"Using Property as a Retirement Asset: A Practical Guide

 Because of a change in the law in Switzerland, we shed some light on how retirement savings and buying a house affect each other. There are times when buying a house can be used instead of saving for retirement. It could also protect you from changes in rental prices (Sinai and Souleles, 2005). When people take money out of their pensions to buy a house, they have to choose between the benefit streams of owning a home and having less money in their pensions in the future and not having a very diversified portfolio. Because owning a home is different from renting an apartment, the person making the policy has to decide if required retirement savings should be used to pay for a house.

In Switzerland, the total number of advance withdrawals has been going down since 2004 because fewer people are buying homes and home prices are going up (see Fig. 1). However, there were still about 30,000 withdrawals each year. Around the time of the change, the total number of withdrawals went down from more than 25,000 in 2011 to less than 20,000 in 2013. This is a drop of more than 15%. During the rest of the observation time (2013–2015), it stayed at this low level. As a result, tougher rules on equity came at the same time as a noticeable overall change in the use of advance withdrawals.

We use administrative data from a big Swiss employer-based pension provider to look at how the change affected people's choices about how to withdraw their money. The pension company works with people all over Switzerland, which is about 1.1% of the Swiss work force. The people who are covered through this pension provider are typical of the Swiss population. We look at all the people who were insured by this pension plan in the years before and after the change, in 2011 and 2013. This includes information on some socioeconomic factors, retirement balances, and early withdrawals. We look into whether a policy change in the form of minimum requirements standards works along two adjustment margins, which are called the extensive and the intensive margins. We look more closely at the types of people who took money out of their pensions early before and after the reform to figure out how the basic mechanisms work. As a result of the change, do people decide not to buy a home, put off buying one, find other ways to get equity, or buy a cheaper home?

We see fewer early withdrawals since the reform; the chance of an individual taking out pension funds goes down. The change also has an impact on the intensive margin: if people decide to take money out of their pensions, they are entitled to a smaller share of the assets in their pension plan. So, changes in who can buy a home have effects on how wealth is distributed. People with lower incomes and older people had a smaller share of their pension wealth taken out after the change. But even after the change, withdrawals are still a big part of getting around cash flow problems when buying a home. The results show that for some potential buyers, the hard equity requirement after the policy change was more of a problem than their pension wealth when it came to buying a home to live in. We didn't look at changes in wages, the jobless rate, interest rates, or home prices around the reform to get our results. We looked at the reform's effects on a test group of foreign residents who should be able to get mortgages from foreign banks. The reform had no effect on this group.

Our work is about three different types of literature. First, taking money out of a pension early is one way to choose a plan for retirement savings. Based on Yogo (2016), housing is the most important real asset for the average retiree out of four main types of assets: bonds, risky assets, pensions, and housing. There are two uses for it: as a way to get things for everyday use and as a way to build wealth that can be given away or traded to pay for medical bills. Fehr and Hofmann (2019) say that long-term care risks may be a big reason why people buy homes. They think this is because home wealth is a low-risk investment and there is insurance to cover long-term care costs.

Second, our study includes a discussion of whether real estate and retirement savings can be swapped out. While we look at the choice to replace pension savings with home equity, most of the research that has already been done looks at the chance of using home equity as a source of retirement income. It's clear that homeownership wealth has a positive effect on spending. Whether or not older people think about selling their home equity to use for everyday living relies on their income to home equity ratio and how much they have saved for retirement (Venti and Wise, 2004). Mitchell and Piggott (2004) say that people in Japan and other countries with low birth rates and high life expectancy should be able to use reverse mortgages to get the money they need for retirement. "Income-poor and house-rich" families are especially interested in selling their homes for cash (Angelini et al., 2014). How well you save for retirement relies on whether you think that housing wealth can be used instead of financial wealth to support your post-retirement spending. Venti and Wise (2004) say that US families shouldn't use their home equity to pay for non-housing spending if they have enough savings to keep up the same level of living they had before they retired.

Finally, our study is related to the choice of annuitization when retirement, since early payments for housing are expected to come from retirement savings. The seminal study by Yaari (1965) shows that annuities give individuals big gains in utility. In a real-world example, Brown (2001) looks at how life annuities can be used to protect against the costs that come with living a long time. As Davidoff et al. (2005) say, market incompleteness and liquidity constraints may make it harder to find the best level of annuitization. Also, Bütler and Ramsden (2016) show that the different tax handling of lump sums and annuities affects a person's choice of how much cash to take out when they retire. It looks like the trade-off between having access to cash and having long-term care insurance, along with most of the things that affect annuitization, will also affect the choice to withdraw money.


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