By Aebra Coe

Law360 (May 26, 2020, 5:16 PM EDT ) Pay cuts have swept through major law firms in recent months, with many attorneys seeing double-digit percentage drops in their compensation. Financial experts say those who have been impacted must tread carefully to avoid exacerbating the situation.

What started as a trickle of law firm pay cuts in March turned into a flood. By mid-May, more than 70 major law firms announced reductions in pay for attorneys and staff. Many of those have reduced associate base pay by between 10% and 20%, and partner compensation has been reduced even more than that in some cases.

For highly paid attorneys, a small reduction in pay may not sound like a reason to adjust habits or plans, but financial advisers say failing to adapt is the biggest mistake an attorney could make right now.

A 20% reduction in base pay for a midlevel associate, for instance, from $250,000 to $200,000 could throw a wrench in that attorney's finances if the situation is not approached with the necessary caution and if spending levels are not adjusted, they said.

Here, experts offer their advice for avoiding some major pitfalls when dealing with a pay cut.

Get a Handle on Expenses

The biggest mistake highly paid professionals can make if their pay has been cut is trying to maintain their current lifestyle by spending savings, their kids' college funds or retirement funds, or by incurring credit card debt, according to Nelson Miller, a professor at Western Michigan University's Thomas M. Cooley Law School and co-author of the book "Lawyer Finances: Principles and Practices for Personal and Professional Financial Success."

"When a pay cut comes, stop the bleeding by cutting expenses. Don't compound the problem by drawing down retirement or other funds or incurring debt," Miller said. "Watch how you spend every dollar, and don't spend what you don't have to spend."

In addition to reducing expenses, Miller said attorneys could consider taking on other paid work where it doesn't conflict, such as adjunct teaching, writing for law publishers or compensated nonprofit leadership.

Martin Shenkman, a financial adviser and estate planning attorney, said lawyers can attempt to negotiate with lenders or landlords for a reduction in certain fixed expenses such as rent or car payments.

"Be careful of merely getting a deferral on expenses, as those will eventually have to be paid. So if your landlord won't cut rent but let you defer for 60 days, that will not help overall as you'll have to come up with the money in the short term," Shenkman said. "If you get a deferral offer, you might counter with an offer to pay currently but at a reduced price."

In order to stick to a more austere lifestyle, all the financial advisers suggested that attorneys make a budget so they are fully aware of what is coming in and what is going out of their bank account.

Due to their busy schedules and considerable earning power, lawyers often fail to go through a personal budgeting exercise, according to Michael Nathanson, CEO of wealth management and financial planning advisory The Colony Group.

"As careful as they may be with their clients, [lawyers] often forget to apply the same rigor in balancing their own net income with their personal expenses," Nathanson said. "Now is the perfect time to go through a careful budgeting exercise to understand any gaps between net income and personal expenses, and adjust any nonfixed expenses to offset any loss of income."

Don't Back Away From Important Investments

Pulling out of qualified retirement plans like 401(k)s or indivdual retirement accounts is an absolute last resort, according to Cynthia Sharp of The Sharper Lawyer.

"If you do withdraw, you lose out on the power of tax-deferred growth, which negatively affects the funds that will be available to you upon retirement," Sharp said. "Also, you will most likely be selling stock when it is at a low point. Not to mention, you will ultimately be responsible for paying taxes on the withdrawal, albeit spread evenly over three years."

Sharp advises that one alternative for those who really need the funds is to take a loan from the plan instead.

"Check with plan administrators to see whether loans are permitted," she said. "Many employer plans are in the process of being amended in light of the [Coronavirus Aid, Relief and Economic Security Act]. However, make a repayment plan and stick to it."

In fact, according to The Colony Group senior wealth adviser Matt Ilteris, not only is withdrawing from a retirement account a bad move, but refraining from reducing deposits to such accounts may be in a lawyer's best interest, if they're able to do so.

"As Warren Buffett once said, 'I'm fearful when others are greedy and greedy when others are fearful.' His contrarian view on the stock market suggests that when prices have dropped significantly and negative media headlines rule the day, this often presents a buying opportunity which may translate into excellent long-term returns," Ilteris said.

Attorneys should also be careful about buying and selling stock unnecessarily, according to Nathanson. Making a strong, diversified plan for investment and staying the course, even when the market is ailing, is often the best way to go, he said.

"Study after study reveals the perils of trying to guess when to exit and reenter the markets successfully, but our emotions — including fear — often compel us to try anyway. Resist these urges," he said.

Find Opportunities and Plan for the Future

In addition to drawing up a budget and cutting expenses in order to maintain investments in a 401(k) or other retirement plan, there are also other financial opportunities presented by the crisis, according to Nathanson.

The decreased value of assets, such as securities, during an economic downturn can present opportunities for writing those losses off at tax time and may also offer opportunities for converting traditional retirement accounts into tax-advantaged Roth accounts, he said.

Additionally, lower interest rates offer opportunities to refinance debt and present opportunities to engage in estate planning and other strategies that can become more effective with lower rates, he said.

The decline in interest rates also provides an opportunity for homeowners to borrow against their home should they need access to capital, he added.

"Despite the ongoing fallout from COVID-19, housing and portfolios have significantly increased in value since the Great Recession," Nathanson said. "These assets can be borrowed against today at exceptionally low rates. For cash-strapped lawyers suffering from a pay cut — or worse, facing a potential job loss — having an existing home equity line of credit or pledged asset line can be used as a bridge to the other side."

According to Sharp, the crisis can also be an opportunity for attorneys to reflect on the ways in which they were not prepared to weather this storm and plan to be better prepared in the future.

"Have a heart-to-heart with yourself," Sharp said. "How many people are really financially prepared with six months' worth of expenses in an emergency fund? Let this situation inform your future planning."

--Editing by Kelly Duncan and Jill Coffey.

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