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.
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
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?