Pension Strategy for the 2030 Generation?… Kim Kyung-rok "Be Sure to Have Capital" [Geumjjok Pension Snowball⑧]

'Pension Guru' Interview
Kim Kyung-rok, Advisor at Mirae Asset Global Investments

"Prioritize enrolling in tax-deductible products like pension savings
It's best to have a high absolute investment ratio"

Choose TDF stock ratio of 70-80%

Kim Kyung-rok, Advisor at Mirae Asset Global Investments. / Photo by Hyunmin Kim kimhyun81@

[Asia Economy Reporter Ji Yeon-jin] In a capitalist society, workers can simultaneously be capitalists and workers. By receiving a salary, the sweet reward of a tough working life, they can purchase shares in strong companies and own capital. This is why Kim Kyung-rok, an advisor at Mirae Asset Global Investments, emphasized that the 2030 MZ generation must "definitely own capital" as part of their 'pension snowball' strategy. Kim advised that one should join pension savings funds and Individual Retirement Pension (IRP) plans as early as possible for tax deductions and invest a portion of their monthly salary through installment investments. He recommended allocating these pension accounts with a high stock ratio: 50% in Exchange-Traded Funds (ETFs), 30% in listed Real Estate Investment Trusts (REITs), and 20% in bond funds. Kim said, "Young people in their 20s will save much more in the future than they have so far," adding, "The stock market prices were high but have fallen due to adjustments, so this is a good opportunity to own capital." He stressed, "Deposits were a means of asset growth in the past high-interest era, but now they are just liquidity. Asset growth comes from capital. Therefore, you must own capital."

Below is a Q&A session.

Should the 2030 generation have a different pension snowball strategy?

The fundamental principle is to prioritize joining accounts related to tax deductions as early as possible. Secondly, you should not withdraw early. Another important point is that the 2030 generation must absolutely increase their investment ratio. Asset accumulation is ultimately determined by the amount saved, the saving period, and the rate of return. Since the National Pension and retirement pensions are mandatory, you must voluntarily join pension savings for tax deductions. Next is deciding which assets to manage. For the 2030 generation, it is advantageous to increase the proportion of investment assets. The reason Korea’s public pension is insufficient compared to other countries is the difference in working periods. In Europe, with a university enrollment rate around 30%, 60-70% start working around age 20 and work until 65, totaling at least 45 years. However, in Korea, due to military service and re-taking college entrance exams, people start working between ages 25 and 28. Early retirement shortens the saving period by about 10 years compared to abroad. Therefore, you should extend your working period and sufficiently build your human capital. A more powerful retirement preparation is dual income, as pensions double. This is called 'pension dual income.' Since two people earn, the National Pension, retirement pension, and pension savings come in two shares, enabling pension dual income.

What should the 2030 generation consider when investing long-term?

With the introduction of default options, only qualified products that have passed strict reviews by the Ministry of Employment and Labor are likely to be traded. Young people should choose target-date funds (TDFs) or mixed products with a high investment ratio. Initially, selecting a product with a high investment ratio and then choosing a TDF that lowers risky asset ratios over a lifetime is the simplest approach. For those in their 20s and 30s, it is best to select TDFs with a stock ratio of about 70-80%.

What kind of products should one choose for pension savings funds or IRPs?

Retirement pensions are managed by the company through default options, but IRPs must be managed thoroughly by the individual. Especially since IRPs are a means to receive severance pay when changing jobs, careful management is necessary. For the 2030 generation, it is definitely better to have a high proportion of investment and risky assets in IRPs. The best funds or ETFs are those tracking comprehensive indices. Nowadays, REITs are like owning real estate, so they are also good. Next are bonds. For the 2030 generation, a composition of 50% stocks, 30% REITs, and 20% bonds is appropriate.

Is rebalancing of investment assets necessary for IRPs or pension funds?

If you put in a lump sum, it is good to readjust assets, but for installment investments, it is recommended to steadily buy funds or REITs as money comes in. Our assets can be divided into deposits and capital; capital includes stocks, real estate, and REITs. The biggest difference between deposits and capital is asset value after 50 years. Deposits remain principal after 50 years, but capital can grow far beyond expectations over time. Try steadily accumulating capital over 30 years. When you reach your 50s, you can adjust to reduce risk.

