Thursday, 28 May 2015

Why Marriage (whatever definition) is the best financial tool

I posit this example based on a 'traditional' family, because it is easier to refer to 'him and her' than to 'A and B'. I in no way support the continuation of marriage inequality. 

I also make the following example based on pure fiction, and it is not based on the circumstances of any of my clients. 

A couple has lived together in happily wedded bliss for 20 years, and are both in their early 50s. They have bought a house (worth $500,000) and have nearly paid it off. They have all the mod-cons, they both enjoy their jobs, and their kids are happy, well-educated, and independent. 

During the relationship, he worked full-time. He earned a good wage, and over the last 20 years, has amassed a significant superannuation balance, nearly $500,000.  He is still working, earning at least $100,000 per annum. 

She worked part-time for most of the relationship, taking time off here and there to have and raise children. She didn't pursue a career, despite having the skills and qualifications to do so. Instead, she took on the traditional 'wife' role, being the housekeeper, child-carer, and generally supporting her husband in his career. Her super is minimal. 

The two were happy in their respective roles. He worked hard, and as a result of not having to worry about things at home, was able to advance in his career. She worked hard, and as a result of not having to worry about money, the home was a happy one, the kids were happy, and everyone was happy. She didn't regret not having a career, because the role that she had happily accepted didn't require her to. She regarded being a 'mum' as the best thing she could have done. 

(Note that this example could be gender-reversed)

The two are well off, saving for retirement, but enjoying life. The mortgage is nearly gone, and they are looking at maybe investing in another property. The kids are about to move out, and life is pretty good. Even if they both lost their jobs, they are well-enough-off that they would survive comfortably. Especially if they both worked for 5-10 more years, they are looking forward to a comfortable retirement. 

The critical point is that they both assumed roles within the family which contributed to a successful financial model. 

But then they separate. Things just aren't working at home, and they decide to call it quits. They go their separate ways, amicably. 

Here is where things become interesting. 

She is entitled to a property settlement, and I won't go into the fairness of it here. Suffice to say that this couple happily took on the family roles that they did, meaning that he earned more than her. In this example, because of her substantially smaller earning capacity, she receives 60% of the property pool, including superannuation. She walks away with $350,000 cash in hand, and half of the total superannuation, being $250,000. He keeps the house, but has to re-mortgage it to pay out his wife. He then has a $500,000 home, with a $350,000 mortgage, and $250,000 in super. 

Neither of them now are well off. 

He has to service a large mortgage, and although he earns well, suddenly his security in retirement is gone because his super is reduced. He can't pay off the mortgage quickly AND put more money away into Super. 

She has cash, but no house. She can only afford to buy a basic house out of town, because her earning capacity isn't enough to get a loan. She can't increase her earning capacity, because it is 'too late' and she doesn't have the skills to make a significant wage any more. She has some superannuation, but it isn't going to increase much during the next 5-10 years while she can't earn a lot. 

So while the total value of the assets is exactly the same, neither party is nearly as well-off as they were in the relationship, when the assets were pooled!

Duh, so what's your point?
Well, if you have read this far, you have probably worked it out. I suggest that the 'couple' is the best financial structure to make/save money. 

Firstly, when you have two people applying for a loan, you can get a much larger one. Over the course of your working lives, you can then pay it off more easily. Compare two people both applying for small loans, neither of whom can individually afford to buy a house, but together can buy a mansion. 

Here is the thing: the cost of living for a couple is far less than double the cost of living for two people who are not a couple. 

Let's look at saving for a deposit to buy a home. Paying rent while you save is a pain, and let's say you have found a $250/week, 2-bedroom unit to live in. Your expenses are about a further $300/week (groceries, petrol, internet/phone, electricity, insurance, etc.) and your wage is $800/week net. At best, you can put $250/week away into savings. To get a $350,000 home, you need a deposit of approximately $42,253 for a first-home buyer (5% deposit, stamp duty, PLUS lenders' insurance). That will take you 169 weeks, or 3 1/4 years to save. That's assuming you don't have any unexpected expenses. 

That also only gets you to the time when you can get the loan. You then have to pay off that house!

Ok, so contrast having a partner. Let's say that you both earn the same. You still pay $250/week, and your internet, gas and electricity bills don't change much. Your food goes up a little, but in general, your household expenses don't change significantly. Now, your budget is $1,600, and your expenses are say $850/week. Now, you can save $750/week. That same deposit now takes just over a year to save. 

This all seems very obvious, until you separate. Suddenly, this financial model comes crashing down, and you are left with two people wishing things were different. 

What this results in is a lot of anger and hostility, when parties realise that after they separate, things just aren't going to be as good as they were. They are not going to have the same luxury and security as they did within the marriage. Their roles, happily accepted and functional during the relationship, are no longer sufficient when single. 

So when/if you are advising clients about a relationship breakdown, make sure you manage their expectations, because if you don't, they are going to be very upset when they realise that even if they 'win' the settlement, they still aren't going to have it easy. 

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