Financial Counseling Case Study: Mid-Life Career and Family

Client Financial Profile

Age (Life expectancy): 46 (85)
Partner's age (Life expectancy): 42 (80)
Children (Ages): 2 children (ages 12 and 8)

Assets
Annual income: $125,000 | Partner's income: $70,000 | Checking: $2,000 | Savings: $17,800 | Annuity: $2,000 (2% on a $100,000 account) | Money market: $28,000 | Other investments: $160,000 | Retirement plan: $32,000 | Partner's retirement plan: $7,000 | Residence: $300,000 | Improvements to residence: $75,000 | Other real estate value: $80,000 | Auto 1: $4,000 | Auto 2: $23,000 | Art: $2,000 | Jewelry: $5,800 | Furniture: $16,000

Insurance
Life: $500,000 | Partner's life: $100,000 | Disability: $50,000 | Business (legal malpractice): $100,000 | Homeowner's: $400,000

Liabilities
Student loan: $5,000 | Mortgage: $108,000 | Auto 2 loan: $17,000 | Auto insurance: $2,000/year | Business insurance: $1,200/year | School tuition: $24,000/year | Retirement/insurance contributions: $2,000/month

(Basic profile format adapted from Parisse & Richman, 2006.)

The client is a 46-year-old lawyer with a small firm in Milwaukee, Wisconsin. She is successful and enjoys her work but wants to spend more time with her children and does not enjoy spending long hours on cases in which she is not personally invested. She has been a very conservative investor and would rather distribute her assets in a way that maintains their value than risk considerable loss. She grew up in a family where money was not an issue, and her parents — currently in their early seventies — still enjoy a comfortable lifestyle in retirement. She is fairly confident that her retirement plan will allow her and her partner to retire modestly, do some traveling, and maintain at least partial employment. She may be relying partly on an inheritance for this plan, although, like many adults, she does not know the exact details of her parents' will or whether they plan any major future expenses (Morris, Siegel, & Morris, 1995). Before deciding to attend law school, she studied photography and is frequently in demand as an amateur photographer for events at her children's school. She is seriously considering starting her own photography business and has a significant stock of equipment, hardware, and software. She has spent time developing a business plan for the photography studio, though it is not yet fully developed.

Her partner, James, is a more risk-tolerant investor. He is currently employed as an architect at a firm specializing in the "green" retrofitting of historical buildings. He still has a small student loan balance (reflected in the profile above), and the family's newest large purchase — a 2008 Volvo sedan — was largely his idea. He has no plans to change careers, but the last few years of turbulence in the housing market have affected his employer's business in both positive and negative ways. While new construction has plummeted, the trend toward green building and retrofitting older structures has soared. James is confident that his salary will continue to grow at pace with inflation. He has been at his current firm for five years and does not plan a career shift until one or both of his children have reached college age. James experienced some financial turbulence in his own childhood and would like to spare his sons the same. His parents are living in a retirement community in Florida and anticipate using most, if not all, of their savings within their lifetimes.

Problem 1: Educational Saving While Spending

It is very important to both the client and James that their children receive a good education, which for them means private school. The school they attend has a Montessori-based curriculum, is challenging and experimental in its approach, and has an excellent college placement record. Tuition is $12,000 per year per student, rising to $14,000 per year at the high school level. The school has a financial aid program that would reduce tuition to $8,000 per student if the family were relying solely on James's income during the first year of the client's business venture.

The client has not been specifically saving for her sons' college education, having assumed that her current investments plus a home refinance would cover the worst-case scenario — both boys attending Ivy League colleges with no financial aid. However, her stock portfolio has not performed well in recent years, and she worries that she will either need to sell the family's summer cottage and reinvest the proceeds more productively, or remain in a career that severely limits her time with her family.

To help the client understand what her sons' educational futures might require, the counselor developed several scenarios varying: (A) whether she remained in her current position or launched a photography studio, (B) what range of college tuition her children might face, and (C) what contribution her parents might make. In the scenario related to option A, the worst-case additional annual contribution would be approximately $31,000 starting in six years (West & Anthony, 2000). This assumes her oldest son's college tuition, room, and board would cost around $45,000 per year, compared to his current high school tuition of $14,000 (College Board, 2010). If she remained in her current career, this contribution would not be especially burdensome, assuming the couple had finished paying off their home and the second vehicle within six years. However, if their second child also chose an expensive school, the client would have no real career flexibility until age 60 — near retirement age.

