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So how are you doing financially? You know your salary, of course. You probably know your net worth, at least roughly. But how do your earnings and wealth really stack up? Different standards can tell you whether you’re on the way to financial independence or slipping behind your high-income peers — which is useful to know. They can put your situation in a context broader than the legal community — which is also good to remember. But perhaps most important, choosing the right metrics can yield more than monetary gains. It turns out that in the quest for personal satisfaction, always looking up doesn’t give the best view. MUST YOU WORK? Perhaps the gold standard of financial success is no longer needing to work for a living. After reaching this point, some people continue to hold down jobs for reasons of additional income or personal fulfillment, but they do so by choice, not out of economic necessity. How much does this freedom cost? The detailed answer would require its own column, but the short version is what’s known as the 4 percent rule. Your retirement portfolio needs to be big enough so you can take out (and thus live on) about 4 percent each year without significant risk of exhausting the portfolio before you die. (The 4 percent figure represents the total withdrawal, which means it has to cover everything, including taxes.) For example, if you have a net worth of $2 million, then you can spend a total of $80,000 a year. Could you or would you want to make it on $80,000 a year? If so, congratulations. You’re financially independent, and you can retire whenever you choose. Welcome to the ranks of what are called the financially independent/retired early (FIRE) folk. If not? Alas, more discovery disputes or due diligence reviews for you. You may have a high income, but you are not yet in the promised land of FIRE. Complete independence is a high standard. Another, somewhat less challenging metric for measuring financial success is the ratio of your income to your net worth. In other words, ask yourself: How well have I turned my income into net assets? One way to evaluate this comes from Thomas Stanley and William Danko, authors of The Millionaire Next Door (1996). Their rule of thumb is to multiply your age by your pretax annual income (including both salary and investments), and then divide by 10. The result is what these authors think your net worth should be. For example, 51-year-olds with an annual income of $500,000 (rough averages for Legal Times readers) should have a net worth of about $2.5 million. Stanley and Danko set as role models those they deem “prodigious accumulators of wealth.” To be well-positioned in this group, a person should have a net worth of about double the amount expected from their formula. Those in that situation might well be pleased, even if they are not yet financially independent. MEASURING UP Stanley and Danko’s number, as well as the 4 percent rule, are numerical, reasonably objective ways to evaluate your financial standing. The measurements involve only you and your portfolio. But humans are more than objective number-crunchers. Regardless of absolute measures, relative comparisons with other people are a big part of how people determine their own financial success or failure. Some psychological studies have found that for many people, what gives them pleasure is not having wealth per se but being richer than other people. So how are all those other people doing? Well, according to a survey of Legal Times readers, the median employment income in 2004 was $317,000 (half made more, half made less), and the mean employment income was $520,000. The total median household income (including investment and spousal income) was $438,000. As for net worth, the median for a reader’s household was $2 million. You can judge for yourself how your financial situation compares with that of other Legal Times readers. The average American is in a somewhat different situation from this paper’s readers. Earlier this year, the Federal Reserve released information from a 2004 survey of consumer finances. It found that the mean family income was $70,700 and the median was $43,200. In other words, the median Legal Times household earned more than 10 times the income of the median American household. And remember that the United States is one of the richest countries in the world. Estimates of average global income range from between $5,000 to $10,000 a year. In fact, if you’d like to see how you compare with all the rest of humanity — arguably the most accurate measure of your financial success — the Web site www.globalrichlist.com allows you to enter your income and find out. For example, a first-year associate’s income of $135,000 (a common starting salary at leading U.S. firms) would be in the top 0.43 percent in the world. A reader with a salary of $520,000 would be in the top 0.001 percent of the world. In fact, according to the Web site, this average Legal Times reader would be the 107,565th richest person in the entire world. Not bad. Not bad at all. CHOOSE WISELY Why do these sort of comparisons matter? The reason is that the yardstick by which you measure your finances can determine whether you consider yourself a success or a failure. And that feeling influences how happy you feel and how driven you are to pursue a high-dollar legal practice. In his book Fooled by Randomness (2004), Nassim Nicholas Taleb tells the story of Marc, a partner in a New York City law firm. Marc lives on Park Avenue with his wife, Janet. He makes about $500,000 a year, but that’s at the low end for the executives and Wall Street traders in their co-op. As a result, Janet feels inferior to their neighbors and tends to view Marc as a failure because he isn’t worth hundreds of millions of dollars. Taleb’s answer? The family should go live in a blue-collar neighborhood, where they would be at the top of the pecking order. Taleb’s solution is somewhat tongue-in-cheek, but the point is solid. Sometimes the financial standard against which we measure ourselves can detract from the enjoyment of an income that could just as easily be cause for gratitude. The blinders of perspective also can trap lawyers in unhealthy situations. I recall a fellow litigator who was miserable (to the point of anguished sobbing) about her high-pressure job. We talked about lower-stress government jobs, but she confessed to me that she “could never live on $70,000 a year.” According to www.globalrichlist.com, $70,000 a year would place her in the wealthiest 0.85 percent of the human population. She would be more successful financially than 99.15 percent of the world. Yet she didn’t see it that way, and thus she continued to suffer. My friend is not alone — or even unusual — among the legal profession. But how we view our financial situation is a decision within our power. On the one hand, associates can choose to compare themselves to junior partners, junior partners to senior partners, and senior partners to investment bankers and CEOs. The consequence can be a never-ending climb on a StairMaster of dissatisfaction. Alternatively, we might evaluate ourselves based on our objective progress toward financial independence or on our relative wealth compared with the vast majority of humanity. In making such decisions about how to view our financial lives, let us choose wisely.
Robert L. Rogers, associate opinion editor at Legal Times , writes the Legal Tender column on personal finance. E-mail Rob with comments or suggestions for future columns.

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