Retirement : Facing to the First Period, No steady monthly income before public pension

 

My spouse and I decided to retire much earlier than the typical retirement age in Korea. Retirement may not necessarily mean the end of work for financial reasons, but generally, we consider retirement and quitting work to be the same thing. Before making the decision to retire, we tried various methods to confirm if this was the right choice for us. “Should we have done at that moment?” The first thing we did was to roughly calculate whether it would be possible to sustain our livelihoods without work using our current assets. We also took some time to validate this rough calculation after retiring. Most retirement-related books focus on financial aspects, such as how much money is needed to retire. Some even describe in detail how to budget monthly living expenses after retirement and how to save money in a whole book. Reading such books made us feel depressed about remaining lifetime. While searching for information, we came across the ARPS (Accredited Retirement Planning Specialist) exam, which is hosted by the nonprofit organization, KFPA (Korea Financial Planning Association) and tests one's expertise in retirement planning. I set a test date and studied related topics, thinking that studying with a goal in mind would allow me to thoroughly review our retirement plan. It became an opportunity for me to find out what other factors I should consider besides financial planning and what I might be overlooking.

 

The exam paper that you received had a passage in the header that struck a chord with you. It said that there are many things that we fail to appreciate their importance until they are right in front of us. These are things that are incredibly important, but our psychological bias leads us to underestimate them when they are far away in time. When we are healthy, we often neglect our health management thinking that we will always be healthy, and only regret it when we get sick. Similarly, when we are young and making money, we tend to put off thinking about retirement issues because it seems far off in the future, but as retirement age draws near, we become deeply concerned. Ultimately, economic reasons may force us to continue working even if we want to retire. Both health and retirement life are deeply related to personal habits and require long-term preparation and management. They cannot be solved overnight. I hope that the information I have gathered can be helpful to those who are planning their retirement or trying to decide on a retirement age.

 

Retirement, Stage, Expense, Source of Income, Pension @HoneyJar

 

I have drawn a chart of post-retirement funding and funding methods by time periods, dividing them into no steady monthly income periods, pension receipt periods, and periods of living alone. The national pension, which is a public pension, has a different age of receipt depending on the year of birth. Currently, a reform plan is being pursued for the national pension in the direction of "paying more and receiving more," but it is not clear when someone will put a bell on the cat's neck. The age of receipt for the old-age pension, which was confirmed through the first pension reform in 1998, is 63 for those born between 1961 and 1964, 64 for those born between 1965 and 1968, and 65 for those born in 1969 and later, according to the "Adjustment of Old-Age Pension Payment Age (Article 8 of Supplementary Provision No. 8541)" Therefore, a typical Korean worker has a gap in work income ranging from 5 years to more than 10 years until they receive a public pension after retirement. This period is not only an economic turning point but also a significant milestone in an individual's life in many aspects. After retiring early, our couple is currently going through their first period of no steady monthly income. The period of no steady monthly income has various characteristics, which can be summarized as follows.
 

1. Might be a long period without monthly income

If you have not yet reached the age to receive public pension and have no other income sources such as financial assets, private pensions, or rental income, how can you cope with the period? The national pension (old-age pension), which is considered the main retirement preparation tool for Korean employees, can only be received when you reach 65 years of age, and there is a big movement to even raise it to 67 years of age. As a result, there may be a long period of no steady monthly income until you receive the national pension after retirement. If you cannot withstand this period of no steady monthly income, you need to extend your work period or create cash flow to cover your expenses through asset rebalancing (a process of adjusting the weight of assets in a portfolio to maximize future returns by modifying the customer's portfolio in response to temporary increases in operating funds or changes in market conditions. This refers to the process of adjusting the weight of assets in a portfolio. It refers to the process of adjusting the weight of assets in a portfolio to create cash flow that can be withdrawn immediately). I think it is not an exaggeration to say that your retirement time depends on how you handle this no steady monthly income period. One of my juniors showed interest in my early retirement life and asked me various questions, but then she said resignedly, "I won't be able to make ends meet even if I miss one month's salary." If that's the case, what my junior needs to do now is to work hard, receive a pension, save, invest, and reduce expenses.

