Seniors see the rules of retirement changeUntil the late 1990s, the retirement plan for most Koreans was simple. Riding on a vibrant economy that showed no signs of slowing down, interest rates on time deposits remained above the 10 percent range.
And those high interest rates meant that retirees could still make a generous income from the interest built on those accounts.
The real estate market also seemed ever-promising. At the time, for those who retired in their late 50s, the obvious answer was to deposit their severance pay or buy property to earn sizable profits a few years on.
But now, nearly 20 years after the Asian financial crisis hit in 1997, the workers who were once banking on that easy retirement plan will now need to find another alternative.
In fact, the current social and economic situation couldn’t be more different from 20 years ago, experts say.
“Those about to retire don’t even fully know the value of their assets, let alone have a retirement plan,” said Kim Jin-young, a director at Shinhan Bank’s future-planning center, which provides consulting on post-work investment plans.
Since the 1997 financial crisis, the Korean economy has been mired in stagnation, which has led interest rates on deposits to drop to 2.1 percent annually on average. Interest rates ranged between 9 and 10 percent in 1996, yielding much higher returns for those who deposited their assets.
In January 1998, interest rates soared to 17.85 percent, almost 10 times that of the current rate.
But with the interest now at rock bottom, even those who have 1 billion won ($922,000) in deposit will only get 1.75 million won a month in return in interest. After taxes, it will be reduced to 1.48 million won.
Also complicating matters is a longer life expectancy. In the past, those who retired in their late 50s were typically expected to live about 20 years longer. But with an increased life expectancy rate, retirees now have to map out plans for a 30-year retirement.
Korea’s baby boomers, who were born between 1955 and 1963, face radically different circumstances than in the past, and only a few have reliable retirement plans.
Kim said that one of his retired clients appeared confident about his retirement because the man’s assets totaled about 1 billion won, which the client claimed would tide him over comfortably for the next 30 years.
Unfortunately, he pointed out, his client had to come to terms with reality. With the interest rate stuck in the low 2-percent range, the man would likely receive less than 1.5 million won a month in interest. And with the real-estate market showing no sign of improving, his client may have to sell his apartment at price cheaper than he bought it for.
Kim told the JoongAng Ilbo that retirees, or those who will be soon, must diversify their investment portfolios, including those that could risk them losing principal.
“A common tendency among the silver-haired is their hesitancy to make investments that could result in the loss of their principal,” the banker said. “Overcoming that fear [of losing out] is the first step in adapting to the new economic situation.”
Cho Tae-seok, the director of the post-retirement investment team at Kookmin Bank, agreed that it was crucial to diversify retirement plans.
“It is essential that people subscribe to a variety of private pension programs before their retirement. To reduce financial risk, they also need to vary their investment plans after consulting with financial managers,” he said.
A projection by the JoongAng Ilbo on financial soundness for the average Korean retiree attested to the need for diversity, rather than putting everything into one account.
The calculation, based on a study by Samsung Life Insurance of its clients, was an assessment for a Korean couple in their mid-50s, who are presumed to have total assets worth 450 million won.
Of that 450 million won, 25 million won on average will be deducted for children’s college education, according to a data from the Statistics Korea.
The biggest expense, however, is the cost of their children’s weddings, when Korean parents traditionally foot the bill. The average Korean family is estimated to spend an average of 250 million won for two children to marry, according to the state-run Korea Consumer Agency.
That would leave the retired couple with 175 million won. The simulation further shows that if the husband and wife live solely off the monthly return from their deposit, their 175 million won would be entirely spent in seven years.
Additionally, more experts point out that the older generation should rethink the idea of their home as an inheritance.
“Parents still hold onto their houses thinking their children should inherit them,” Kim said. “But they need to think of it as a tradable asset that could be sold and used to boost their retirement funds.”
“A majority of those in their 50s still stick to traditional investment plans,” he added. “But now the world has changed. Without changing that I’m-going-to-keep-the-old-way attitude, making it through 30 years of retirement will be very tough, not if impossible.”
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