"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 Stra

Many people set a goal of accumulating 1 billion won for their retirement, but financial experts advise that rather than fixating on amassing a large sum, retirees should first design a structure that ensures a steady monthly income to cover living expenses after retirement. This can be achieved by supplementing the cash flow generated from the National Pension and retirement benefits with individual pension plans and managing these funds over the long term to diversify sources of retirement income. In particular, those in their 40s, who are generally at their peak in terms of career activity and income, can take advantage of the tax benefits of pension accounts and aim for the long-term compounding effect.

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Sohyun Park, Director at Shin Young Securities, recently appeared on the YouTube channel ‘Jisik Hansang,’ explaining retirement strategies for people in their 40s and 50s, stating, “The key is not simply accumulating 1 billion won, but designing a structure that can yield 1 billion won.”

Work Backwards from 3 Million Won a Month, Not 1 Billion Won

The method recommended by Director Park is to start by working backwards from the monthly expenses needed after retirement. For instance, if a couple estimates their monthly living expenses to be 3 million won, instead of viewing this as a single large sum, they can plan to receive 1 million won each from the National Pension, retirement pension, and individual pension plans, respectively. This is the so-called ‘three-tier pension’ structure, where the National Pension forms the first tier, the retirement pension the second tier, and private pensions such as pension savings plans and individual retirement pension (IRP) accounts form the third tier.

Director Park emphasizes that, especially for those in their 40s, consistently contributing to pension accounts to maximize tax benefits is crucial. Using the example of contributing a total of 9 million won per year to both IRP and pension savings, she suggested that minimizing unnecessary variable spending and accumulating funds in pension accounts over the long term maximizes results.

20-Year Contributions From Your 40s ... The Power of an 180 Million Won Principal

If you contribute 9 million won a year from age 40 to 60, the principal you accumulate totals 180 million won. Adding investment returns can significantly increase this asset. In Park’s simulation, assuming an average annual return of 3%, the fund would reach approximately 246.23 million won by age 60; at 5%, about 308.28 million won; and at 7%, approximately 390.69 million won.

Assuming the retirement benefits start being withdrawn at age 65, the estimated monthly payouts would be approximately 1.59 million won, 2.61 million won, and 4.29 million won, respectively, for the three scenarios. However, these are purely simulation results based on assumed returns. Actual pension payouts will vary depending on contribution period, actual performance, fees, and the specific method of withdrawals.

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

The key takeaway is that long-term, steady contributions are more important than chasing high returns. Park’s advice is that people in their 40s, who typically have higher incomes than those in their 20s or 30s, are in the perfect position to start preparing for retirement in earnest.

Not Too Late in Your 50s ... ‘Contribute Later, Withdraw Later’

Even those already in their 50s should not give up on preparing for retirement, according to Park. Deferring the start of withdrawals from retirement and individual pensions can further extend both the accumulation and management periods. The National Pension also offers a "deferred retirement" system, allowing recipients to postpone their pension start date.

Park explained that for every year the National Pension withdrawal is postponed, the pension payout increases by 7.2% annually. Deferring for the maximum of five years can result in a total increase of about 36%. However, when considering deferred retirement, an individual’s health status, alternative income sources, assets, and life expectancy should all be taken into account.

First, Check ‘My Pension’ ... Don’t Overlook Your Retirement Pension

The first step in preparing for retirement is to check the size of the pension benefits already secured. Using the inquiry services provided by Korea’s Financial Supervisory Service, individuals can estimate their expected payouts from the National Pension, retirement pension, and individual pension products, and then calculate any shortfall.

For example, if your expected combined payments from the National Pension and retirement pension totals 2 million won per month, you can plan to cover the remaining 1 million won with individual pension products to meet your targeted living expenses. After allocating funds to pension accounts, it’s essential to consider appropriate investment vehicles such as exchange-traded funds (ETFs), along with management fees.

For retirement pensions, it is important to understand the characteristics of both defined benefit (DB) and defined contribution (DC) plans. According to Park, since the payout of a DB plan is linked to salary, it may be wiser not to switch to a DC plan during periods of promotions or rising salaries.

Conversely, if salary increases are tapering or if you enter the wage peak system, it could be appropriate to switch to a DC plan. Because DC plan participants must manage their own contributions, a good understanding of financial products is necessary. If one lacks confidence in investment management, using principal-protected products is a safe alternative.

Asset Management in Your 50s: Bonds Are Not Always 'Completely Safe'

As retirement approaches, it becomes increasingly important to reduce portfolio volatility. Park suggested that those in their 40s and 50s might consider allocating 60% to safer assets and bonds, and 40% to risk assets such as stocks and gold. However, the actual balance should vary depending on retirement timing, other sources of income, total assets, and individual investment preferences.

Image to aid in understanding the article. Getty Images Bank

However, bonds are not always inherently safe. Long-term bonds can decline in value if interest rates rise, and corporate bonds carry the issuer’s credit risk. The longer the maturity, the more sensitive a bond is to changes in interest rates and inflation, so it’s important to align your investment horizon with the maturity of your chosen bonds.

Don’t Invest Lump Sums All at Once ... Be Even More Cautious With Leverage

It’s advisable to avoid investing a large sum all at once. Because it is nearly impossible to predict market bottoms with accuracy, dividing investments over time can help reduce the risk of concentrating funds at an inopportune moment.

In particular, retirees should avoid leveraged investments that use loans or credit. For example, if you invest 20 million won with only 10 million won of your own money and 10 million won borrowed, and the investment drops by 30%, your assets decrease by 6 million won, but the borrowed 10 million won still needs to be repaid in full.

Park emphasized that the core of retirement planning is not building wealth through one-time, large investments, but rather creating a stable cash flow through consistent, long-term contributions and diversification. Ultimately, rather than chasing a single lump sum of 1 billion won, setting the required amount for monthly living expenses after retirement and appropriately distributing this amount among the National Pension, retirement pension, and individual pension plans should serve as the starting point for retirement planning.

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