[Insight & Opinion] The Need for a Korean-Style Asset Withdrawal Strategy

One-third of the Korean population is the so-called baby boom generation. Combining the numbers of the first and second baby boom generations accounts for 34% (16.5 million people) of the total population, forming a massive demographic group. Among them, the earlier generation has already entered retirement, and the later generation is gradually joining their ranks. The retirement of the baby boom generation exerts comprehensive influence on government finances, employment structures, and welfare policies, and this impact will intensify in the future. Especially on a personal level, there will be dramatic changes in asset management methods.

As time passes, the influence of income such as earned income or business income will diminish, and the value and utilization of held assets will become more important. Some individuals will continue to earn high income even after retirement, but such retirees will not be many. The challenges of asset management after retirement are twofold. First, assets must grow in line with increased life expectancy. Without asset growth and only withdrawing money, the depletion point will come sooner. This is retirement bankruptcy. The other challenge is to continuously withdraw from those assets to cover living expenses. In other words, one must simultaneously perform the dual tasks of growing assets while making withdrawals.

Most discussions so far have focused primarily on asset growth. In other words, the emphasis has been on earning money. However, at some point, cash must be withdrawn from held assets to cover living expenses. Still, one cannot just withdraw money recklessly from existing assets. Withdrawal strategies are necessary. The most famous withdrawal strategy is the “4% rule.” Proposed by American financial planner William Bengen, this method suggests withdrawing 4% of assets in the first year of retirement, then adjusting withdrawals annually by the inflation rate (4% + inflation rate), allowing funds to last for 30 years without depletion. This assumes a portfolio invested half in U.S. stocks and half in bonds. Although it seems very simple, the significance of the 4% rule lies in considering two variables: fund depletion and inflation. In developed countries, various withdrawal strategies have been discussed following the 4% rule, and Nobel laureates like William Sharpe have also researched this topic.

In Korea, discussions on withdrawal strategies have not even reached the beginner stage. Despite the dramatic demographic changes represented by the retirement of the baby boom generation, which has made withdrawal strategies an important issue in asset management, there is no discussion on this matter. Since pension systems and cultures differ slightly by country, there is a need to actively discuss Korea-specific withdrawal strategies.

Awareness of risk management must also broaden further. Until now, the focus has mainly been on investment-related risks, but now risk management strategies must include sequence risk and longevity risk. Sequence risk refers to the significant impact caused by the order of returns, especially as the first 10 years of post-retirement portfolio performance play a decisive role in securing future retirement living expenses.

In the short term, there is a need to improve awareness and education on comprehensive risk management strategies that consider withdrawal strategies, longevity risk, and sequence risk. In the mid to long term, infrastructure development is required to establish personalized withdrawal strategies using various digital tools such as applications (apps). It is time to accept that we have moved beyond simply accumulating money to an era where we must also consider how to spend it.

Sang-geon Lee, Head of Mirae Asset Investment and Pension Center