"Think of pensions as high-quality commercial properties free from vacancy stress or management hassles. It’s like buying one brick of a building that will steadily pay you rent every month."
Rattebeaver (Lim Eun-jeong), the author of 'Pension User Manual,' said this, advising against viewing retirement preparation as difficult. In the past, many people thought of purchasing commercial properties or officetels to receive monthly rent as a means to secure cash flow after retirement. However, real estate can lead to interrupted rent if vacancies occur and requires continuous management, including dealing with tenants, repairs, and complaints.
On the other hand, according to Rattebeaver, pensions allow you to easily create cash flow after retirement by steadily accumulating funds while earning income and implementing a well-planned withdrawal strategy. He said, "If you think of buying high-quality commercial properties on long-term installment plans and start laying one brick at a time from now on, the burden of preparing for retirement can be reduced."
He worked in the financial sector for 10 years, managing assets for wealthy individuals, and also obtained a master’s degree in real estate and a certified real estate agent license. The reason he focused on pensions after experiencing both finance and real estate fields is his judgment that 'asset size' and 'cash flow' are separate issues.
Even if the value of a single house is extremely high, it does not automatically generate cash flow while you live in it. While real estate can be effective for growing assets, it means that separate preparation is needed after retirement to create money that can be withdrawn monthly.
The foundation of post-retirement cash flow is the 'three-layer pension' structure. The first layer consists of public pensions such as National Pension and Public Official Pension; the second layer includes retirement pensions; and the third layer comprises personal pensions like pension savings accounts.
He explains, "The first layer, National Pension, covers daily meal costs; the second layer, retirement pension, covers medical expenses to maintain health; and the third layer, personal pension, covers money for travel and hobbies." He advised checking the expected National Pension payout first, then reviewing whether the retirement pension is being managed properly, and finally filling any shortfall in retirement living expenses with personal pensions.
National Pension differs from other financial assets because payments are adjusted for inflation and can be received for life. According to him, National Pension is the most reliable backbone of retirement, so much so that it is recommended for voluntary enrollment even for full-time housewives with no income.
The key with retirement pensions is not to neglect them. In the case of DC-type plans where participants bear investment responsibility, leaving funds solely in principal-guaranteed products over a long period may result in returns failing to keep up with inflation, so active management using ETFs and other instruments is necessary.
Personal pensions serve as the area to fill any shortfall after accounting for the first and second layers of pensions. He initially advised utilizing pension savings funds, which offer relatively flexible investment and contribution options. Pension savings funds allow risk assets to be allocated up to 100%, whereas IRP (Individual Retirement Pension) can only hold up to 70% in risk assets.
If tax deduction limits are actively utilized, it is possible to contribute 6 million won annually to pension savings and 3 million won to IRP, totaling 9 million won. However, he emphasized that one should not force funds into these accounts based solely on tax benefits but instead consider their own taxable income and future funding needs.
If tying up funds for a long period is burdensome, another option is to use the tax-advantaged ISA (Individual Comprehensive Asset Management Account) as a 'pension practice account.' This involves gaining experience with ETF investments through the ISA and then transferring the matured funds into pension accounts to connect them with retirement savings.
Diversification is essential for portfolios. Rattebeaver recommended setting a basic framework of 60% stocks and 40% bonds, with some adjustments based on individual risk tolerance. If monthly contributions are small, start with two types: an ETF tracking the U.S. S&P 500 index and a 10-year U.S. Treasury bond ETF; as investment funds grow, add ETFs tracking indices like NASDAQ-100 to enhance growth potential.
Strategies for withdrawing pensions are just as important as saving them. The basic strategy is to receive pension payments over an extended period rather than all at once, considering the payout amounts and tax rules for personal pensions such as pension savings accounts and IRP. Since low-tax rates apply when annual pension income is 15 million won or less, he explained that it is more advantageous for couples to prepare assets under each spouse’s name rather than concentrating them in one person’s account.
※This article was written based on a video uploaded to the YouTube channel 'Single Fire,' which provides investment information aimed at achieving economic freedom for people in their 20s and 30s. For more detailed insights explained by Rattebeaver, please refer to the video. The second part of the series is scheduled to be released on August 18.
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