Retirement for Law Firm Owners Pt 1: Closing the Wealth Gap: (Ep. 69)

Have you ever wondered if you are financially prepared for retirement or if you’re just hoping for the best? As a law firm owner, the difference between financial freedom and endless work hours hinges on a crucial concept – your wealth gap.

In this solo episode of The Lawyer Millionaire Podcast, host Darren Wurz guides you through understanding and closing your wealth gap, specifically tailored for law firm owners.

5 Key Takeaways from this Episode:

1. Understanding the Wealth Gap: Gain a clear definition of the wealth gap and comprehend its significance to your financial plan.

2. Defining Financial Goals: Learn how to envision your ideal retirement and set concrete financial goals to achieve it.

3. Analyzing Current Cash Flow: Understand why tracking your expenses meticulously is crucial for maintaining your standard of living in retirement.

4. Income Gap vs. Wealth Gap: Learn to differentiate between your income gap and wealth gap and how to address each.

5. Strategies for Closing the Wealth Gap: Discover the dual approaches to closing your wealth gap, including saving and investing as well as leveraging the sale of your law practice.

What is the Wealth Gap?

The wealth gap is the difference between your current wealth and the wealth you need for financial independence.

The Importance of Knowing Your Wealth Gap:

1. Direction and Focus: Identifying your wealth gap provides a roadmap for your financial journey.

2. Valuing Your Law Practice: Your law firm represents a significant financial asset, which can be leveraged to bridge your wealth gap.

Steps to Calculate Your Wealth Gap

1. Define Your Goals: Determine what your ideal retirement or work-optional life looks like. Consider key factors such as location, lifestyle, and legacy planning.

2. Analyze Current Cash Flow: Meticulously track your expenses to understand your standard of living. Include both personal and business expenses to get an accurate picture.

3. Calculate Your Income Gap: Subtract any future income streams (e.g., Social Security, pensions) from your projected annual spending.

4. Determine Total Wealth Needed: Apply the 4% rule by dividing the annual income gap by 0.04.

5. Subtract Current Wealth: The difference between your current wealth and the total wealth needed represents your wealth gap.

Example Calculation:

– Projected Annual Spending: $200,000

– Future Income (e.g., Social Security): $50,000

– Income Gap: $150,000

Using the 4% rule:

– Total Wealth Needed: $150,000 / 0.04 = $3.75 million

– Current Wealth: $1 million

– Wealth Gap: $2.75 million

Dual Strategies to Close Your Wealth Gap

1. Save and Invest: Accumulate wealth through disciplined saving and strategic investments.

2. Sell Your Law Practice: View your law practice as an asset with significant market value. The sale of your practice can provide a substantial infusion of capital to close the wealth gap.

As a law firm owner, you possess the unique opportunity to sell your practice, potentially yielding substantial returns and accelerating your path to financial independence.

Conclusion

Identifying and calculating your wealth gap is foundational to your financial strategy and ultimate achievement of financial freedom. Take immediate steps to:

1. Calculate your wealth gap.

2. Develop strategic actions to close it, whether through enhanced savings, investments, or preparing your practice for a successful sale.

Procrastination is a risk you cannot afford. Knowledge provides the clarity and focus necessary for effective financial planning.

For personalized guidance through this process, schedule an introductory call with Darren Wurz via the link in the show notes.

Stay tuned for part two, where we will delve into the intricacies of valuing your law practice and strategies for maximizing its value.

Resources:

Transcript:

Darren Wurz [00:00:15]:
Do you know what your retirement will look like? And if you’re on track, or are you just hoping for the best? Welcome to the Lawyer Millionaire, where we deliver insights on business expansion, profit maximization, and wealth growth for ambitious law firm owners so that you can enjoy more time, more abundance, and less stress. Even if you’re still growing your law practice, have you ever calculated the distance between your current financial situation and the future that you envision? Well, get ready, because over the next three episodes, we’ll be diving into retirement strategies for law firm owners. We’ll be talking about how to figure out what your wealth gap is, how to value your practice, figure out the value of your law firm, and how to drive up the value of your law practice and potentially sell your law practice. So, very exciting stuff coming up. Well, today we’re dealing with the critical concept of the wealth gap. Let’s go ahead and dive in. As a law firm owner, do you know what your wealth gap is? Is understanding this number could be the difference between retiring well or not at all. The difference between enjoying more time, freedom, and dying at your desk.

