Earlier this year, I left my high paying, big law firm job and took an attorney job with the state. I did so for a variety of reasons. The hours weren’t great, the work was stressful, and the atmosphere was overall pretty unpleasant. It just wasn’t a great fit for me. I pretty much knew this would be the case going in, but I still needed the job in order to make a big dent in my student loans. As a young lawyer, there really isn’t any other way to make a ton of money except by working at a big law firm.
I ended up paying back my student loans in 2.5 years. With my debt gone, I no longer needed the big paycheck. Since I was free of the student loan burden, money was no longer the primary motivating factor for a job. I could instead look at jobs that I thought would be a better fit for me.
The Paycut
I ended up finding a new gig with the state, in a position that seemed more interesting to me and with better, more steady, and more predictable hours. However, going from private practice to a state job also meant a huge paycut. A $50,000 paycut to be precise! That’s more money than a lot of people make in a year!
Luckily, I was in a position where I could afford to take the paycut. I’d paid off my student loans, so I didn’t have a student loan bill anymore. And I’d gotten used to saving and living on less. Still, I was worried about how I would adjust to this new income. What would my new paychecks look like? Would they be enough? Could I still save at the level I wanted with this lower salary?
Surprisingly, I discovered that, despite my huge income drop, my projected retirement savings for the year have stayed almost the same. This was pretty crazy to me since I didn’t really take any specific steps to try to keep my savings rate high.
Retirement Savings While In Big Law.
I’ve always found it helpful when bloggers share actual numbers, so I thought I’d share what my savings numbers looked like while I was in big law and what they currently are in my present job.
My salary for 2016 at my big law firm was $125,000 per year. Since I was paid biweekly, that meant each paycheck, before taxes, was $4,807. (Gosh, that’s a ton of money when I look at it).
I had access to three tax advantaged retirement accounts in 2016: a 401(k); a Roth IRA; and a Health Savings Account (HSA). I was on pace in 2016 to make the following contributions to each account by the end of the year.
- 401(k): $18,000
- Roth IRA: $5500
- HSA: $3350
Total Tax Advantaged Savings: $26,850
$26,850 of my $125,000 pre-tax income going into retirement savings equals a mere 21% of my income. Remember, I was still paying off student loans through the first half of 2016, so the majority of my excess income was still going towards student loan debt. My plan was that once I was done with the student loans, I’d just throw the extra money into savings or invest it in a taxable account (assuming I stuck around in big law).
Even though I was paying off debt, my high salary still gave me the ability to put me on pace to max out my retirement contributions for 2016. I set up my 401(k) and HSA contributions to automatically deduct from each paycheck. (There’s an advantage to having HSA contributions deducted from payroll, as doing so allows you to avoid paying FICA taxes). For my Roth IRA, I set up an automatic withdrawal from my checking account.
My employer did not offer any match, so there are zero employer contributions in the above numbers.
Retirement Savings In My New Job
Fast forward to my new job. The salary at my new government job is now $75,000 per year. $50,000 is a lot of money to suddenly lose. In order to keep my lifestyle the same, I figured that my retirement savings would probably drop a decent amount.
So what am I on pace to save this year? Here’s what my savings look like for 2016, assuming that I had been making these same contributions since the beginning of 2016.
Defined Contribution Pension Plan: $8625
457(b) Plan: $7500
Roth IRA: $5500
HSA: $3350
Total Tax Advantaged Savings: $24,975
Despite a $50,000 paycut, my absolute savings for the year decreased ONLY $1,875. I was pretty surprised by this result as well!
My pre-tax retirement savings now jumps to about 33% of my income. Not too shabby.
Breakdown of My Retirement Savings
Here’s the breakdown of how my current savings are being allocated:
Defined Contribution Pension Plan. As a state employee, we get a defined contribution pension plan. It’s not really a pension like you would think of in a traditional sense. Essentially, it’s just a tax advantaged retirement account, so I don’t really think of it as a “pension.” The state requires me to contribute 5.5% of my pre-tax income to the plan. The state then contributes 6% of my pre-tax income to the plan. All together, that’s 11.5% of my income getting put away in tax advantaged savings. $4125 comes out of my paycheck. $4500 per year comes from the state.
