next financially? 

[KOMODO]

My two cents:

Set up an automatic withdrawal from your bank account on pay day. Every time you get paid, that payment will be taken out immediately and transferred to your retirement account, so you never think about it or miss it, and you don't have to take any active role in making it happen on a regular basis. The amount should be something you can live with that doesn't stretch you too much financially - this is a payment that you never lower or pause unless you're in a true emergency (or sometimes you might pause it if you're on a parental or medical leave). A good place to start if you've recently paid off your student loans is the amount of your student loan payment, as you're familiar with having that amount missing from your earnings already. Then every time you get a raise or feel like you have additional room in your budget, increase the amount of that payment until it hits about $1,000 for each biweekly paycheque. Once you're doing that, you're getting close to the RRSP contribution limit and can think about what to do next. Keep in mind that the RRSP contribution limit is 18% of your earned income to a certain maximum each year, so be careful not to exceed it (I'm using $1000 biweekly as a nice round number assuming that you may also have some room from prior years and you may hit the max salary ceiling before you get to a point where you can save $1000 biweekly). 

The next big question is - what do you do with the transferred cash? In a perfect world, you would see a fee-for-service financial advisor before making a decision, but if that's not possible, you'll need to do some research and consider your own level of investment knowledge and risk tolerance. The following tend to be popular products for associates who are starting to save for retirement:

1. Roboadvisors like WealthSimple - take a quiz about risk tolerance, set it, and forget it. Low effort and relatively low fees.

2. Trading ETFs on a platform like Questrade - you have to understand what you're buying and actually make the purchases and monitor them. More active participation required but lower fees (generally) than a roboadvisor. There are various websites geared to recommending ETFs for Canadians. As you work at a firm, be very careful not to buy individual stocks that could put you on the wrong side of an insider trading inquiry. 

3. Bank mutual funds - easily accessible and more of a "traditional" product, so some associates get into them through their parents, etc. Fees can be much higher than the other options so tread very carefully. 

4. Firm sponsored funds - I am assuming that your firm will not provide "matching funds", as that is quite rare, but some firms offer to connect you with funds that are just available for mutual fund investment. Beware of fees as noted above but also beware of what happens if you leave the firm, as they are sometimes converted to a different type of product. Obviously if your firm is matching then this is likely the best option.

Other notes:

- Someone will probably come in and make the comment that you have to consider whether it's better to start funding your TFSA or RRSP and it depends on your income. That may be true but my personal preference has always been to start a retirement fund using an RRSP because then your funds are locked in and more likely to actually be used for retirement. Once you're hitting the RRSP limit, you can start using a TFSA as a secondary retirement savings vehicle. People also sometimes make the point that it can be better to "save up" RRSP room and use it in a higher earning year, but again I think on a practical level my preference is to get the funds saved rather than waiting to potentially have tons of cash later. My experience has been that as income rises, so do your expenses, and you never have as much spare cash in future years as you expected to have. 

- Consider your other financial goals (condo? better apartment? wedding? pet? car? vacation? less demanding but lower paying job?) and make your retirement savings plan in light of those goals. You want to get into the habit of saving for retirement, so the amount needs to be realistic, long term, and livable. 

- I'm definitely not a financial planner and I have no investment experience whatsoever except for my own, as an associate in private practice. This advice is only meant to give you an idea of the options out there, but definitely do your own research, speak with various people in real life and elsewhere, etc. Hopefully a few other lawyers will weigh in with their own personal experience and we can all learn from each other 🙂

[Kimura]

I second ETFs, such as one-ticker, all-in-one ETFs offered by Vanguard (VGRO) or Blackrock (XGRO). They're set it and forget it type ETFs that can be chosen based on your risk tolerance, with MERs (management expense ratios) of approx 0.20% - compare this to mutual funds, for example, where the MERs tend to be much higher. You can imagine how much you end up paying in fees as your investments compound over the years. 

A good place to start looking for DIY investing information is the Personal Finance Canada subreddit. Lots of very useful information over there, including a money-steps chart and a list of book recommendations. 

This is exciting - best of luck! 

 

[Rusty Iron Ring]

The "Canadian Couch Potato" website has a wealth of information about how to be a passive investor and keeping investment costs down.  They also have model portfolios based on your preferred level of risk, built on the most common ETF's.  