 

2. Income has decreased but expenses remain the same

Before retirement, we often find ourselves reaching for our wallets in both social and domestic situations. The habit of increased spending doesn't change overnight after retirement. It's still a time of child-related expenses, as many people retire before their children finish their education or become financially independent. Continuing to spend on child-related expenses out of a desire to keep up with others could put your valuable retirement funds at risk. Additionally, it's a time when there's a burden of supporting elderly parents. If one generation is considered to be 30 years, then the parents of a 55-65-year-old child are likely to be 85 years or older. With life expectancy increasing, it's still common for parents to be alive. We're now in an era of "elderly parent care" where we have to support our aging parents while we ourselves are aging. According to Statistics Korea in 2020, South Korea has the highest elderly poverty rate among OECD member countries at 38.9%. It's important to remember that expenses related to parents are a variable that's hard to reduce even during no steady monthly income. It's still a time of expenses, and it can be difficult to reduce expenses that aren't actively managed, and the decreasing available funds could lead to increased depression. Therefore, it's necessary to organize all expenses by category for recent years, divide them into fixed and variable expenses, and then identify and reduce any expenses that can be reduced every month. This is a time for organization, planning, and action.
 

3. Time to adjust assets and liabilities

It is now the time to actively adjust assets and liabilities as the method of asset management changes from saving to withdrawal. While accumulating savings used to be the primary way of managing assets during one's working years, now the main method is to leave the savings and use them for living expenses. The most important thing when planning and implementing a withdrawal plan is to ensure that there is enough retirement savings until the end of one's life. It is also a time to pay attention to the assets and cash flow more than ever before. According to a report by Yonhap News Agency in March 2022, the average assets held by households in their 50s were the highest at 640 million won, compared to other age groups. However, their debt was also 108 million won. Some may think that there is no problem since they have a lot of assets despite the debt, but it is important to note that most of their assets are physical assets such as their residential property. It may be difficult to pay off debt with the lack of cash flow liquidity and they may have to bear financial costs related to debt. The real estate market, which had been thriving in recent years, has faced a downturn since 2022, and the loan-to-value ratio of residential property has decreased, increasing the pressure of debt repayment. The financial costs of debt are also increasing due to ongoing interest rate hikes, and the biggest problem is the burden of principal and interest repayments. In a situation where there is no other income besides retirement pensions, it will be a significant burden to repay the loan principal and interest from living expenses. Financial costs in living expenses are not controllable expenses unless one pays off their debts.

 

4. A big transition from company-centered to homely

Fourthly, this period is a time when, for working people, they transit from being company-centered individuals to home-centered individuals. In Korea, the family structure of those in their 50s often follows the model of a "salaryman husband and full-time homemaker wife," in which the husband works outside the home while the wife is responsible for managing the household and raising children. However, this structure is disrupted when the husband retires. Even for dual-income couples, the change is significant in terms of the family dynamic. Many people focused solely on their jobs during their working years, and as a result, they may not know how to communicate well with their family members. It is also not easy to find friends to spend time with after retirement, as their social relationships were primarily formed around their work. The significance of titles and business cards gradually fades after retirement. When the husband starts spending more time in what was traditionally the wife's domain, there may be tension as he begins to comment on things he hadn't paid attention to before, and the wife may feel that he is interfering too much. However, as retirement is a period when couples spend the most time together, they need to adjust to each other's interests and find ways to share responsibilities, such as household chores. It should be the starting point for spending time together.

 

From a financial standpoint, it is necessary to be prepared for a period of no steady income until the pension payment period. After retirement, many people are anxious to generate cash flow and invest their lump sum, such as retirement pay, into starting a business. Those who shift to self-employment after retirement often start businesses in fiercely competitive industries such as restaurants or fried chicken eatery. According to statistics, 60% of these self-employed individuals close their businesses within a year, less than 20% maintain their businesses after two years, and the remaining fail to sustain their businesses. Additionally, investing retirement funds in real estate speculation, stocks, Cryptocurrency, etc., may lead to falling from the middle class to poverty during the transition from working age to old age due to failure. Therefore, to avoid anxiety during this period, it is necessary to design a plan before retirement that ensures at least a minimum amount of living expenses during the period of no steady income. Good options from a cash flow perspective are using retirement pensions, pension savings, and home pensions. All three can be received as a pension after the age of 55. Private pensions are often designed to allow pension utilization after the age of 60. How we prepare for the period before entering full-fledged retirement before the age of 65 will also affect our enjoyable retirement life.
 
I hope we don't spend this golden period, where we are still healthy and have many things we want to try and enjoy, in a rush due to financial reasons. Looking back, I hope we don't have any regrets such as "I could have done and enjoyed more back then..." My mother, who turned 60 last year, said, "I think the 50s were the best time of my life."

 

Source: Korean Association of Financial Planners, "Retirement Planning Experts," Alphago Co., Ltd., 2018.