Term Paper on "Financial Counseling"

Term Paper 10 pages (3022 words) Sources: 8

[EXCERPT] . . . .

Financial Counseling Profile:

Tackling Mid-life Shifts

In this paper, I will describe the career, family situation, and relevant life history of my client, Laura Lemming, and outline the solutions to several financial problems she is having. Laura approached me because she was contemplating a serious career change and wanted to know whether it was wise, or if it would significantly impact her ability to provide for her family. We discussed her current goals, her previous goals and how she pursued them, and worked through a number of practical issues that came up in our consultation. After my initial assessment of Laura's situation, we adjusted several of her goals to accommodate current market dynamics and provide a buffer for potential setbacks. We had a specific meeting about financing her small business idea and related tax and insurance issues. We have planned to meet again at the 6-month mark to see how her goals are progressing and if any adjustments need to be made.

In the following paper, I will give a thorough description of Laura's financial situation, followed by a description of her career and family, and discuss three specific problems in Laura's financial life and the solutions to these problems: saving for her children's future education while maintaining their current attendance in a private school, launching a career change without destabilizing the couple's retirement plans, and selling or renting Laura's family's summer cottage.

Laura Lemming: Detailed Financial Profile

Age (Life expectancy):

46 (85)

Partner's age (Life expectancy):



42 (80)

Children (Ages):

2 (12, 8)

Assets

Annual income:

$125,000.00

Partner's income:

$70,000.00

Checking:

$2,000

Savings:

$17,800

Annuity:

$2,000 (2% on an $100,000 account)

Money Market:

$28,000

Other investments:

$160,000

Retirement plan:

$32,000

Partner's retirement plan:

$7,000

Residence:

$300,000.00

Improvements to same:

$75,000.00

Other R.E. value:

$80,000.00

Auto 1:

$4,000.00

Auto 2:

$23,000.00

Art:

$2,000.00

Jewelry:

$5,800.00

Furniture:

$16,000.00

Insurance

Life:

$500,000.00

Partner's Life:

$100,000.00

Disability:

$50,000.00

Business (Type):

$100,000.00 (Legal malpractice)

Homeowner's:

$400,000.00

Liabilities

Student Loan:

$5,000.00

Mortgage:

$108,000.00

Auto 2 loan:

$17,000.00

Auto insurance:

$2,000.00/year

Business insurance:

$1,200.00/year

School tuition:

$24,000.00

Retirement/insurance contributions:

$2,000/month

(Basic format: Parisse & Richman, 2006)

Laura 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 working 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 70s, still enjoy a comfortable lifestyle in their retirement. She is fairly confident that her retirement plan will allow her and her partner to retire in a more modest lifestyle and do some traveling while maintaining at least partial employment. She may be relying on inheritance for a large part of 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 (travel, etc.) (Morris, Siegel, & Morris, 1995). Before she decided to go to 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 business as a photographer, and has a significant stock of equipment, hardware and software. She has spent some time developing a business plan for her photography business, but it is not fully fleshed out.

Laura's partner James is a more risk-tolerant investor. He is currently employed as an architect in a firm that specializes in 'green' retrofitting of historical buildings. He still has some student loan balance to pay off (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 significantly impacted his employer's business both positively and negatively. While new construction has plummeted, the trend towards green building and retrofitting old structures to serve new purposes has soared. James is confident that his salary will continue to grow to match the pace of inflation. He has been at his current job for 5 years and is not planning a career shift until one or both of his children have reached college age. James's childhood had some financial turbulence in it, and he would like to spare his own children that. His parents are living in a retirement community in Florida, and they anticipate that they will use most if not all of their savings within their lifetime.

Problem 1: Educational Saving While Spending

It is very important to both Laura and James that their children have a good education, and for them, this means sending the boys to a private school. This school is challenging and fairly experimental with a Montessori-based curriculum, and has an excellent college placement record. The school's tuition is $12,000 per year per student, rising to $14,000 per year in high school. The school has a financial aid program that would lower this tuition to $8,000 per student if the Lemming family was relying on only James's income for the first year of Laura's business venture.

Laura has not been specifically saving for the boys' college education, and had assumed that her current investments plus refinancing the family's home would cover the "worst case scenario" in which both boys attended Ivy League colleges with no financial aid. However, her stock portfolio has not done very well over the last few years and she is worried that she will either have to sell the family's summer cottage and invest the funds more productively, or continue in a career that severely limits her time with her family.

In order to show Laura what her sons' educational future might require, we created several different scenarios in which we varied: (a) whether she stayed in her current job or started a photography studio, (B) what college tuition range her children would end up with, and (C) what contribution her parents might make. In the scenarios related to (a), the "worst case scenario" additional contribution would be $31,000 per year starting in 6 years (West & Anthony, 2000). This assumes that her oldest son's college tuition, room and board would cost $45,000 per year, compared to his high school tuition of $14,000 (College Board, 2010). If she stayed in her current career path, this contribution would not be very problematic, assuming that the couple had finished paying off their house and the second vehicle in 6 years. However, if their second child also chooses an expensive school, Laura would not have any real career freedom until she was 60 -- nearing retirement age. Both Laura and James agree that the high-powered college prep track is not best for everybody, 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 pay at least part of their own tuition by working during the summers. Laura is much more inclined to ask her parents to contribute to their grandchildren's education than to require the boys to give up the chance to travel or intern during their college summers.

The most interesting (or difficult) scenario was one in which Laura launched her photography studio next year, quit her legal job, and used some of the couple's investments as start-up funds for her business. In this case, the couple might qualify for financial aid at the boys' current school, but in 6 years the photography studio probably would not be paying an equivalent to Laura's salary at the law firm. Of course, this would also free up funds currently in use paying Laura's malpractice insurance, which is required by her employer. The couple decided that if this is the path that they decide to take, they would be willing to refinance their current residence and/or take out student loans on the boys' behalf rather than restrict their educational choices. They also decided that they would minimize any withdrawal from their stock and mutual fund investments in order to finance Laura's business. The couple thought that these investments' potential would be better realized down the road in their children's college tuition, while Laura's photography studio could be funded by business loans that would ideally be paid off before the boys graduated from high school.

Problem 2: Changing Careers Mid-stream

Laura's dream of living off her talent as a photographer is a long-standing one, despite spending 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 focused on copyright law and contract law as it applies to creative workers. As mentioned previously, she is an avid hobbyist photographer and has already done some of the legwork of putting together a… READ MORE

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