Darren Wurz [00:01:34]:
According to the exit Planning Institute’s 2023 State of owner readiness study, 75% of business owners would like to exit their businesses within the next ten years. And I would imagine the numbers are similar for law firms as well. And yet, the same study finds that only 58% actually have a written financial strategy. Wow. Well, your financial strategy starts with understanding your wealth gap. So let’s start there, and let’s talk about what exactly this wealth gap is. Well, it’s actually a really simple concept, and today you’re going to understand how exactly to calculate your wealth gap. And knowing this number can really, actually be super empowering for you, because it’s going to give you a lot of clarity on where you are now and where exactly you need to go, where exactly you need to get to.

Darren Wurz [00:02:29]:
Okay, so what is a wealth gap? Well, simply, it is the difference between the amount of wealth that you have now and the amount of wealth that you need to acquire in order to have financial independence. And the reason I use financial independence is a very good reason why I use that terminology. You know, years before, when I worked with, you know, a lot of other folks, we talked about, you know, the traditional route of retirement, right? You work for a company for many, many years, and at a certain age, you retire and for most people, that means they’re going to stop working and they’re going to go enjoy, you know, the rest of life, spend time with family, travel, pursue things they always wanted to do? Well, in my work with law firm owners, I find that it’s a lot different. Law firm owners don’t usually have the traditional notion of retirement. And maybe you’re the same way. Maybe you think, well, I don’t want to actually retire. I don’t want to stop working. I love what I do, and I love, you know, owning a firm and being an attorney or maybe, you know, working with clients, right.

Darren Wurz [00:03:36]:
Maybe there are things that you really love and you never want to stop. That’s okay, you know, but the wealth gap informs us about when you could stop, you know, so instead of thinking about the traditional idea of retirement, maybe we should think of it this way. At what age or how much money do you need to have in order to be work optional, in order to be at a stage in life where you could stop working if you wanted to? And we call that financial freedom. It’s having the freedom to choose the clients you want, to choose, the workload. You want to do whatever you want because you don’t depend financially on your firm, right, on the billable hours and the clients and things like that. So getting you to that stage, how do we get you there? And if you have a traditional concept of retirement, great, this will really apply to you as well. Now, the reason this is so important to understand, two reasons. Number one, ignoring it doesn’t work, right.

Darren Wurz [00:04:45]:
A lot of folks just don’t want to think about these things. We don’t want to think about the concept of retirement because it’s associated with all these negative connotations of getting old and things like that. Well, throw that out the window. So let’s change the verbiage. Let’s talk about financial freedom. Let’s talk about having, getting you to that place where you can do whatever you want. And there’s a couple of things we need to understand. Number one is that this allows you to understand where you need to get to, right.

Darren Wurz [00:05:19]:
And what you need to do to get there. So that’s the first thing, the two reasons you really, really need to understand this. Number one, it allows you to know where you’re going and what you need to do to get to that place. If you don’t understand your wealth gap, if you don’t know what that number is, it’s kind of like flying blind. You know, you don’t have a map. You don’t know what the destination is. You don’t know where you’re trying to get to. And so many of us are so busy, you know, working and running our businesses and growing our businesses.

Darren Wurz [00:05:50]:
We’re stuck on this hamster wheel, and I, we don’t know where we’re going. We’re just more and more, more, more, more, more. Right. Build the firm, grow the revenue, maximize the profits. But what is the end game? What’s the goal that we’re trying to get to? Number one, it allows you to understand the direction that you’re headed in and know how far you need to go to get there. The second thing is that knowing and understanding your wealth gap can be really powerful for knowing where your law firm needs to go. So one of the really cool things about retirement planning for law firm owners is we can think about the value of your practice as an asset. Your law firm is a financial asset.

Darren Wurz [00:06:37]:
And for many law firm owners, your law firm might be your largest financial asset. And we should think about, strategically, about maximizing the value of that asset as a transferable financial asset. You know, that you could sell. Wow. Not a lot of law firm owners are thinking about this. If you are thinking about this, hats off to you. You are at the forefront of the cutting edge of the legal field. It’s becoming more and more popular to sell your law firms, and there are lots of buyers looking to buy law firms.

