17 August 2011

Mortgage and superannuation for single parents

Today I'm featuring an email from a lady who wrote a couple of weeks ago about establishing a life while paying a mortgage and saving for retirement. I think this might be a topic of interest for quite a few readers. She comments here so let's call her Martha.  Martha wrote:

"I became a single Mum almost 4 years ago I realised that my priority had to be to spend nothing so that I could buy another house to bring my kids up in. And it had to have a yard big enough for fruit trees, veggies etc...I bought probably the worst house in a safe area for the kids. I was soooo lucky to achieve this just as the GFC was picking up pace, especially given that I had given up my work (self-employed) to be home with my kids, and was just re-establishing my business. 

My question now is, do I keep trying to pay the mortgage down fast and finish renovating (necessary for health and safety), or should some of my money be going towards super? (I have only about $30000 and I'm 44. My thought is, what if I make us as self-sufficient as possible by saving for solar panels, water tanks etc… and of course gardening and making things - am I deluded if I think I will be able to survive on a tiny amout of super if I'm debt-free and self-sufficient? I really don't think much will be available in the way of pensions when I'm 65 and I wonder what you would do in my position?

My children are 8 and 11. I do support myself with my business (I'm a pianist and teach too, mostly from home). However, without child support and a bit of family tax benefit I wouldn't be able to support my family - unless I took on a lot more work. I was working every other Saturday to try and get ahead financially, but realised this only made me more exhausted and stressed, my kids didn't want me to do it, and it didn't seem to give me extra income in the long run. This is because I had to let the vegetable garden go, stopped baking bread etc...  The good news is, I have no debt other than my mortgage, and a bit of rainy day savings."

Well Martha, the short answer is, yes, you are deluded to think you can survive on that amount of money when you retire if there is no pension then.  And I think that in 21 years time, when you're 65, the retirement age will be closer to 70.  However, you asked what I would do. I think you're doing the right thing, actually. Buying an older home in a good area is what I would have done.  The good news is, if you have no debt and live in your own home with opportunities to grow food and have chooks, you won't need nearly as much as they say you need when you retire. 

I would stop paying superannuation at the moment while you renovate, but in the long term, I think it's wise to continue paying it. Remember, it's not only the lump sum at the end of your working life, there are also tax benefits too. If I were in your shoes, I would to continue to pay off the mortgage as fast as possible, even if some months you can only manage an extra $50. Everything extra is a real bonus.

But you also need to renovate. While you're renovating, buy as much as you can from ebay, demolition yards and second hand shops. There are lots of ways you can cut back, even when you're renovating. It's good you have those "rainy day savings" - that can be your emergency fund while you renovate.

If you're self employed, you'll probably be doing your own payments into your super fund, these may be regular payments or lump sums. As soon as the renovating is over, build yourself an emergency fund, then start regular contributions to your superannuation again. You still have over 20 years you can pay into your fund, taking a couple of years off to get your renovations done won't make too much difference in the long run. The main focus should be to get the home in order, make sure it's safe and sound, and you and your family are too, then start thinking about your retirement.

There is absolutely no doubt in my mind that you and your children will be better off living in a home that you own. If that home is set up to support a frugal and simple life, with vegetable gardens, hens, water tanks and solar panels, you will reap those benefits for many years. But you also need money to pay rates, for the emergencies that will come up over the years, for insurance and for the enjoyment of life. "The Association of Superannuation Funds of Australia, together with Westpac, found that to have a comfortable lifestyle, retired singles who live in their own home need to spend $36,607 a year and couples $48,648." This is from How much do you need to retire?  Hanno and I live on less than that, anyone can - it all depends on what you're will to do without and how much work you can do in your home, while remaining happy, optimistic and strong.

There can't be a definitive answer to the question about how much money you'll need in retirement, because it depends on how long you'll live and no one can predict that. But if you produce some of your own food, if you have set your home up well to support an environmentally sound life and if you live simply, then you will be in a better position to live well than if you didn't have those supports. Don't forget to learn as much as you can about the things that will support you and live simply now. That will help with your current financial situation and when you do retire, it will be a smooth transition to your new life.

This is a really good retirement calculator. You can fiddle around with it and see how much you'd have on retirement using differing super payments. It also gives actions plans and ideas about working longer.

So to summarise, I would: 
  1. stop superannuation payments for the time being 
  2. keep paying as much as possible on the mortgage 
  3. renovate the home on a tight budget, without cutting corners
As soon as the renovation is finished:
  1. build an emergency fund
  2. start paying into the superannuation fund again
  3. keep paying off the mortgage as fast as possible
There are just two points I'd like to add. 1. Make sure all your superannuations is in ONE account. Fragmented super will cost you money. Usually the industry-specific funds give the best returns so I hope you're in one of those. If you have to transfer fragmented funds to one account, know the cost of your transfer fees before you act. 2. Enjoy life as you go along. That is easily done while living simply but you are the sole breadwinner and that can brings responsibilities and concerns that may keep you from the lighter side of life. Look for ways you and your children can spend time together and have fun without it costing a lot of money. Camping, homemade pizza and movie nights,  swimming in summer, hiking in winter - all these things will show your children that enjoyment isn't always bought. It will also give you a break from those sole parent responsibilities and help you see that happiness is still all around you.

That is what I would do. Do you have any thoughts for Martha?

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