Paul and Jennifer had a lot of good habits when I met them in 2015. They were good savers, had life insurance, and they’d made substantial progress saving for college for their three children. Paul was an engineer, tapped to one day be an owner in his firm, and Jennifer was a corporate attorney at a large firm. Things were good except Paul was concerned that their investments weren’t growing sufficiently during a bull market, and Jennifer wondered if they were saving more than they needed to and, as a result, missing out on some joys along the way. Also, they had made a large investment the year before in expensive whole life insurance policies, and they wanted a second opinion on the wisdom of that. Paul and Jennifer were sharp, fun to be around, and I was excited to see if I might help.

We started with Paul’s question: why weren’t they getting the rate of return they expected from the market? After all, Paul said he was shooting for 60-70% of the return of the Dow Jones, a reasonable target, and they were young enough to invest to achieve it. Paul gave me some perspective—while the S&P 500 had been up 13.46% the year before, and a “balanced,” 60/40 portfolio of stocks-to-bonds would have earned a 10.47% return before fees, Paul and Jennifers’ portfolio had earned a 0% rate of return. Paul wasn’t greedy—he didn’t necessarily want ALL of the return of stocks—but he was reasonably frustrated to not be earning anything.

The first thing I learned about their investments was that their advisor was using something called sell stop orders, or automatic orders to sell their investments if the price fell below a certain target. While such orders are intended to protect an investor’s gains, if overused they can make a portfolio overreact to normal swings in the market, selling out of investments too often, and leaving a person’s money in cash, earning little. This is part of what happened to Paul and Jennifer, and they were concerned.

Next, we turned to Jennifer’s primary concern: were they saving too much? This is a hard question for a financial advisor to answer, particularly when speaking to a couple who is still young (Paul was 40 and Jennifer was 39 at the time). That said, after a dive into their spending, savings, and hopes for the future, Jennifer’s suspicion was validated—they were saving at a very high level, arguably higher than they needed. One of the places this was showing up was in the 529s they had set up for their three children. While they hoped to pay 100% of the cost for college for each of their children at a state university, they were in danger of having more funds in their 529s than would be necessary for the three children combined.

Armed with this initial information, we were soon able to help Paul and Jennifer

• Redesign their portfolio to get the level of returns they expected from their investments.
  
• Refine their future education savings strategy to include more than just a 529.

Once these improvements were implemented, we returned to the subject of their life insurance. The year before we met, they had invested in cash value whole life policies that had very high annual premiums. They bought the policies through an agent Paul met through his work. While the life insurance policies would pay a death benefit if Paul or Jennifer died, the idea behind the policies was actually to accumulate tax-free dollars within insurance policies in order to take tax-free income from the policies in retirement. While Paul and Jennifer had a correct understanding of the tax nature of life insurance, they were only presented with one kind of cash value insurance at the time they made their purchase. Unbeknownst to them, there were policies that would provide these same tax benefits at a much lower cost by giving them access to superior investments within the policy and by charging lower internal fees.

This was an emotional discovery for them. They felt they had been taken advantage of when they bought the whole life policies because they hadn’t been presented with other options. As Paul put it, he felt like they’d bought a Cadillac Escalade to pick up groceries—yes, it worked, but it wasn’t the best use of their resources. The result of learning about many different kinds of insurance policies was that Paul and Jennifer decided to cut some of their losses, and pivoted to policies that lowered the cost of the insurance, letting them redirect more savings into investments.

When the tax law changed in 2017, Paul and I met for lunch to discuss it. One change that was relevant to his family pertained to 529 plans. They could now be utilized for up to 10k of pre-college private school tuition. This was significant as his 529s were very highly funded, and he expected his children might attend private high school (something that has since come true).

On the subject of taxes, Paul also wanted to discuss the smartest way to give to charity. Because his inclination was a general one, and not tied at the time to any specific charity, we discussed Donor Advised Funds. These are accounts that allow a donor to give money to a charitable account now, getting a tax deduction, but allow the donor to actually distribute the money to a charity at a later date. This idea was potentially a good fit for Paul; his income was high and he wanted to help others, but he hadn’t yet narrowed down which charity he wanted to give to.

When I step back from my relationship with Paul and Jennifer, I can see many areas where our firm has added value:

• Helping Paul consider the implications of becoming an owner in his business
  
• Helping Paul’s father determine the best way to contribute to his grandkids’ education
  
• Suggesting Paul and Jennifer could afford to spend more as they search for a new home
  
• Thinking through a piece of land Paul wanted to purchase to hunt on
  
• Thinking through the smartest way to pay for private school from a tax perspective

For me, the best part has been the back-and-forth discussions, the relationship itself. No one is more excited about the wins in their life than I am!

This is a case study and is for illustrative purposes only. Actual performance and results will vary. This case study does not constitute a recommendation as to the suitability of any investment for any person or persons having circumstances similar to those portrayed, and a financial advisor should be consulted. This case study does not represent actual clients but a hypothetical composite of various client experiences and issues. Any resemblance to actual people or situations is purely coincidental.

Goostree Financial Group does not provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation.