Assets and especially real estate ownership reduce the risk of poverty in old age. However, in practice, the owner-occupied home often becomes a burden factor, as it accounts for the majority of the assets on the one hand, and does not increase the current income on the other hand. That is the conclusion of a recent study conducted by the Empirica analysis institute on behalf of the German Institute for Retirement Provision (DIA). Unlike typical poverty measurement studies, this evaluation also considered assets. Typically, according to Empirica study author Dr. Reiner Braun does not lead to distortions, since it is rightly assumed that poor people do not own assets. However, this does not apply to the issue of old-age poverty, he emphasizes. This age group has accumulated a disproportionately large amount of wealth over the course of their lives. According to Braun, this age group is therefore also considered to be in income poverty if they have assets but their current income, such as pension payments, is insufficient. In many cases, according to Braun, the assets are owner-occupied residential property.
Risk of old-age poverty lower for real estate owners
According to the study, the risk of poverty for all individuals in Germany falls by one percentage point to 15.6 percent when existing assets are converted into current income over the rest of their lives. The risk of poverty drops to 14.8 percent if real estate assets are also converted accordingly, reports the DIA. In terms of old-age poverty, the risk decreases more significantly when assets are taken into account: It is reduced by four percentage points to 14.9 percent if financial assets are included in the calculation. The risk of poverty in old age is reduced by a further percentage point if real estate assets are also taken into account. According to this calculation, this means that fewer people are affected by poverty in old age, according to the DIA.
Property can become a burden in old age
However, this view does not necessarily benefit many seniors with real estate property, but low pensions: "The annuitization of the property – as assumed in these calculations – usually does not take place at all," explains DIA spokesman Klaus Morgenstern. The consequence: On the one hand, seniors have lower expenses, since they do not have to pay rent. On the other hand, you also have to keep money for modernization and repairs in reserve. The problem is also shown by a survey conducted by the Institute of Insurance Science at the University of Cologne on behalf of Deutsche Leibrenten AG among seniors aged 69 and older: According to the survey, one in four respondents said that the money was "just enough to live on". And around a third of the survey participants have no other assets apart from the property.
Life annuity and reverse mortgage as a solution?
The DIA therefore calls for greater efforts to be made to find solutions for generating additional income in old age by annuitizing residential property. This is possible on the one hand via a so-called reverse mortgage, which is widespread in the Anglo-Saxon countries. In this model, the property owner takes out a loan, which is paid out by the bank in monthly installments. The property does not change hands. The situation is different with a life annuity – another way of turning the property into cash and continuing to live in it: Here, the property passes to a new owner, who grants the annuitant a lifelong right to live there, which is also recorded in the land register. The purchase price is settled with an annuity, although a one-time payment or a mix of annuity and one-time payment can also be agreed upon.
Reduce debt at an early stage, build up additional provision
One thing property owners should generally keep in mind as they age, given their tighter budgets: They should deleverage their property as early as possible before they retire. So there is still time until retirement to build up a reserve for modernization and repairs. Depending on your budget, you should also not neglect private pension plans. Those who missed out on this at a younger age can still make provisions in their 50s. However, due to the relatively short period of time until retirement, higher monthly savings rates are required to build up a significant additional pension.