[Insight & Opinion] Preparing for Retirement Like a Disaster Response Drill

As I enter my mid-50s, it is not uncommon to see people around me retiring one by one. Retirement, along with events such as the loss of a spouse or divorce, is one of the most dramatic changes in life. Like any major change, the impact of retirement on life is comprehensive. It affects not only daily routines but also psychological states. Among these, one of the biggest shocks is likely the economic change. The cash flow in the form of salary either stops or sharply decreases. If retirement happens suddenly, the impact of reduced cash flow will be even greater. This creates an income cliff. In retirement planning, the period from retirement until the National Pension begins is likened to a crevasse?a narrow and long gap formed by a glacier splitting?called the "income crevasse."

It would be ideal if the income crevasse were as narrow as the original meaning of the word suggests, but in reality, this is not the case. There are still not many people who work at their main job until age 60 and receive the National Pension at 65. Even those in a slightly better situation who work until 60 must endure income reductions due to wage peak systems. For a period ranging from as short as five years to as long as ten years, they must withstand a break or sharp decline in cash flow. Realistically, very few people can replace the income cliff period with income from another job or assets equivalent to their main job income. This means that, to varying degrees, everyone faces some form of income cliff.

There are limited financial ways to compensate for this. One can find another job, utilize the pensions they are enrolled in, convert held assets into cash-flow-generating assets, or create cash flow from existing assets. Another possible method is receiving assets through inheritance or gifts. While this would be ideal, most people will likely find it difficult to generate the desired level of cash flow using their assets.

It goes without saying that preparations must be made to generate cash flow in various forms to prepare for the income crevasse. One suggestion I want to make is to recognize the income cliff caused by retirement as a life disaster event and conduct response training. Much like civil defense drills prepared for disasters such as fires.

It is worth referring to the concept of "financial firefighting drills" proposed by Democratic Senator Elizabeth Warren, a former bankruptcy law professor, in her book "The Two-Income Trap." Originally, this concept was proposed for the economic lives of dual-income couples, but in reality, it is more suitable for retirees. The question, "If you retired now, how would you respond to the income cliff period?" If someone cannot answer this properly, they are likely to face difficulties when confronted with sudden retirement.

Surprisingly, there are quite a few financial tasks to complete before retirement. First, fixed costs such as mortgage loans and insurance premiums must be organized, as these are continuous cash outflows. It is also necessary to consider how much living expenses can be reduced. Since abruptly cutting living expenses involves hardship, conducting the aforementioned financial firefighting drills for about six months is also a good method.

Numerous studies have already shown that the first ten years after retirement largely determine the overall quality of old age life. While there is no need to worry or fear excessively, it might not be a bad idea to conduct prior training on how to handle these ten years.

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