Darren Wurz [00:07:17]:
We’ll get into that more in parts two and three. But it all starts with understanding what your wealth gap is. And I’ll give you one more. This is especially important for law firm owners because you are important. You are in charge your own savings. You don’t have the benefit of working for a company where you have a 401k or a profit sharing plan, and they’re just putting money into that plan for you. Right? You are the one who has to set aside money for you. You know, if you’re working at a big company, they might have a certain amount of money that’s going into your 401k, maybe as a match or maybe just as an amount that they’re giving you off the top.

Darren Wurz [00:08:03]:
And that’s great. That all contributes to your savings rate. But if you’re a law firm owner, you’re the one responsible for all of that. And what I see often in among law firm owners is that the savings rate is too low because there’s no company that’s also behind you putting money into your retirement for you. It’s all on you. So this is really, really critical. Okay. Let’s dive in.

Darren Wurz [00:08:28]:
Let’s talk about the wealth gap. Let’s talk about how you can identify what exactly your wealth gap is. Well, I mentioned what it is. It’s very simple. Here’s the formula. If you’re sitting somewhere, you can write it down. If you’re driving, don’t write it down. But here it is.

Darren Wurz [00:08:43]:
Your wealth gap equals the wealth you need, minus your current wealth. Very, very simple math, right? Nothing too crazy. Okay, so how do we do that? Well, the first thing you need to do is define your goals. It starts there. Okay. We have to know what exactly you want your life to look like. I mean, that. That right there is going to be the foundation for how much money you need.

Darren Wurz [00:09:10]:
The golden question is, what’s your spending going to look like? Right. It costs a lot less money to retire in certain places than others. Right. If I want to retire, you know, to a beach house in Malibu, that’s going to cost a lot more money than maybe a cabin in the woods somewhere, right? So you really need to get clear on your goals. So here are some questions to think through, and you can think through these right now, wherever you are. What would your ideal retirement look like? I want you to vision it. I want you to picture it in your mind. Right.

Darren Wurz [00:09:50]:
What are you doing? If you didn’t have to go to work tomorrow, what would you do? Right. What exactly would you go out and do? Some other things to think about your ideal retirement. Right. Where are you living? Where in the world are you living? Is it continental? Us? Is it international? It could be many, many things. Who are you with? That’s really, really important. Who are the people that you’re with? Who are the people that depend on you? That’s a critical question. What are your values? If you’re struggling to figure out what you would do if you didn’t have to work, think about what are the things that give you purpose? What are your most important values? What are your legacy goals? Right. It might not be just about you.

Darren Wurz [00:10:43]:
Right. Is there a certain amount of money that you want to hand off to your kids, or do you have charitable goals and intentions? Are there causes that you want to support? These are all critical questions to think through. So start there. Number one, define your goals. Okay. Step two, once you understand what your future goals look like, we need to come back to the present, and we need to understand what our current cash flow is like. Okay? Okay. So I have a challenging question for you.

Darren Wurz [00:11:16]:
Are you tracking your expenses? Okay, be honest. So many law firm owners and I’m guilty of this sometimes, too. So I’m in the same boat. We don’t keep track of what we’re spending. The problem with that when you don’t keep track is that you, you spend without thinking about it critically, and you might be spending money on things you don’t truly want or need, and there could be a lot of waste. So that’s, number one, why it’s important to track your spending. But number two, really, for our purposes, you need to track your spending so that you know what your standard of living is. And so many people, when I have these conversations with people, inevitably, if they’re not tracking their expenses, they will almost 100% guaranteed, underestimate their spending.

Darren Wurz [00:12:04]:
It’s so easy to think we’re spending less than we are. And when I dig into the numbers with folks and they’re like, holy crap, I’m spending $10,000 a month, you know, or whatever it is, or, oh, my gosh, I spent five grand on Amazon last month, right, whatever it is. You know, when you’re just swiping the card or you’re just nowadays clicking the button, it’s so easy to note, think about those things. But all those little things really do add up in a very big way. So we need to know what our standard of living is. What are your basic living expenses once you have that down? And by the way, I have a great worksheet for determining your budget, and I’m going to put that in the show notes. I’ll put a link to that. You can download it and you can get my budgeting worksheet.

Darren Wurz [00:12:53]:
And really, it’s an exercise to help you think through all the different things you’re spending money on so that, you know, what are the core expenses? Because things come up throughout the year that you may not have had last month. So if you’re just going to go back and look at your spending over the last month, that’s not really going to cut it. So anyway, got to get clear on your spending. And then you want to think about how are those things going to change in the future? You know, if you’re not working or if you’re older, how are those expenses going to change? Some things will be more, some things will be less. Healthcare is often one of those things that increases with age. However, once you’re on Medicare, those costs may actually go down pretty significantly because Medicare is pretty generous compared to private health insurance plans. Commuting for work is one thing that you won’t necessarily be paying for anymore. If you’re used to buying power suits for the courtroom.