Investopedia is also great if you just don't know anything about investing. And I think reading "The Wealthy Barber" is probably worthwhile - it's so short and easy to get through. 

What you should do next? Keep income up, and expenses down, and put money away.  The details are important and worthwhile, but putting it away and keeping it there is more than half the battle. 

 

 

[Cool_name]

1 hour ago, KOMODO said:

My two cents:

Set up an automatic withdrawal from your bank account on pay day. Every time you get paid, that payment will be taken out immediately and transferred to your retirement account, so you never think about it or miss it, and you don't have to take any active role in making it happen on a regular basis. The amount should be something you can live with that doesn't stretch you too much financially - this is a payment that you never lower or pause unless you're in a true emergency (or sometimes you might pause it if you're on a parental or medical leave). A good place to start if you've recently paid off your student loans is the amount of your student loan payment, as you're familiar with having that amount missing from your earnings already. Then every time you get a raise or feel like you have additional room in your budget, increase the amount of that payment until it hits about $1,000 for each biweekly paycheque. Once you're doing that, you're getting close to the RRSP contribution limit and can think about what to do next. Keep in mind that the RRSP contribution limit is 18% of your earned income to a certain maximum each year, so be careful not to exceed it (I'm using $1000 biweekly as a nice round number assuming that you may also have some room from prior years and you may hit the max salary ceiling before you get to a point where you can save $1000 biweekly). 

The next big question is - what do you do with the transferred cash? In a perfect world, you would see a fee-for-service financial advisor before making a decision, but if that's not possible, you'll need to do some research and consider your own level of investment knowledge and risk tolerance. The following tend to be popular products for associates who are starting to save for retirement:

1. Roboadvisors like WealthSimple - take a quiz about risk tolerance, set it, and forget it. Low effort and relatively low fees.

2. Trading ETFs on a platform like Questrade - you have to understand what you're buying and actually make the purchases and monitor them. More active participation required but lower fees (generally) than a roboadvisor. There are various websites geared to recommending ETFs for Canadians. As you work at a firm, be very careful not to buy individual stocks that could put you on the wrong side of an insider trading inquiry. 

3. Bank mutual funds - easily accessible and more of a "traditional" product, so some associates get into them through their parents, etc. Fees can be much higher than the other options so tread very carefully. 

4. Firm sponsored funds - I am assuming that your firm will not provide "matching funds", as that is quite rare, but some firms offer to connect you with funds that are just available for mutual fund investment. Beware of fees as noted above but also beware of what happens if you leave the firm, as they are sometimes converted to a different type of product. Obviously if your firm is matching then this is likely the best option.

Other notes:

- Someone will probably come in and make the comment that you have to consider whether it's better to start funding your TFSA or RRSP and it depends on your income. That may be true but my personal preference has always been to start a retirement fund using an RRSP because then your funds are locked in and more likely to actually be used for retirement. Once you're hitting the RRSP limit, you can start using a TFSA as a secondary retirement savings vehicle. People also sometimes make the point that it can be better to "save up" RRSP room and use it in a higher earning year, but again I think on a practical level my preference is to get the funds saved rather than waiting to potentially have tons of cash later. My experience has been that as income rises, so do your expenses, and you never have as much spare cash in future years as you expected to have. 

- Consider your other financial goals (condo? better apartment? wedding? pet? car? vacation? less demanding but lower paying job?) and make your retirement savings plan in light of those goals. You want to get into the habit of saving for retirement, so the amount needs to be realistic, long term, and livable. 

- I'm definitely not a financial planner and I have no investment experience whatsoever except for my own, as an associate in private practice. This advice is only meant to give you an idea of the options out there, but definitely do your own research, speak with various people in real life and elsewhere, etc. Hopefully a few other lawyers will weigh in with their own personal experience and we can all learn from each other 🙂

As Komodo said, an automatic withdrawal is imperative. Your spending will increase to match the amount of disposable income you have, it is a law of nature. As a third year lawyer, I physically cannot understand how I spent so little as an articling student.
 

So, you need to cut it off at the source by setting up automatic withdrawals. Each time you get a raise, increase the auto withdrawal. Do it as soon as you get the raise so you don’t adjust your spending above where you want it. How much of the raise you put towards an auto withdrawal is personal preference, the pros and cons of more vs less are obvious.

