"Contributing 9 Million Won Annually…430,000 Won per Month Steadily from Age 65" …The Power of the “Three-Tier Pension”

Three-Tier Retirement Planning: National, Corporate, and Private Pensions
Starting in Your 40s with Annual Contributions of 9 Million Won: Utilizing IRP and Pension Savings
It's Not Too Late in Your 50s: Adjusting Pension Payout Timing as a Strategy

As retirement approaches, many people set a target of "1 billion won in retirement funds," but experts advise that it is more important to design a structure that generates the necessary monthly living expenses after retirement, rather than focusing solely on accumulating a large lump sum. The goal is to supplement insufficient cash flow by combining the National Pension, retirement pensions, and private pensions, and to manage these funds over the long term so that retirement income is diversified. This approach is particularly recommended for those in their 40s, when economic activity and income are relatively robust: by taking advantage of tax benefits for pension accounts, it is possible to maximize the effect of long-term accumulation.

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Soohyun Park, Director at Shin Young Securities, recently appeared on the YouTube channel "Knowledge Hansang," stating, "It’s not about accumulating 1 billion won, but rather about building a structure that can generate 1 billion won," as she explained how those in their 40s and 50s can prepare for retirement.

Reverse Calculation from 3 Million Won per Month, Not “1 Billion Won”

The method proposed by Director Park is to work backwards from the required living expenses after retirement. For example, if a couple needs 3 million won per month for living expenses in retirement, it is better to think of this as being fulfilled by three separate sources—1 million won each from the National Pension, a retirement pension, and a private pension—rather than pursuing it as a single lump sum. This is known as the "three-tier pension" structure: the National Pension forms the first layer, the retirement pension the second, and private pensions (such as pension savings and individual retirement pensions, or IRPs) the third.

Director Park emphasized that from one’s 40s onward, it is important to steadily accumulate assets by utilizing the tax benefits of pension accounts. She cited the example of contributing 9 million won per year through a combination of an IRP and a pension savings account, and suggested reducing unnecessary variable spending to allow for the long-term accumulation of assets in pension accounts.

20 Years of Accumulation from Your 40s: The Power of an 180 Million Won Principal

If you contribute 9 million won annually from age 40 to 60, your principal will total 180 million won. With investment returns added on, your assets can grow significantly. In Director Park’s simulations, assuming an average annual return of 3%, your assets at age 60 would be about 246.23 million won; at a 5% return, about 308.28 million won; and at a 7% return, about 390.69 million won.

If these amounts are withdrawn as a pension starting from age 65, the estimated monthly payments would be approximately 1.59 million won, 2.61 million won, or 4.29 million won, respectively. However, these are merely simulated outcomes based on assumed returns; actual pension amounts will vary depending on contribution period, investment returns, fees, and method of disbursement.

Sohyun Park, Director at Shin Young Securities. Screenshot from the YouTube channel 'Jisik Hansang' video.

The key is not to chase high returns, but rather to consistently accumulate assets over the long term. Director Park explained that since people in their 40s often have higher incomes than those in their 20s or 30s, this is the right time to get serious about preparing for retirement.

It's Not Too Late in Your 50s: “Later Contributions and Later Payouts”

According to Director Park, being in your 50s is no reason to give up on preparing for retirement. If you delay receiving your retirement and private pensions, you secure additional accumulation and management periods. For the National Pension specifically, you can use the deferred pension system by postponing the payout start date.

Director Park explained that for each year you defer receiving the National Pension, your annual pension increases by 7.2%. If you defer for the maximum five years, your total payout could increase by about 36%. However, she noted that when considering a deferred pension, you must take personal health, other income and assets, and life expectancy into account.

Check “My Pension” First…Retirement Pensions Matter Too

The first step in preparing for retirement is to check how much pension you already have. Use the pension inquiry services provided by the Financial Supervisory Service to determine your estimated payouts from the National Pension, retirement pensions, and private pensions, then calculate any shortfall.

For example, if your forecasted monthly National and retirement pensions total 2 million won, you need to make up the 1 million won shortfall with a private pension or similar sources. Once funds are in your pension accounts, you should consider which products to invest in, such as ETFs, and pay attention to fees.

You must also weigh the characteristics of DB (defined benefit) and DC (defined contribution) plans for your retirement pension. Director Park explained that since the benefit amount for DB plans depends on your salary level, it may be advantageous not to switch to DC during periods of promotion and rising income.

Conversely, if your salary growth slows or you enroll in a salary peak system, it might make sense to consider switching to a DC plan. Because employees must manage DC plan funds themselves, they need to understand financial products. If you lack confidence in your investment management abilities, you can consider using principal-guaranteed products.

Asset Management in Your 50s: Bonds Aren’t Always “Safe”

As retirement nears, it also becomes important to reduce asset volatility. Director Park suggested a portfolio for individuals in their 40s and 50s of allocating 60% to safe assets such as bonds, and 40% to riskier assets like stocks and gold. However, the exact portfolio should be tailored to your retirement age, other income sources, existing assets, and investment preferences.

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It is a misconception that bonds are always safe investments. Long-term bonds can fall in price as interest rates rise, and corporate bonds come with the credit risk of the issuing company. The longer the maturity, the more sensitive the bond price becomes to changes in interest rates and inflation, so it is important to match the timing of your cash needs with the maturity of your bonds.

Do Not Invest Large Sums All at Once; Be Even More Cautious with Leverage

Investing a large lump sum all at once should be avoided. Since it is nearly impossible to predict market bottoms, you should consider staggering your investments to avoid concentration risk at specific times.

In particular, you should never use leverage from loans or credit for your retirement funds. For example, if you invest 20 million won by combining 10 million won of your own money with a 10 million won loan and incur a 30% loss, your assets drop by 6 million won, but you still have to repay the full 10 million won loan principal.

Director Park emphasized that the core of retirement planning is not growing your money with a single large investment, but rather building cash flow through steady long-term accumulation and diversification of your investments. Ultimately, rather than setting the accumulation of “1 billion won” as your goal, you should start by determining the amount of monthly living expenses needed after retirement and filling this gap by dividing it between the National Pension, retirement pensions, and private pensions.

This content was produced with the assistance of AI translation services.