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How does Germany handle retirement? In the US, your home is seen as an investment, one that can partially fun retirement or depending on the market, pre-retire

How does Germany handle retirement? In the US, your home is seen as an investment, one that can partially fun retirement or depending on the market, pre-retirement income.

ygra 10y ago
You pay into a retirement fund as long as you work (Rentenversicherung). When you retire you then get a monthly payment from there. By now, due to more old people and fewer young people, the amount you'd get is getting lower. To combat that there are various ways people invest money for retirement. Betriebliche Altersvorsorge is one, where a part of your income is deducted before taxes. There is Riester-Rente, which is state-sponsored to some degree. Of course, some people choose to invest into property, but there are lots of other options with varying flexibility and payoffs. In general, even if you don't do anything towards your retirement (apart from working your working life), you still have some security as you age. But such provisions are probably one very major difference between the US and Germany.
nommm-nommm 10y ago
>In the US, your home is seen as an investment Historically a very poor one. http://www.usatoday.com/story/money/personalfinance/2014/05/10/why-your-home-is-not-a-good-investment/8900911/ http://www.usatoday.com/story/money/personalfinance/2014/05/... >"Capital gains have not even been positive. From 1890 to 1990, real inflation-corrected home prices were virtually unchanged." >From 1890 -- just three decades after the Civil War -- through 2012, home prices adjusted for inflation literally went nowhere. Not a single dime of real growth. For comparison, the S&P 500 increased more than 2,000-fold during that period, adjusted for inflation. And from 1890 to through 1980, real home prices actually declined by about 10%. Not to say that a house is a bad thing. A house can be great! It provides shelter, stability, and can provide a vast amount of joy and pride. Its a very poor investment vehicle. Its a very bad idea to have 100% of your wealth tied up in your primary residence. Diversification is a key to financial stability everywhere.
- zip1234 10y ago
  I mostly agree with you but the 2012 point is a very bad end point to choose for house prices. 2011-12 were the trough on housing prices after the crash.
- bzbarsky 10y ago
  > home prices adjusted for inflation literally went nowhere Yes, but what does that mean for money invested in houses? The reason this is not the same question is that money invested in houses is leveraged, at least in the short term. Simple example of how this can work: You buy a house at 20% down and an interest-only mortgage with a fixed interest rate of 4%. Inflation averages 3% and your house's price grows at exactly inflation. You live there for 40 years and then sell. To make our numbers simple, let's say the initial price was $100k. So you put $20k down and take out a $80k loan. Each year you pay $3.2k in mortgage interest. The price of your house after 40 years is, in then dollars, $326k. You sell, pay off the $80k loan, and have $246k left. Let's consider the alternate situation: you rented for those 40 years. How much did you pay for rent? Chances are, it's no less than the interest on your loan (if only because a landlord would have that interest _and_ other expenses). In practice it probably went up over time, unlike your payments, but let's pretend it didn't. You invested your $20k downpayment in the stock market. What nominal return do you need to get to end up with $246k at the end of 40 years? The answer is about 6.5%. If inflation really averaged 3%, then that's a pretty decent stock market return, and that's all assuming that the capital gains treatment of the house and the stocks is the same (it's _not_ in the US; houses are exempt from capital gains tax to a large extent). Obviously if you actually pay off your house all this goes out the window. ;) Likewise, if the house goes _down_ in price the leverage acts against you. Realistically, houses are an awesome investment if you buy at a time of low-ish interest rates, and then before you've really paid off a large fraction of the house inflation spikes. If house prices simply keep up with inflation in that situation, you can really win out. People who bought in the US in the 60s and sold in the 80s or 90s did quite well, on average.
pluma 10y ago
My grandmother owns a house. She's constantly talking about moving into a retirement home (but still lives in the house out of nostalgia). My parents-in-law also own a house and they're also fairly certain they will move out when they grow too old. Typical family houses are spread across two storeys with bedrooms on the upper floor and the living room and kitchen on the lower floor. This necessitates stairs. Also, the house was probably sized to have enough space for children, who at that point have long moved out. And even if you find different uses for that space it still needs to be cleaned and maintained (and you need to clean and maintain the rest of the house anyway). So depending on how affluent you are, how close your children are and how much care you need, either you struggle living in an oversized house, you move into a single-storey "Bungalow", you move into an apartment or you move into a retirement home. Another option depending on how the house is built is to split the house into two apartments and have one of your kids live in the other apartment.

