Saturday, January 17, 2015

Power of the dual-lawyer family.

Some law students are like oxygen molecules, they form covalent bonds very quickly.  After one semester, it comes at no surprise that couples have started to form in class.

While I think that teasing is not a necessary part of campus life - I am certainly happy for my classmates who are now happily attached to each other, it would be interesting to examine what i would think is the most potent couple combination in class.

The lawyer-lawyer couple is, financially one of the most potent combinations you can form in Singapore. This may have far reaching consequences for policy makers if they are concerned about social stratification but that is not part of our discussion today.

After both husband and wife gets admitted to the Bar, their combined income far exceeds anything me and my wife have achieved in our entire lives ( once we discount our investment income ). Of course, the mathematics can also apply to doctor-doctor couples or management consultant - investment banking couples, but lawyer couples form very easily in class since there is so many opportunities to work with each other in SMU.

As part of my analysis, I generated a spreadsheet with a very conservative assumptions of the cash flow a legal couple can expect.
  • Salary begins with a post-CPF take home pay of $4,500 and 3 month bonus every year.
  • A projected 10% increment every year for a decade after which the increment slows to 5% a year. I expect lawyers to job hop a lot to maintain this salary trajectory. 
  • A very modest assumption of 6% investment returns from a 25% savings rate.
My results are as follows :


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YearAnnual SalaryCouple SalarySavingsAccumulated SavingsInvestment Income
1$67,500.00$135,000.00$33,750.00$33,750.00$2,025.00
2$74,250.00$148,500.00$37,125.00$72,900.00$4,374.00
3$81,675.00$163,350.00$40,837.50$118,111.50$7,086.69
4$89,842.50$179,685.00$44,921.25$170,119.44$10,207.17
5$98,826.75$197,653.50$49,413.38$229,739.98$13,784.40
6$108,709.43$217,418.85$54,354.71$297,879.09$17,872.75
7$119,580.37$239,160.74$59,790.18$375,542.02$22,532.52
8$131,538.40$263,076.81$65,769.20$463,843.75$27,830.62
9$144,692.24$289,384.49$72,346.12$564,020.49$33,841.23
10$159,161.47$318,322.94$79,580.73$677,442.46$40,646.55
11$167,119.54$334,239.09$83,559.77$801,648.78$48,098.93
12$175,475.52$350,951.04$87,737.76$937,485.46$56,249.13
13$184,249.30$368,498.59$92,124.65$1,085,859.24$65,151.55
14$193,461.76$386,923.52$96,730.88$1,247,741.67$74,864.50
15$203,134.85$406,269.70$101,567.42$1,424,173.60$85,450.42
16$213,291.59$426,583.18$106,645.80$1,616,269.81$96,976.19

The results are very interesting.

Basically it means that if the couple maintain a steady household expenditure and increase their standard of living at the same rate of salary growth, they can expect to still accumulate their first million at year 13 from graduation ( about 15 if they used a bank loan to pay for the JD program. )

A 28 year old couple will accumulate about $1 million at around age 41, earlier if they can save their entire bonus and increments.

Of course it can be argued that life can be very unpredictable and my table does not account for the burnout rate of legal professionals. It is also entire possible that one member of the couple can take a few years off to raise kids.

Another impediment is that many lawyers can get used to the high spending culture and lifestyle common to keep up with appearances, which would make saving 25% unrealistic.

Lastly, it can also be argued that few lawyers, being very verbal creatures, might be able to eke 6% from their investments. I believe that they can afford the best fee-only financial advisors to meet their investment goals.

Of course, I am not just doing this analysis for couples.

Observe that by halving the numbers, a single lawyer who can save 25% of income can also achieve a passive income of more than $2,000 sometime around year 11. This means that a legal career sort of pays for financial freedom is it can be sustained for about 11-13 years.

This can be helpful in answering some crucial questions my classmates have on managing their lives.

My classmates are now faced with a decision on whether it is advisable to speed up and accelerate their JD studies from 3 years to 2.5 or 2 years.

In the grander scheme of things, with prudent management of resources, my classmates can reasonably be financially free after about 11- 13 years of hard back-breaking work, they just need to survive.

From this perspective, it makes the acceleration of classes unnecessary.





1 comment:

RetailTrader said...

Unfortunately I would say the reality is that most of the lawyers I know are very susceptible to lifestyle inflation. Telling a lawyer-lawyer couple to live within living expenses of below 100k a year is like sentencing them to "hardship". Lawyers are also not the most savvy persons when it comes to concepts like personal finance and financial independence. This could be due to the nature of their job so they spend more to cope with work pressures, or that they are simply to busy to read up/reflect on these. A lawyer will need to first seek knowledge and understanding of these concepts, and then have the requisite amount of motivation to achieve these financial states, in order to achieve financial independence.