457(b) Plan. The 457(b) plan is basically a tax advantaged retirement plan like a 401(k) or 403(b), except it has the added benefit of having no early withdrawal penalty – perfect for any FIRE folks out there. Unlike the defined contribution pension plan described above, the state doesn’t require us to contribute anything to this account. I arbitrarily chose to contribute 10% of my income. I wanted to make sure that I could adjust to my lower income, and I think I might move this rate up once I know I can afford it.
Roth IRA. I have automatic withdrawals from my checking account contributed into my Roth IRA. I’ve gotten so used to this that I never even notice it. I’m still on pace to max out my Roth IRA for 2016.
Health Savings Account. My new employer also has access to a High Deductible Health Plan, so I was able to keep contributing to my HSA. I opted not to do payroll deductions this time because the HSA provider for my current employer has pretty poor investment options (think 1% expense ratios). Instead, I just decided to throw in some of my side hustle income directly into the HSA and max it out for the year. I’m still debating whether I should be avoiding the FICA taxes, but for now, this is the route I took and I’ll probably try to reassess later.
Lessons To Take Away
- Automatic savings are super important. Almost every personal finance nerd will tell you to automate your savings, and I’d agree 100%. That’s exactly why my savings numbers have been able to stay high. My pre-tax savings come right off the top and my Roth IRA deductions simply come out of my bank account in the same amount every two weeks. Even with the pay decrease, I just don’t notice the money being saved since I never really see it.
- Matching is awesome. I didn’t have matching at my previous job, so I never understood what a big deal matching is. Well, it turns out its huge! Part of the reason I’m still able to save a large amount is because $4500 of that amount is coming right from my employer!
- It’s super important to live below your means. I think this is probably the most important lesson out of this. For a lot of people, voluntarily taking a big paycut just isn’t possible. The cost of living is just too high, or taking the paycut will make it impossible to keep saving at the same level. Since I try to live below my means, I haven’t really noticed any change in how I live. My paychecks might be smaller, but I’m still saving at a good level, in my opinion.
- Side hustles can really help your savings. This is another thing that I think is neglected. If you have an HSA and can’t afford it, it’s not that hard to just make $3000 or so in a year from some side hustle and throw the entire thing into an HSA. The same is true of an IRA. I think almost anyone can make a few thousand a year on the side. Put that into retirement savings and you suddenly have a bigger next egg.
What do you think? Can you take a $50,000 paycut and still keep saving?
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Kevin is an attorney and the blogger behind Financial Panther, a blog about personal finance, travel hacking, and side hustling using the gig economy. He paid off $87,000 worth of student loans in just 2.5 years by choosing not to live like a big shot lawyer.
Kevin is passionate about earning money using the gig economy and you can see all the ways he makes extra income every month in his side hustle reports.
Kevin is also big on using the latest fintech apps to improve his finances. Some of Kevin's favorite fintech apps include:
- SoFi Money. A really good checking account with absolutely no fees. You'll get a $25 referral bonus if you open a SoFi Money account with a referral link, and an additional $300 if you complete a direct deposit.
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- US Bank Business. US Bank is currently offering new business customers a $900 signup bonus after opening a new account and meeting certain requirements.
- M1 Finance. This is a great robo-advisor that has no fees and allows you to create a customized portfolio based on your risk tolerance. You also get $100 for opening an account.
- Empower. One of best free apps you can use to monitor your portfolio and track your net worth. This is one of the apps I use to track my financial accounts.
Feel free to send Kevin a message here.
Great post! Thanks for being so open and sharing details of your salary, at big law vs government. This definitely keeps me motivated to pay off my student loans on my path to financial freedom. Thank you!
Glad my post helped!
Hi! I’ve just discovered your site and find it really interesting! Do you have any posts or information that would be good for someone in the UK? Thanks!
Hey Rachel! I think a lot of the stuff I talk about can be applicable to anyone. For specifics, unfortunately, I don’t know much about retirement accounts or things like that in the UK.