Darren Wurz [00:13:50]:
You may not have those anymore. So think through the things that will change. Now, if you’re a law firm owner, here’s a very, very critical one. Listen up here. Right? What are the things that your law firm is paying for? Oh, oh, yes, right. The law firm is paying for my car, and the law firm’s paying for my Netflix account and. Right. So as business owners, we run so many expenses through the business, and so it can be very deceiving and hard to figure out exactly what your personal spending is.

Darren Wurz [00:14:27]:
So you need to also look through your business accounts and your business transactions. Are there some expenses on there that you need to plan for having, paying for yourself if, you know, if and when you do retire? Okay, so that’s step two. Step one, define your goals. Step two, understand your cash flow. And then step three, we need to figure out what your income gap is. Before we get to your wealth gap. We need to figure out your income gap. Well, your income gap, very simply, is the difference between what you need.

Darren Wurz [00:15:01]:
Right. So if you did that cash flow, you know what your spending is, you know what your spending budget’s gonna be in the future, right. So let’s say my spending budget in the future is $200,000 a year. Right. That’s my spending, my after tax spending. Okay, then we need to think about what are the future income streams that I’m going to have? Social Security, pension income, stuff like that, you know, anything. Any future streams of income that are going to be permanent, I need to. I can take those off.

Darren Wurz [00:15:28]:
So let’s say I’m going to get $50,000 a year from Social Security, as an example. Then my income gap is only $150,000. That’s the amount of money I’m going to need an annual basis. And it’s going to increase with inflation, by the way, too. So there’s your income gap. Step four. Then we need to figure out what’s the total wealth needed. That’s.

Darren Wurz [00:15:48]:
That’s that part two of our equation. Remember, wealth gap is the wealth needed minus the current wealth. Okay? So the wealth needed. I’m going to get to that here. And we’re going to use a simple process called the 4% rule to figure that out. All you do is take that income gap, that future income that you’re going to need, and divide by 4%. And don’t try to figure that out in your head. If you’re nothing, a math person, get out your calculator, divide by 0.4.

Darren Wurz [00:16:19]:
Right. So if I have a $100,000 expense that I need, let’s say I need $100,000 a year, right. And I’m going to divide that by 0.4%. Well, that’s $2.5 million. Okay. So I need two and a half million dollars to give me $100,000 a year for the rest of my life. Indexed for inflation. Right.

Darren Wurz [00:16:50]:
Keeping up with inflation. When you do the numbers like that, it’s like, oh, wow, I actually do need quite a bit of money now. Why the 4% rule? Well, the 4% rule is a very well studied rule. It’s a rule of thumb in finance. There’s a lot of studies that have been done to show if you have a portfolio that’s invested in the stock market, what is the initial withdrawal rate that I can start with and be reasonably sure that I’m not going to run out of money over lots of different timeframes. People have tested this out over different timeframes. 4% is you have a high probability of not running out of money, but also you’re not going to end up with a whole lot of money left over. So it’s a reasonable assumption to use.

Darren Wurz [00:17:45]:
Morningstar has a study on this. They’ve done all kinds of different withdrawal rate percentages with different portfolios using different allocations of stocks to bonds and timeframes. So you’re usually planning on a retirement timeframe of maybe about 30 years. If you retire at 65, you want to have enough money to last until age 95. Okay. So the numbers vary depending on the aggressiveness of your portfolio and the timeframe. So if you’re going to retire later and you may not need as much money, you can do a higher withdrawal rate. If you’re going to retire earlier, you’re going to need more money.

Darren Wurz [00:18:26]:
So you may need a lower withdrawal rate. And that’s a starting withdrawal rate because we have to think about inflation, and inflation is going to make our expenses go up over time. So let’s say I start with 100,000. Great. But next year, if we have 4% inflation, I’m going to actually need $104,000 out of my portfolio. Right. So the 4% rule accommodates for the effect of inflation. I’m going to start at 4%, but my ending withdrawal rate is actually going to be much higher because it’s going to go up over time.