Both the client and James agree that a high-powered college preparatory track is not the right path for everyone, and may not be best for both of their sons (Pink, 2009). James paid his own way through college and is not averse to requiring his sons to work during summers to contribute to their tuition. The client, by contrast, is more inclined to ask her parents to contribute to their grandchildren's education than to require the boys to forgo travel or internship opportunities during their college summers.

The most complex scenario was one in which the client launched her photography studio the following year, left her legal position, and used some of the couple's investments as start-up funds. In this case, the family might qualify for financial aid at the boys' current school, but in six years the studio would likely not be generating an income equivalent to her law firm salary. On the other hand, this would free up funds currently spent on the client's malpractice insurance, which her employer requires. The couple decided that if they pursued this path, they would be willing to refinance their home and/or take out student loans on the boys' behalf rather than restrict their educational choices. They also decided to minimize any withdrawals from their stock and mutual fund investments to finance the studio. The couple reasoned that these investments' long-term growth potential would be better realized as a source for college tuition later, while the photography studio could be funded through business loans ideally paid off before the boys graduate from high school.

Problem 2: Changing Careers Mid-Stream

The client's dream of living off her talent as a photographer is longstanding, despite nearly 20 years in the legal field. Her undergraduate degree was pre-law with a minor in studio art focusing on photography. Her legal career has concentrated on copyright law and contract law as they apply to creative workers. As noted above, she is an avid hobbyist photographer and has already begun assembling a business plan. She is well-connected within her community and is confident that her business would become profitable within a year or two. She has a strong, charismatic personality and is also connected to Milwaukee's artistic community through her husband's architectural work restoring historic buildings. She has a considerable portfolio and, during law school, occasionally sold stock photos and worked as a wedding photographer.

The client recognizes that in the current market, individuals and companies may be cutting back on "luxuries" such as professional family and staff portraits. However, she has a range of expertise in architectural and interior photography in addition to portrait and event work. She is willing to diversify her skills and pursue further education if necessary, though in her field an additional artistic degree would be most useful only for teaching or competing for gallery showings at a national level.

According to her business plan, start-up costs would be approximately $60,000. The counselor and client discussed several ways to fund this, and two main options emerged: cashing out some stock investments and "repaying" herself based on projected studio income, or taking out a small business loan (Quinn, 1995). They also considered a combination of the two, or the possibility of selling the summer cottage to cover start-up costs.

In exploring the underlying reasons for this seemingly abrupt life change, the counselor discovered that the client had always wanted a more artistic career from early adulthood, a desire compounded by observing how flexible and stimulating her husband's work in architecture appeared to be. Because his employer allowed him to work from home on days without site visits, he was generally able to pick the boys up from school and spend more time with them when she was working late on cases. Due to the culture of the legal profession, the client felt pressured to take minimal maternity leave and rarely took time off when her children were ill (Sass, Monk, & Haverstick, 2010). She also had the impression that James's work environment was more varied and brought him into contact with more interesting people on a daily basis.

Social dissatisfaction at work may be driving the client's push for a career change more than a genuine desire to run a photography studio. Since a financial counselor's most important function is to remove emotion from decision-making, it was essential to identify what emotions were underlying such a radical choice. The day-to-day stress of working long hours at a job she no longer felt connected to was affecting her personal relationships, and it became clear that some form of change was necessary, even if not the specific change the client had envisioned. After their meetings, the client remained committed to starting her own business, but the financial considerations led her to conclude that a longer timeline would be best for her family's financial health. Rather than drawing on the principal of her investments — which have averaged a 10% return — she is now investigating small business loans, which are currently available at significantly lower interest rates.

References

College Board. (2010). Trends in college pricing, 2010. Retrieved from http://trends.collegeboard.org/

Hung, A., & Yoong, J. (2010). Asking for help: Survey and experimental evidence on financial advice and behavior change. RAND Working Paper WR-714-1.

Morris, K. M., Siegel, A. M., & Morris, V. B. (1995). The Wall Street Journal guide to planning your financial future. New York: Lightbulb Press.

Parisse, A., & Richman, D. (2006). Questions great financial advisors ask… and investors need to know. Chicago: Kaplan.

Pink, D. (2009). Drive: The surprising truth about what motivates us. New York: Riverhead.

Quinn, J. B. (1991). Making the most of your money. New York: Simon & Schuster.

Sass, S., Monk, C., & Haverstick, A. (2010). Workers' response to the market crash: Save more, work more? Chestnut Hill: Center for Retirement Research.

West, S., & Anthony, M. (2000). Storyselling for financial advisors. Chicago: Kaplan.