How does Germany handle retirement? In the US, your home is seen as an investment, one that can partially fun retirement or depending on the market, pre-retirement income.

ygra 10y ago

You pay into a retirement fund as long as you work (Rentenversicherung). When you retire you then get a monthly payment from there. By now, due to more old people and fewer young people, the amount you'd get is getting lower. To combat that there are various ways people invest money for retirement. Betriebliche Altersvorsorge is one, where a part of your income is deducted before taxes. There is Riester-Rente, which is state-sponsored to some degree. Of course, some people choose to invest into property, but there are lots of other options with varying flexibility and payoffs. In general, even if you don't do anything towards your retirement (apart from working your working life), you still have some security as you age. But such provisions are probably one very major difference between the US and Germany.

nommm-nommm 10y ago

>In the US, your home is seen as an investment Historically a very poor one. http://www.usatoday.com/story/money/personalfinance/2014/05/10/why-your-home-is-not-a-good-investment/8900911/ http://www.usatoday.com/story/money/personalfinance/2014/05/... >"Capital gains have not even been positive. From 1890 to 1990, real inflation-corrected home prices were virtually unchanged." >From 1890 -- just three decades after the Civil War -- through 2012, home prices adjusted for inflation literally went nowhere. Not a single dime of real growth. For comparison, the S&P 500 increased more than 2,000-fold during that period, adjusted for inflation. And from 1890 to through 1980, real home prices actually declined by about 10%. Not to say that a house is a bad thing. A house can be great! It provides shelter, stability, and can provide a vast amount of joy and pride. Its a very poor investment vehicle. Its a very bad idea to have 100% of your wealth tied up in your primary residence. Diversification is a key to financial stability everywhere.

zip1234 10y ago
I mostly agree with you but the 2012 point is a very bad end point to choose for house prices. 2011-12 were the trough on housing prices after the crash.
bzbarsky 10y ago
> home prices adjusted for inflation literally went nowhere Yes, but what does that mean for money invested in houses? The reason this is not the same question is that money invested in houses is leveraged, at least in the short term. Simple example of how this can work: You buy a house at 20% down and an interest-only mortgage with a fixed interest rate of 4%. Inflation averages 3% and your house's price grows at exactly inflation. You live there for 40 years and then sell. To make our numbers simple, let's say the initial price was $100k. So you put $20k down and take out a $80k loan. Each year you pay $3.2k in mortgage interest. The price of your house after 40 years is, in then dollars, $326k. You sell, pay off the $80k loan, and have $246k left. Let's consider the alternate situation: you rented for those 40 years. How much did you pay for rent? Chances are, it's no less than the interest on your loan (if only because a landlord would have that interest _and_ other expenses). In practice it probably went up over time, unlike your payments, but let's pretend it didn't. You invested your $20k downpayment in the stock market. What nominal return do you need to get to end up with $246k at the end of 40 years? The answer is about 6.5%. If inflation really averaged 3%, then that's a pretty decent stock market return, and that's all assuming that the capital gains treatment of the house and the stocks is the same (it's _not_ in the US; houses are exempt from capital gains tax to a large extent). Obviously if you actually pay off your house all this goes out the window. ;) Likewise, if the house goes _down_ in price the leverage acts against you. Realistically, houses are an awesome investment if you buy at a time of low-ish interest rates, and then before you've really paid off a large fraction of the house inflation spikes. If house prices simply keep up with inflation in that situation, you can really win out. People who bought in the US in the 60s and sold in the 80s or 90s did quite well, on average.

pluma 10y ago

My grandmother owns a house. She's constantly talking about moving into a retirement home (but still lives in the house out of nostalgia). My parents-in-law also own a house and they're also fairly certain they will move out when they grow too old. Typical family houses are spread across two storeys with bedrooms on the upper floor and the living room and kitchen on the lower floor. This necessitates stairs. Also, the house was probably sized to have enough space for children, who at that point have long moved out. And even if you find different uses for that space it still needs to be cleaned and maintained (and you need to clean and maintain the rest of the house anyway). So depending on how affluent you are, how close your children are and how much care you need, either you struggle living in an oversized house, you move into a single-storey "Bungalow", you move into an apartment or you move into a retirement home. Another option depending on how the house is built is to split the house into two apartments and have one of your kids live in the other apartment.