[Senior Trend] Money Talk③ The Winning Rules of Pension

Life is unpredictable. Our lives are always exposed to risks of accidents or incidents, big and small. The same goes for money. The process of accumulating and managing money is full of various ‘financial risks.’ There are always risks of interest rate or exchange rate fluctuations, inflation risk, bankruptcy, and liquidity risk. Beyond that, there are risks of longevity?living longer than expected?and endless child support. In that sense, it seems important to better understand money and have an appropriate attitude toward it. Kim Seungho, chairman of Snowfox Group, who built a global dining group from nothing to become one of the wealthiest, emphasizes the ‘power of steady income’ in his book The Nature of Money. Today, I want to talk about pensions, which can be a friend amid all these retirement risks.

The Life Cycle refers to the process of dividing the period from birth as a baby to becoming an adult and then an elderly person into certain stages. According to the equation for ‘life asset management,’ it becomes more important not to lose money as one ages. Therefore, senior retirement funds should be approached from the perspective of ‘asset management’ rather than ‘financial investment.’ Financial investment originally focuses on ‘increasing returns,’ taking risks, and making concentrated short-term investments to gain large returns. It is necessary to create a steady monthly cash flow without losing money. This is why pensions are essential in financial planning in the era of 100-year lifespans.

Pensions come in various forms and types. The most commonly thought of is the National Pension. It is a state pension that everyone can receive according to the qualifications designated by the government. There is much debate about when the National Pension will be depleted, but according to Article 3-2 of the National Pension Act, ‘The state shall establish and implement necessary policies to ensure that pension benefits under this Act are paid stably and continuously.’ Through pension reform, if the current ‘funded’ type changes to a ‘pay-as-you-go’ type like in Europe, pensions should not be avoided but actively considered.

Next is the retirement pension. It is a system where a certain amount is saved while working at a company or public institution and received as a lump sum or pension upon retirement. Its momentum is tremendous these days. Last year, retirement pensions reached the 350 trillion won era. Now, people are increasingly moving their pensions to places that manage them well, rather than just accumulating them like putting money in a safe. Therefore, competition among banks, securities firms, and insurance companies is fierce. Each financial institution strives to increase returns while maintaining stability. Overseas, investment destinations are already diversified to achieve performance, and sustainable ESG (Environmental, Social, Governance) indices are being sought.

Our senior generation has so far received retirement pensions as lump sums at a rate exceeding 95%. This was the exact opposite of the situation in the United States, due to low returns, taxes, and institutional issues. Although slow, changes have begun here as well. Some pension management companies support weekend pension studies, while others assign pension-specialized consultants or provide consultants. Some use robo-advisors to create customized ‘pension portfolios’ and adjust products according to market conditions over time. Products that were once composed conservatively in a lump sum are now diversified into high-risk, medium-risk, and low-risk products. Interestingly, the Ministry of Employment and Labor annually selects well-performing companies, which can be referenced. They evaluate pension asset size, performance, and capabilities; in 2023, the four were Mirae Asset Securities, Korea Investment & Securities, Hana Bank, and KB Insurance.

There is also the individual pension. It is a voluntary system where individuals save for pensions, classified into pension savings trusts, pension savings funds, and pension savings insurance depending on whether tax benefits are available during the payment period. Recently, many seniors who joined pension savings funds for tax savings have found them to be a boon, so it is necessary to carefully read management company reports and thoroughly evaluate accumulated past performance. Besides these three stages of retirement security, there are also private school pensions, government employee pensions, disability pensions, and survivor pensions.

Recently, housing pensions have attracted attention (if children oppose for inheritance reasons, ask for a fixed allowance). It is a pension system implemented by the Korea Housing Finance Corporation in the form of a reverse mortgage. By the end of last year, the number of subscribers exceeded 110,000. It is a guaranteed financial product where those aged 55 or older provide their already owned home as collateral to a financial institution and receive a fixed monthly amount like a pension. It is gaining popularity because owners can continue living in their homes while receiving monthly payments for life. For a general house worth 700 million won, at age 60, receiving a fixed amount with lifetime payments is about 1.43 million won per month. For an apartment worth 1.2 billion won, it is about 2.45 million won. According to the KB Financial Group Management Research Institute’s report on ‘Retirement Preparation Diagnosis and Residence Selection Conditions,’ the minimum monthly living expense in retirement is on average 2.51 million won. Considering the National Pension and existing savings, this is a considerable help.

The winning rule for pensions is quite simple. Regardless of the product chosen, start early, do not break it for the future, take full advantage of tax benefits, and manage it actively.

Lee Boram, CEO of Third Age