 

Once you have more assets a good private wealth financial advisor is helpful, a bad financial advisor on the other hand can be terrible and may fleece you with fees. The person in your local bank branch selling mutual funds isn’t a financial advisor, they are a mutual fund salesperson (or worse life insurance investment salesperson)

[Aureliuse]

Not having kids. The family curse ends with me. Best retirement plan. Keep putting 60% of my income each month into savings/investments.

[Lawstudents20202020]

The alternative is the kids are the retirement plan, Atleast according to my parents

[Jaggers]

I use a couple of ETFs in my non-taxable accounts (which are relatively large) and a couple of low fee mutual funds in my taxable accounts (which are relatively small). In recent years, I’ve put extra money towards my mortgage rather than putting it into taxable investments, figuring I might as well get the guaranteed after-tax return, even if it’s not a really high one. 

as for my day-to-day, about half of my paycheque goes into a savings account, and every little while (there’s no rhyme or reason really as to how often) I allocate extra money there to my RRSP, tfsa, resp, mortgage, etc.  

I have fully funded my RRSP and tfsa every year since I paid off my student loans. Why turn down free money? Though I don’t have much RRSP room these days, as I have a pretty decent pension plan. Most of my RRSP accounts were built up during my last two jobs, when I didn’t. Helped out by the miracle that has been the stock market over the last 15 years. 

[AllWellAndGood]

Reviving this thread to ask an RRSP question:

My spouse and I have now maxed out our TFSAs. I have never contributed to my RRSP before. I'm junior big law associate, so my income has high taxes (margin is over 40%) but theoretically will increase over the rest of my career (although I expect I'll make the in-house shift eventually). Is an RRSP still a good idea this year if I anticipate being in progressivey higher income brackets in the future? Or would it be better at this stage to just pay down my variable mortgage... curious what other people have done, since I often hear the recommendation generally to not pay into an RRSP if your tax rate will be higher in the distant future unless you're out of TFSA space, which is now my position.

[Jaggers]

I always maxed out my RRSP when I was an associate rather than paying my mortgage. I did put some extra money towards the mortgage when I had it, but my priority was the tax sheltering. It's been a good strategy for me, but that was in the era of low interest rates and major bull markets, so it may not necessarily be the same now. Still, the tax sheltering is very valuable over the long term.

@mal convinced me that tax sheltering is so valuable that I should stuff my kid's RESP as much as possible the day after he was born, even at the expense of giving up the government's 20% matching of annual contributions later on.

If you want the best of both worlds, you can contribute $20K to your RRSP then put the $10K tax refund towards your mortgage.

[AllWellAndGood]

2 hours ago, Jaggers said:

I always maxed out my RRSP when I was an associate rather than paying my mortgage. I did put some extra money towards the mortgage when I had it, but my priority was the tax sheltering. It's been a good strategy for me, but that was in the era of low interest rates and major bull markets, so it may not necessarily be the same now. Still, the tax sheltering is very valuable over the long term.

@mal convinced me that tax sheltering is so valuable that I should stuff my kid's RESP as much as possible the day after he was born, even at the expense of giving up the government's 20% matching of annual contributions later on.

If you want the best of both worlds, you can contribute $20K to your RRSP then put the $10K tax refund towards your mortgage.

Thanks for the advice, I think I'll take the advice and do the max RRSP contribution and then prepay my mortgage with the return!

I also have a young one and went for a larger first year RESP contribution, and then will use the remaining 25k space over time to get the matching, after a collegue sat me down and argued the point haha. 

[Jaggers]

It will add up fast, especially if you get a few years of good returns. Mine is down 20% in the last year, but it was nothing but up for the 14 preceding years. 

[Mountebank]

IMO, this is probably the order for most people:

1. Pay all debts except mortgage.

2. Max out TFSA.

3. Contribute to any RESPs.

4. Max out RRSP.

5. Pre-pay mortgage.

Like @Jaggers said, you may fiddle around with no. 5 a bit given that you're variable and the bull run is over, while someone already at the highest marginal rate may fiddle with no. 4, but this is still probably decent general advice.

You also might invest rather than pay off debts if you're investing into your own business/career in some real way that will generate long-term returns.

For instance, as a self-employed person my list looks like this:

1. Pay all debts except mortgage.

2. Buy sailing yacht.

3. Escalate sailing hobby in various ways.

4. Rinse and repeat.

[Jaggers]

I have a somewhat significant amount of money in a taxable investment account and am seriously considering just cashing it all out at mortgage renewal time later this year and just using it all to whittle down my mortgage.

