According to Fidelity Investments, Americans aged 65 and older who retire in 2024 will need to spend a total of $165,000 (approximately 241 million won) on healthcare and medical expenses until their end of life. As the era of living to 100 increases life expectancy, the burden of medical expenses has likewise grown. Compared to 2002, the load of healthcare expenditures has more than doubled. Fidelity noted, "People are living longer, and the inflation rate in healthcare continues to outpace the average inflation rate," advising to prepare for unexpected increases in medical costs upon retirement.
"A silver tsunami is coming." The Wall Street Journal (WSJ) reported that more Americans than ever will turn 65 in 2025. The baby boom generation (defined in the U.S. as those born from 1946 to 1964) is retiring, with 4.1 million people reaching 65 each year from 2024 to 2027. The retirement of this group also impacts industries. According to WSJ, the total amount of individual pensions in the U.S. is expected to surge from $300 billion (approximately 438 trillion won) in 2022 to $520 billion (approximately 760 trillion won) this year.
This is a case highlighting the growing importance of asset management in old age. As expenditures exceed income during retirement, the significance of asset management increases. With rising life expectancy, the burden of medical costs grows, leading to significant withdrawals from assets. Some retirees face the risk of bankruptcy, questioning, "Will I outlive my money?" There is a "income gap" until pensions are received after retirement, and inflation and rising living costs put pressure on budgets. Meanwhile, in South Korea, the baby boom generation (defined domestically as those born from 1955 to 1964) is also retiring. This group has amassed the highest level of wealth in history, but now faces retirement amid low growth, an aging population, and low interest rates. "Economy Chosun" analyzed ways for the silver generation to manage their retirement assets in terms of stocks, real estate, taxes, and healthcare.
"Income assets that lay golden eggs" are gaining attention
The starting point of retirement asset management is planning how much of the saved money to withdraw each year. The most commonly used rule globally is the "4% rule." Proposed by American financial manager William Bengen in 1994, the 4% rule is based on research indicating retirees who withdraw 4% of their held assets each year have a high probability of not exhausting their assets over approximately 30 years. For example, if one has 1 billion won, they would withdraw 40 million won in the first year and then adjust the withdrawal for inflation in the second year. If the inflation rate in the first year is 3%, then 41.2 million won would be withdrawn in the second year.
However, the longevity risk and lowered investment returns in a slow-growth phase make it difficult to apply the 4% rule. Suzy Orman, an asset management consultant at CNBC, suggests starting with 3%, arguing that the 4% rule is too aggressive and risky in today's environment. This caution is due to inflation eroding purchasing power and people living longer than ever. Experts advise that a realistic withdrawal rate for the first year is between 3% and 3.5%.
The core of retirement asset management is generating stable cash flow, with pensions being representative. For those not nearing retirement, stacking a "three-tier pension" is beneficial. This involves placing government-guaranteed public pensions in the first layer, retirement pensions in the second layer, and individual pensions in the third layer.
In the low interest rate era, relying on bank interest alone to keep up with inflation is challenging, making investments essential. Michael Finke, a professor of asset management at the University of Financial Services in the United States, advises, "Secure the minimum amount needed to maintain a basic lifestyle reliably from low-risk investment products or pensions, and manage the remaining assets by accepting an appropriate level of investment risk."
Investments specialized in generating cash flow are income assets. They focus on regular income such as dividends and interest rather than capital gains. While there may be price fluctuations, the regular cash payments classify them as medium-risk, medium-return products. High dividend stocks, dividend exchange-traded funds (ETFs), and real estate investment trusts (REITs) are examples of income assets. In fact, the domestic asset management industry is placing emphasis on target income funds (TIFs) that aim to provide investors with stable income. TIFs invest in dividend stocks, government bonds, REITs, etc., based on market conditions. Younger and middle-aged individuals can prepare for retirement early by joining target date funds (TDFs). TDFs set a target retirement date for investors and automatically adjust the portfolio according to the life cycle. As the retirement date approaches, the proportion of risky assets is gradually reduced. According to FnGuide, the TDF assets in South Korea surged from 2.8145 trillion won in early 2020 to 9.1152 trillion won in early 2024.
When cash is short, housing pensions are an alternative
In South Korea, the silver generation has a particularly high proportion of real estate within their total assets. According to Statistics Korea, the proportion of real estate in the assets of households aged 60 and older was 77.7%. Seniors who own a home but face a shortfall in living expenses can utilize housing pensions from the Korea Housing Finance Corporation to create cash flow. This product allows individuals to receive a lifelong pension in exchange for using their home as collateral. Even if the pension amount exceeds the home's value, payments are made reliably until death, and if less than the home's value is received, the balance is bequeathed to heirs. For example, a 70-year-old buying into a housing pension with a 300 million won home can receive around 892,000 won per month. If home values are rising, it may be beneficial to hold the property and aim for capital gains, while anticipating a drop in home prices makes housing pensions much more advantageous.
Investing in income-generating real estate that earns rental income is another method. KB Real Estate advises that retirees aged 55 or older should invest in stable rental properties rather than focusing on capital gains. Since retirees need to live off the cash flow generated by rental properties, emphasizing rental yield is more important than aiming for appreciation in asset value. KB Real Estate points out that easy-to-manage income-generating properties include officetels, section offices, and one-room apartments.
Saving is just as important as earning
In addition to increasing income through investments, attention must also be paid to reducing fixed costs. The first step is reducing taxes. By utilizing pension accounts such as pension savings or individual retirement pension (IRP), individuals can save up to 9 million won annually, receiving tax credits of 13.2% (or 16.5% for total salary below 55 million won). Additionally, if not subject to comprehensive taxation on financial income, individuals can receive tax benefits of up to 2 million won through personal comprehensive asset management accounts (ISA). Gift tax applies to assets acquired without consideration for minor children up to 20 million won for a period of 10 years.
If pension payments are received as a lump sum instead of as an annuity, the tax burden can be reduced by about 30% to 40%.
To save on medical expenses that threaten retirement assets, maintaining health is crucial. By keeping healthy, associated costs like care expenses in nursing facilities or for caregivers also decrease. "Maintaining muscle is the best financial technology." As aging progresses, muscle mass declines, and loss of muscle can lead to decreased immunity, increasing the risk of complications and falls. Park Hyun-young, the director of the National Health Research Institute, noted, "Groups that consistently performed resistance exercises (strength training) faced up to a 45% reduced risk of muscle loss compared to those who did not," adding that aerobic activities like walking and swimming are effective in preventing chronic diseases such as cardiovascular disease and diabetes.
Plus Point
"Only 8.4% reported they are well-prepared for retirement."
According to the household finance and welfare survey released by Statistics Korea at the end of last year, the minimum monthly living expenses for a household head after retirement were calculated to be 2.4 million won for a household of two. Adequate living expenses were set at 3.36 million won. This marked an increase of approximately 400,000 won and 450,000 won, respectively, compared to five years ago. The burden of living expenses continues to grow every year after retirement. Furthermore, while household heads anticipated their retirement age to be 68.3 years, the actual age at retirement was 62.8 years, about five years earlier than expected. Calculations indicate that approximately 1.5 billion won is needed for a household of two to maintain adequate living expenses from retirement at the age of 62.8 up to 100. The survey revealed that 52.5% of household heads responded that they are "not well-prepared for retirement," while only 8.4% reported they are "well-prepared for retirement."