The Next Step: Auditing a young lawyer’s retirement plan

Retirement planning can feel overwhelming, but what if taking just one step could improve your outlook? That’s the idea behind The Next Step, Financial Planning’s newest series.

We’re inviting Americans from all walks of life to participate. By sharing basic details about their savings, income and retirement goals, participants provide a snapshot of their current financial situations. We then anonymize this information and present it to professional financial advisors, asking: What single step could make the biggest difference in this person’s retirement readiness?

Each edition of The Next Step will spotlight an individual’s story and feature actionable advice from advisors on how they can take their next step toward a more secure retirement. 

For the inaugural edition, Financial Planning heard from a 26-year-old lawyer living in New York City. Here’s a snapshot of their current finances and how they compare to an average U.S. adult in their same age bracket.

The saver makes just under $84,000 annually, roughly 43% more than the median full-time worker in their age range. Currently, 14% of their income goes toward retirement savings. After taxes and withholdings, they receive $4,858 in monthly income, more than enough to cover their average monthly expenses of $2,095.

Even after attending law school, the saver has no debt. That puts them well ahead of the median debt figure for someone in their age bracket. Adults less than 35 years old report a median debt figure of just under $43,000.

The saver has $5,000 stowed away for retirement, roughly 74% less than the median adult in their age range. About 60% of that is in pretax retirement accounts, while the other 40% is in nonqualified accounts. Based on their current income and contribution rate, they save just under $1,000 every month toward retirement.

READ MORE: As Social Security claims surge, young investors brace for its absence

The saver said they want to retire at 67, with plans to spend slightly more than they currently do. Based on their desired retirement age, FP projected how much money they can expect to have at 67, given a $5,000 starting base and a monthly contribution of $978. In the calculation, FP assumes an average inflation-adjusted return of 7%.

General savings guidelines suggested by Fidelity Investments recommend having savings equaling one year of your annual salary by age 30, with the goal of having 10 times your annual salary saved by age 67.

The saver also said they do not have a spouse with whom they share a retirement strategy. Based on the information they shared. Financial Planning asked advisors: “What single step could make the biggest difference in this person’s retirement readiness?”

Here’s what they said:

Prime time for Roth contributions

Filip Telibasa, founder of Benzina Wealth

If I could give just one piece of advice, it would be to start prioritizing Roth contributions now. At 26, their current tax rate is likely the lowest it will ever be, and they have decades ahead for growth. Every dollar contributed to a Roth account buys many years of compounding that will eventually be withdrawn tax-free.

Currently, 60% of savings are in pretax accounts and 40% in nonqualified, which means there’s most likely no Roth exposure. Shifting contributions to a Roth 401(k) or Roth IRA locks in today’s lower tax rate while preserving future flexibility. As income and tax brackets rise over time, they can always pivot back to pretax contributions. The goal is to diversify across all three tax buckets — pretax, after-tax, and nonqualified. This way, they can strategically draw from each in retirement based on their tax situation.

READ MORE: For Gen Z, retirement feels out of reach. Can advisors bring it closer?

We can’t predict future tax policy, but we know their taxes are likely at their lowest today. That makes Roth contributions the smart move while they’re young.

Heather Hofstetter, client service associate/paraplanner at Angeles Investment Advisors

Given the client’s age, my first question would be, “What does your emergency savings look like?”

My second question is, does the employer match retirement contributions (and if so, how much?). If this client is not already saving enough to receive the full match, my first recommendation would be to increase their savings until they do.

If they are already getting the whole match, then I recommend adding savings to a Roth IRA. If they could make the full $7,000 annual contribution, it would go a long way toward providing both income and tax efficiency in retirement, but even a smaller amount done consistently would benefit from the long-term compounding and give them flexibility and options later. (If they were fortunate enough to have a 529 that wasn’t exhausted to pay for higher education, the 529 owner might be able to help them seed this account from the excess 529 funds!)

Make a roadmap and follow it

Judson Meinhart, director of financial planning at Modera Wealth Management

If I were going to advise this person to do one thing that can help them, it would be to set a 10-year goal to start working toward.

READ MORE: Confronted with college costs, parents reach for their 401(k)s

Those early days of saving and investing can be intimidating (investment gains on a $5,000 balance are small, and contributions make up most of the account growth). It might feel like you’re not making any progress in those early years, and it can be tempting to give up. Having a roadmap and an achievable 10-year target can help keep things in perspective. 

The goal doesn’t have to be elaborate. A spreadsheet with projected contributions and investment growth can be a simple, yet effective, method to keep you motivated to save.

Build a nest egg early

Ben Loughery, founder of Lock Wealth Management

The only thing I really see is if we could get them to 20% savings … or even meeting in the middle at 17 or 18%, especially before lifestyle creep, possible family with kids in the future, etc. That way, we have time on our side, building the nest egg early. When those bigger expenses do come up around mid-life life, we don’t need to worry about playing catch-up as much.

Prepare for the unexpected

Samuel Molina, founder of The Academy of Financial Education

The next step this person can take is to purchase whole life, disability, and long-term insurance to protect their wealth. If they are not insured, a disabling event can become very costly and drain their accounts. 

READ MORE: How to advise clients on Biden’s SAVE plan before it disappears

The whole life insurance policy would be to protect against down markets. If the person only has money in investment accounts and we experience a recession, near or during their retirement, they can use the cash value to weather the storm as their investment portfolio rebounds.

Take a breath and treat yourself

C Garrett Moore, founder of Moore Financial Management

My advice for this individual would be: don’t forget to enjoy life, too.

In short, they’re doing great financially. They have an excellent income for their age, they are living well below their means with zero debt, they are saving a fantastic amount, and they are being smart about their tax allocation. So long as they have their investments buttoned up alongside a decent cash cushion, they are in really, really good shape.

If they haven’t already, they need to take a breath, pat themselves on their back, and treat themselves to something they would like. I always recommend experiences that create memories you’ll never forget.

Ready to contribute?

Financial advisors who are interested in contributing to future editions of The Next Step can submit their names and emails below, and Financial Planning will contact them when there is another opportunity to participate.