The Net Worth of a Big Four Partner (#356)

Before you embark on a lifelong path toward becoming a Big Four partner, you might want to consider whether it is going to be worth the effort. To be exact, what is the value of a partner’s investment assets?

This is one of those topics that – in a way – is impossible to figure out, because it’s going to vary for every single partner. You have to make a guess at how much the average Big 4 partner makes, how old they are when they make partner, how long they stay in the job, what their average annual rate of return is, their tax rate, and – a very important item – how much they save.

Partner Net Worth Assumptions

All of that being said, I made a bunch of guesses. And here are those guesses. I’m assuming that a Big 4 partner starts off making a half million dollars a year and stays that way for the first five years. Then the pay goes up to 750,000 for the next five years, followed by a million a year for the next five years, and so on. Once they get to one and a quarter million, I figure that they top out and stay at that level until retirement. And by the way, the precise figures aren’t published anywhere, so I had to go with the information listed on message boards.

Next, I assumed that the average person makes partner at age 35, and retires at 60. Which is a bit rough, since lots of partners quit before then, or are forced to retire early.

Next, I assumed that income taxes would cut those income figures by thirty-five percent. That covers both federal and state income taxes. This one is extremely rough, since we can safely assume that Big Four partners, of all people, have some good ideas about how to avoid or at least defer paying income taxes.

The next big guess is their savings rate. I’m assuming they’ll save thirty percent of their income during their first five years, which is when they have the least income, after which it goes to a forty percent savings rate for the next five years, and then a fifty percent savings rate from there on out. This is a tough one to estimate, because some partners are going to be prudent with their expenditures, and some are going to blow the money. I ran across one reference to a partner who has a gambling problem and four ex-wives, so that one’s a good guess to have a savings rate of zero. Overall, I may be too optimistic on this one.

And finally, I assumed an average rate of return on investment of five percent per year. Of course, you can dig around for better investments, but they’ll also have a higher risk level. I think this number is prudent, and maybe a bit low, but I think the stock market is fully valued, if not over-valued, so there’s not as much room for it to grow as used to be the case.

Partner Net Worth Outcomes

What did I find out? Let’s take a first-year partner who’s earning $500,000. At a 35% tax rate, you have $325,000 of take-home pay, and a 30% savings rate leaves you with savings of about $97,000. Now move forward five years, when you’re earning $750,000. Now your take-home pay is about $487,000 and a 40% savings rate leaves you with $195,000 in savings. Let’s keep moving forward another five years, and your take-home pay from $1 million of gross pay is $650,000. If you save half of that, your savings are $325,000. Let’s run it forward one more time by another five years, where your income of $1.25 million ends up being savings of about $406,000, assuming the usual tax rate and a 50% savings rate.

Given all of this information, how much should a Big Four partner have in the bank after five years? Not much, only $538,000. At this point, you’re earning at a fairly low level in comparison to what’s still coming in the future, and you can’t afford to save as much, because you’re not making that much. After all, at this point you’re presumably 40 years old, and are married with kids. And kids are expensive.

Let’s move forward five years. You’re now 45, and your net worth has increased to $1.7 million. Not bad, but not enough to retire on. So after ten years of grinding away as a partner, you have a modest nest egg, but your big net worth years are still to come. I know this because – I ran the numbers!

Five years later, at age fifty, your net worth has gone up to just over $4 million, while at age 55, it’s $7.4 million. And at age 60, your net worth is about $9.5 million. Which is a solid retirement fund.

Lessons Learned

So, what else can we extract from this information? First, it really, really pays to stick it out as a partner for as long as humanly possible, since your big income years are well out along the partner track. You don’t really earn enough early on to pile up a whole lot of money. In fact, your net worth should go up in your final five years as a partner by about as much as your net worth went up in your first 11 years as a partner.

Another massive issue is that you have to invest a lot of your money to get into this range of net worth. Plenty of partners decide that they want a vacation home, and a couple of fancy cars, and maybe put their kids through private school – and the next thing you know, the amount you’re saving is way down. And so is your net worth.

And a final point – divorce. The overall divorce rate for the U.S. population is about 50%. I haven’t found any reliable information about divorce rates for Big 4 partners, but it would be reasonable to say that the number is not lower than 50%. This is a tough lifestyle, and you’re working long hours, and that would put a strain on any marriage. So, if you do get a divorce, there goes half of your net worth. And if you get married again, and divorced again, then your net worth keeps getting cut in half.

In short, you might work like crazy for years and years, but if you’re not prudent in your spending – and your investments – and your marriage arrangements – you’re just not going to end up with that massive nest egg that you thought you’d have.

Partner Pensions

And one more item. Net worth is not the only source of wealth for Big 4 partners. They also get a really nice pension. There’s not a lot of detailed information about it, but Price Waterhouse stated in a report in Australia a few years ago that it pays its retired partners about $140,000 per year. So, you’re not just relying on your net worth for retirement income. There’s additional cash coming in.