Financial Counseling Case Study: Mid-Life Career and Family

Client Financial Profile

This paper describes the career, family situation, and relevant life history of a financial counseling client — referred to here as the client — and outlines solutions to several financial problems she is facing. The client approached her financial counselor because she was contemplating a serious career change and wanted to know whether it was financially wise, or whether it would significantly impact her ability to provide for her family. During their consultations, they discussed her current and previous goals, how she had pursued them, and worked through a number of practical issues. After an initial assessment, several of her goals were adjusted to accommodate current market dynamics and to provide a buffer for potential setbacks. A specific meeting was held regarding financing her small business idea and related tax and insurance issues. A follow-up meeting has been planned at the six-month mark to assess progress and make any necessary adjustments.

The paper that follows provides a thorough description of the client's financial situation and family background, followed by a discussion of three specific financial problems and their solutions: saving for her children's future education while maintaining their current private school enrollment, launching a career change without destabilizing the couple's retirement plans, and deciding what to do with the family's summer cottage.

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.)

Problem 1: Educational Saving While Spending

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.

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.

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.

Problem 2: Changing Careers Mid-Stream

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.

Surprisingly, this problem generated the most emotional reactions from both the client and her partner. The client and James inherited a beach cottage in Michigan from one of the client's aunts. Although the property is in the client's name, several of her family members use it throughout the summer and fall. For example, the previous summer her brother and his family spent two weeks there, and her parents joined them for the final weekend. Roughly every other year over the past decade, James and the boys have spent a week at the cottage, with the client joining them on one or both weekends. The cottage was built by the client's aunt and uncle, who had many nieces and nephews but no children to inherit. Now that the boys are getting older, the couple would like to begin taking longer trips with them, including potential international travel. The cottage sits unused for all but approximately six weeks per year. The client is uncertain whether it is worth keeping, especially if the sale proceeds could fund her business venture. James, however, fears they would regret selling something that is, in essence, a family heirloom to be passed on to their sons. He has also used the cottage more frequently over the past decade than the client has, though she retains fond childhood memories of it.

A key question the counselor raised was who the potential buyers would be. In the current fiscal environment, second homes are flooding the real estate market, and many are priced similarly to the cottage. The client believed it could find a buyer within four to six months given its condition and location. A follow-up with a local real estate agent confirmed that while the market is cautious, the cottage could sell within a year if the client was flexible on price. Another option the client had not seriously considered was renting through a vacation property management company. She had previously dismissed rental because she feared that wear and tear would reduce the property's value and that self-managing would add more stress to her life. The counselor was able to advise her to consider listing the cottage through an agency that handles cleaning, payment collection, and liability insurance for a small commission on the rental fee. In conjunction with her decision to pursue a small business loan for the photography studio, renting the property rather than selling it at present emerged as the more financially sound course of action.

The client's financial situation is not unlike that of many people at her stage in life. She is committed to making changes that will give her more time with her family while also providing for that family to the best of her ability. She has considerable personal and financial resources that will serve her well as she faces each of these three challenges. During their meetings, the counselor and client also discussed redistributing her investment accounts to reduce short-term risk — an appropriate step given her decision to start a business, since she may need to draw on those investments as a safety net if the studio gets off to a slow start or operates at a loss before becoming self-sustaining. She decided to convert some of her riskier stock positions into funds to achieve greater short-term portfolio stability.