With the recent continued market downturn, it seems the 2030 generation who invested in stocks might be very disappointed with their capital.

It is disappointing. But those who should be more disappointed are people in their 60s. They invested lump sums and suffered large losses, so their disappointment is greater. This is why TDFs reduce stock ratios as one ages. Investing a lifetime’s savings and seeing a drop of over 50% would be a nightmare for retail investors. People in their 20s will save much more in the future than they have so far. Buying when asset prices are low is good. Since prices were high and have only fallen through adjustments, this should be seen as an opportunity. Recently, there may be some short-term losses, but long-term gains are possible. Those who invested lump sums in virtual assets may not have recovered losses yet, but young investors who fail still have chances to recover. So I want to encourage them. You will earn much more in the future than you have so far. In boxing, you cannot hit your opponent without getting hit at least once.

Kim Kyung-rok, Advisor at Mirae Asset Global Investments. / Photo by Hyunmin Kim kimhyun81@

With recent weakened investment sentiment, even if default options are introduced, many might choose principal-guaranteed products. What do you think?

Surveys of retirement pension subscribers show that when the market is bad, they choose principal-guaranteed products, and even when the market improves, they do not switch to higher investment ratio products. The same applies to those who chose high investment ratio products when the market was good. This means initial subscription is heavily influenced by market conditions. Therefore, the current poor market is a good time to subscribe to retirement pensions. The worst time is when the market is overheated and people boast about 50% returns over two years. Default options are set through labor-management agreements, so individuals don’t have much to worry about. What matters is choosing products from asset management companies with a certain scale. Hence, individual choice is important. Individuals must decide between TDFs and deposits, but most tend to choose deposits because they believe pensions should be safe. However, deposits were a means of asset growth in the past high-interest era. Now, deposits are liquidity, and asset growth comes from capital. You must own capital.

You mentioned stocks and real estate as representative capital investments. Among young people, 'Yeongkkeul' (borrowing to the max) real estate investment and installment stock purchases are popular. What is your view?

Owning a home should be a priority. For those living alone, real estate ownership may not matter much, but for families or those with children, it is essential. Housing can later be converted into income through reverse mortgages, so buying a home is necessary. However, the current timing is not good. Bond prices and stock markets have sharply declined, but real estate prices have not yet dropped significantly. With rising interest rates, housing loan interest costs may exceed expected returns, so now is not the time to buy a home. Especially, areas on the outskirts of Gyeonggi Province are riskier than central Seoul. From past experience managing bonds, when bond prices rise, even low credit rating bonds rise sharply but fall first when the market turns bad. The same applies to all assets. When luxury housing is scarce, large officetel prices rise sharply but will fall once supply-demand balances. This will first appear this year and next in Gyeonggi outskirts.

Also, I do not recommend buying specific stocks through installment investments. Buying an S&P 500 ETF is much better. Warren Buffett’s advice to his wife was '90% S&P 500 and 10% bonds.' Investing in individual stocks means entrusting your life to one company, which is not advisable. The S&P 500 selects 500 good U.S. companies, so it diversifies your life investment.

How do installment stock investments compare to real estate investments?

Expected returns are similar. REITs in the U.S. and Korea have comparable expected returns. Even if you don’t borrow to buy stocks, purchasing stocks itself creates leverage. The same applies to real estate. Expected returns are similar whether you borrow or not, but if you don’t buy a house and accumulate stocks, you tend to consume more. Buying a home involves borrowing, which must be repaid, creating a 'forced savings' effect. While some, like John Lee (CEO of Meritz Asset Management), exercise self-control to buy stocks whenever money comes in, such cases are rare. Therefore, I recommend buying a home. However, for pension accounts, a high stock ratio is necessary when young.

What concerns do you have regarding the default option being introduced domestically?

Default options allow individuals to choose products with less short-term price volatility. When stock prices fall, people choose principal-guaranteed products. However, the state’s role is to encourage long-term asset growth by incentivizing selection of products that increase assets over the long term. Leaving all choices to individuals after providing everything is shifting the state’s responsibility.