Darren Wurz [00:19:03]:
Okay, so a lot of explanation there, but 4%. Right. The 4% rule. Take your income gap. I need $100,000 a year in the future. Or whatever you need at retirement. Or if you were to retire, divide that by 4%, and that is the grand total of wealth that you need. Now, the final step in the process, and it’s very, very simple, is to calculate your wealth gap.

Darren Wurz [00:19:29]:
So if I have a current portfolio of $1 million and I need $2.5 million, well, then my wealth gap is $1.5 million, right? That’s the difference between where I am today and where I need to get to now. That seems so simple, right? Well, yes, it is, but it’s also very powerful because knowing that number is going to. Now tell me, okay, that’s the gap that I need to close. And now I’m focused. Now I’m mentally focused. I’m thinking about this, and I know the direction I need to go. I know that I need to somehow accumulate another one and a half million dollars over the next however many years in order to have, you know, be in a position where I could walk away from work. Now, I will let you in on the really big, powerful secret here that I haven’t shared yet, and that is, as a law firm owner, there are two ways to close that wealth gap.

Darren Wurz [00:20:31]:
Wait a minute. There are two ways to close that wealth gap? Yes. Yes. Now, there’s the one way, the main way that most people think of, and that’s I need to save and invest. I need to put money in my 401k or my investments, and I’m going to accumulate that. I’m going to that extra money that I need and close that wealth gap. Well, the other secret way that you can close your wealth gap as a law firm owner is through the sale of your law practice. Wow, that’s true.

Darren Wurz [00:21:04]:
So another way to think of it, if I have a million dollars and maybe you’re really close to retirement. Right. And, oh, gosh, you know, retirement’s ten years away. I don’t have a. I can’t accumulate a million and a half dollars in the next five years or whatever if it’s a short timeframe. Well, you have another secret weapon at your disposal, and that is you have the ability to grow your law practice and sell your law practice. And the returns, the potential returns on business growth can actually be significantly greater than the returns in the market, potentially, because you control that there are levers that you can pull as a law firm owner to maximize that value. And we’re going to get into that on part two.

Darren Wurz [00:21:50]:
So come back for part two, but think about the value of your law practice as a part of that equation. Maybe I could sell my law practice for a million dollars, and then I only have a wealth gap of 500,000. Right. So you factoring in that potential sale of your law practice as an asset, as a financial asset that we can monetize, that’s a very powerful thing. Okay, so here’s. Here’s my challenge to you today, right? First of all, go and calculate your wealth gap. Do it today. If you’re driving when you get home, or if you’re home right now or wherever you’re somewhere, you can sit down.

Darren Wurz [00:22:30]:
Just. It doesn’t have to be very complicated, you know, I know I laid out some. Some in depth steps to go through, but start with a very basic calculation. Come back later, go through your budget, think about your goals, and really get clear on what that wealth number is that you need to get to, and then calculate that wealth gap and write it down. That is so, so critical, because you’ll forget. We all forget. And having it written down actually does something that’s really, really powerful for you. So that’s the challenge today.

Darren Wurz [00:23:08]:
Know your wealth gap, understand it, and, of course, come back next week to learn how to close it, because in next week, we will dive into how to assess the current value of your law practice and how to turn that into a monetizable asset. I’m going to show you. I want to walk you through the calculations on how to determine the value your practice. Now, the reason I’m so passionate about this is this is at the core of what we do here at Wurtz Financial Services. We actually do this. We help our clients calculate their wealth gap, and we can help you calculate your wealth gap. And the way we do it is powerful because we use sophisticated software, number one, to track your cash flow and figure out what that is. And we have some exercises that we can go through together to figure out what are your future goals, what exactly you want that future life to look like.

Darren Wurz [00:24:06]:
And then we have some really powerful software we can use to model out the future, to model out the growth of your portfolio, and really pinpoint what exactly that wealth gap is. And finally, to really design a customized strategy that could be a combination of growing your law practice and saving to close that wealth gap for you. If you need help with this, I want you to go right down into the show notes right now and click the button that says, schedule an introductory call with Darren. That’s me. Darren, go ahead and schedule that call, and I’ll walk you through exactly how to do this and how we could potentially work together and I could help you. Well, this has been another exciting episode of the Lawyer Millionaire podcast. I hope you learned a lot today. I’m your host, Darren Wurz, here to help you expand your business, maximize your profits, and, of course, grow your wealth.

Retirement for Law Firm Owners Pt 1: Closing the Wealth Gap: (Ep. 69)

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