I could take a $50k pay-cut and still save. My “retirement” savings wouldn’t change. I’d still max out my 401k, Roth IRA, and HSA. But my brokerage account contributions would decrease dramatically. I still think of that as my retirement savings since it’s a nest egg I plan to live off of when I don’t have W2 income. It would definitely slow down my time to FIRE, but it would be a decision I could make if it made me happier. Numbers aren’t everything.
That’s terrific that you can still save even if you took a paycut. It means you’re living well under your means. I know a lot of people wouldn’t be able to keep saving or even afford to take big paycuts.
Congrats on paying off the debt and making the move into government! Work-life balance and doing work you enjoy is much more important. I am a government attorney as well…though I’ve never worked in Big Law. The benefits are good and the work-life balance is much better. I learned recently that you can take withdrawals from the 457 with no penalty when you leave which is awesome. I sometimes dream about early retirement but the pension is a bit of a golden handcuff…and I live in a high cost area (NYC)
Short term pain for long term gain, I love it! It’s not about the extra benefit, but the highest benefit. The extra dollars look like it’s more but when you consider other factors and the big picture, it certainly can be made up. I’m all about maximizing utility and you took a novel way to get there!
Yep! I’m just trying to be happy. State work isn’t too bad and the benefits are pretty darn good – enough that I can still save at the level I want! Big salary is nice and all, but if I can still reach my goals while making less, it’s okay in my book.
Congratulations on eliminating your student loan debt, that’s huge!
Thanks Crazy Kicks! It was a big deal to me when I got rid of that debt. So many of my colleagues are stuck and can’t really afford the pay hit because of their student loan obligations.
Being free from debt is such a wonderful feeling. Isn’t it amazing when you aren’t shackled by debt the opportunities that come your way that can greatly improve your life.
I’ve found since getting rid of my mortgage that I don’t worry about money nearly as much as I did and now feel freer at work to pursue projects at work that interest me as opposed to the one that will allow me to climb the corporate ladder.
Being free from debt is huge! You are definitely right that it gives you a much more flexibility at work. It might not be financial independence, but there’s something about getting rid of debt that makes me feel pretty safe. I feel like, if something were to happen, I can figure out a way to survive without any debt payments.
Great job. 457Bs are great for people planning on retiring early. I have been maxing out mine last 5 years or so. I just started thinking about early retirement and when it may happen for us. A few side hustles would definetely speed up the process.
Keep doing what you are doing and good luck rest of the way.
Thank DGE! That’s awesome that you’ve been maxing your 457. I think it’s such an unknown retirement account, probably because not too many people have access to one.
Congratulations! I’m a small firm attorney myself, and I’ve never really felt the urge to go big firm. The big firm money is great, of course, but I’m sure I’d burn out faster than you did. I’d rather work at a small firm and do side hustles and real estate investing to make pretty close to big firm money without wanting to jump out of the highrise windows.
Nice work with the debt payoff and continuing to live small, even when your paychecks are/were large! I’ve subscribed to the same philosophy, and it’s paid off big time so far. Looking forward to reading more of your stuff!
Thanks! I’m always glad to see other attorneys drop by. Hope that one day we can get to a net worth like yours! Ms. FP and I plan to one day probably become landlords if/when we move from our current home, but we’ll see. Still trying to learn more about real estate, so thanks for sharing all that helpful info on your site.
That’s very nice of you to say. Thank you. Looking forward to watching your progress! 🙂
Your saving tips are awesome! It would take a lot of work for me to take a 50k pay cut but automating my savings would help a ton. In addition. I like your tip about getting a side hustle.
Thanks Tia. I thought it was interesting to see the numbers themselves. Really shows how once you get used to a certain level of expenses, the savings can happen without even thinking about it. I thought for sure my savings would have to drop a huge amount. A 50k paycut isn’t a small one! I was really surprised when I added up the numbers and saw how close my retirement savings were, even with the paycut!
Wow! That’s great that you were able to make the adjustment to the lower income without much difference in the retirement contributions. I’m sure it helps tremendously to have the student loan debt completely paid off. The 457(b) sounds like a good deal for those wanting to retire early!
Thanks Amanda! It definitely wouldn’t be possible if I still had the student loan debt. Paying the student loans back gave me a ton of flexibility!