[PzabbytheLawyer]

1 hour ago, Jaggers said:

I have a somewhat significant amount of money in a taxable investment account and am seriously considering just cashing it all out at mortgage renewal time later this year and just using it all to whittle down my mortgage.

Tough decision. 

The market may be in for a very fast recovery if no other shock to the financial system occurs (patterns holding would have inflation around 3 percent by year end). 

Housing likely won't recover quickly, and will probably take another 2-5 years to get back to a hot market to have meaningful gains.

Of course, interest is high on mortgages right now, so lots to save. But that may well change quickly if patterns hold. Then the tax saving vehicle of real estate becomes a safe investment again.

[Jaggers]

16 minutes ago, PzabbytheLawyer said:

Of course, interest is high on mortgages right now, so lots to save. But that may well change quickly if patterns hold. Then the tax saving vehicle of real estate becomes a safe investment again.

We're also comparing it to taxable investments, so if I'm looking at renewing my mortgage at 4.5% (or whatever it ends up being) I'd need to make 9% in the market to keep up.

[BlockedQuebecois]

46 minutes ago, Jaggers said:

We're also comparing it to taxable investments, so if I'm looking at renewing my mortgage at 4.5% (or whatever it ends up being) I'd need to make 9% in the market to keep up.

Wouldn’t your capital gains only be taxed at ~26%, meaning you would need to make ~6.1% return in the market to be better off investing? 

[Jaggers]

Yeah, and some are dividends too, though I'm conservative so still keep some interest-bearing investments, especially now. It's probably something in between those, but maybe a bit closer to 6 than 9?

 

But I do like to take the sure thing, so a guaranteed after tax return of something approximating 5% is pretty attractive.

[AllWellAndGood]

41 minutes ago, Jaggers said:

Yeah, and some are dividends too, though I'm conservative so still keep some interest-bearing investments, especially now. It's probably something in between those, but maybe a bit closer to 6 than 9?

 

But I do like to take the sure thing, so a guaranteed after tax return of something approximating 5% is pretty attractive.

Im fairly conservative when it comes to investments and budgets myself, which is why a large portion of my TFSA is in GICs at 5-5.3% at the moment.. also because I hope to upgrade from an apartment to a house in 2-4 years at around the same time I would like to move in-house, so having secure investments (or prepayments) is my ordinary preference. 

[Jaggers]

I don't hope to downgrade to a house, but we did have a mat leave and parental leave a few years ago, so I got a little conservative and haven't really changed.

[Jaggers]

What is the best place to park your emergency savings these days? High interest savings accounts will get you mid-3% interest and you can get your money out any time you need it. 1 year GICs will give you 5%, but you can't get it out without sacrificing the interest. A ladder of GICs will give you between 4.5 and 5%. Mal, I saw you lurking out there🙂

[WhoKnows]

8 minutes ago, Jaggers said:

What is the best place to park your emergency savings these days? High interest savings accounts will get you mid-3% interest and you can get your money out any time you need it. 1 year GICs will give you 5%, but you can't get it out without sacrificing the interest. A ladder of GICs will give you between 4.5 and 5%. Mal, I saw you lurking out there🙂

IMO, it's in the name. Emergency fund. It should be easily accessible without penalty in its entirety. Cashable GICs may make sense, but usually the rates are nearly the same as a good HISA with EQ or the like. 

My general rule is can I unwind the position in under a month at any time. I can float my life or an emergency expense on a credit card, but come payment time I want that gone. 

Edited January 12, 2023 by WhoKnows

[Jaggers]

"Emergency" might be overdramatic. We have enough money in our chequing accounts to pay for a few months of expenses. This is for the next tranche after that if it's ever required. I wouldn't mind earning a little more than nothing in the meantime.

[PzabbytheLawyer]

How much emergency should someone hold?

Note, student debts. So any emergency funds means technically paying interest for the luxury.

[Jaggers]

I suspect that the answer for those of us who are 15 years into our career are very different than people just into it. I know it was very different for me. It's all about feeling secure. For me, having a month or two of cushion was huge at that time, though with a kid and a mortgage it's more.

I would say that three months of your regular expenses is a fairly secure cushion? Five or six is probably better if you have a spouse and a mortgage. Nine or ten is probably better if you have a kid? But that's expenses, not income.