Title: Contrasting Retirement Approaches: America’s Pension Millionaires vs. Korea’s Property Focus
Entered: September 24, 2023 – 18:34 Modified: September 24, 2023 – 18:34
In 2023, it is evident that America is witnessing a surge in wealthy pensioners, while Korea adopts a different path, heavily relying on investments in apartments for retirement preparation. However, this approach raises concerns about its effectiveness. Let’s delve into these divergent strategies.
America: Investing in Retirement Pensions
The United States is actively involved in pension investments, leading to a rapid increase in the number of pension millionaires. This growth can largely be attributed to long-term investments in the stock market through retirement plans like the 401K. Individuals like David Schwartz, an insurance planner from New York, are enjoying the fruits of their investments. With an average monthly pension of $8,500, Schwartz plans to retire early and indulge in domestic and international travel with his wife.
Korea: Apartment Dependency
Meanwhile, in Korea, individuals like Manager Jeon Mo find themselves facing challenges in retirement preparation. Due to financial constraints, Jeon had to resort to withdrawing his retirement pension to finance the purchase of an apartment. His monthly salary barely leaves any leftover funds after paying loan interest and living expenses. The overall retirement readiness of Korean office workers lags behind that of developed countries despite it being only two years away from becoming a super-aging society.
Income Replacement Rate Disparity
Data from the Organization for Economic Co-operation and Development (OECD) reveals that the income replacement rate for Korean office workers is a mere 50.8%, significantly lower than the United States’ rate of 81.3%. Such a disparity implies that a retiree with a pre-retirement income of 100 million earned in Korea would receive only 50.8 million earned annually, whereas in the United States, the pension would amount to 80 million earned.
Pension Millionaires and Homeownership Trends
The United States, with its thriving stock markets, has witnessed a considerable rise in pension millionaires. Similarly, the UK has observed a growth in elderly homeowners thanks to retirement funds secured through pensions. Countries like Australia are proactively promoting retirement preparation through various incentives.
Public Perception and Policy Support
The Korean government has introduced policies to support retirement preparation, including a default retirement pension option. However, public perception remains unchanged, as a significant number of office workers neglect to monitor the returns on their retirement pensions.
The 401K Phenomenon in America
When it comes to Americans’ retirement income, the 401K plays a crucial role. Its private pension system has provided substantial advantages, resulting in higher retirement incomes compared to countries relying heavily on public pensions. The 401K system has ushered in a new investment pattern, encouraging individuals to save and invest in various assets like stocks for their retirement security.
Tax Benefits and Matching Ratios
The 401K system in the United States offers tax advantages, deferring taxation on investment earnings and excluding the savings from taxable income. Companies also receive tax exemptions on 401K savings. The matching ratio of a company’s contributions to an employee’s 401K plan has become an essential criterion for job seekers, highlighting the significance of this retirement benefit.
The Faith in Long-Term Investment
401K plans have consistently demonstrated their strength through the US stock market. Over the past decade, average annual returns on 401Ks have ranged from 8 to 10%. The trust in these investments and the power of compound interest have created numerous pension millionaires. The size of 401K savings and private pension funds have increased significantly, reflecting the stability and growth of the US retirement pension system.
In conclusion, while America celebrates its pension millionaires through strong stock market investments and retirement plans like the 401K, Korea’s heavy dependency on property investments raises concerns about ensuring adequate retirement income. The divergent approaches highlight the need for effective retirement policies and public awareness to address the challenges ahead.
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Entered 2023.09.24 18:34 Modified 2023.09.24 18:34 Paper A5
America is full of rich pensioners… Korea is going all in on apartments
This is not the way to go when preparing for retirement.
(1) Go to pensionman heavenThe US is actively investing in retirement pensions… Retirement income is 80% of pre-retirement income
Korea, ‘youngkkeul’ flat due to early withdrawal of severance pay … Preparing for old age
Thanks to the boom in stock markets such as Nasdaq, the number of pension millionaires in the United States is increasing rapidly. Analysis suggests this is a result of long-term investment in the stock market through a 401K, a defined contribution (DC) retirement pension. On the 20th, travelers including retirees enjoy sightseeing on the street in front of New York’s Grand Central Terminal. New York = Choi Man-soo Reporter David Schwartz (55), who works as an insurance planner in New York, plans to retire early when his second son goes to college next year. No worries about old age. Thanks to the 401K and the Individual Retirement Account (IRA) accumulated over 28 years, I can receive an average monthly pension of $8,500 (about 11 million earned). He said, “I plan to travel domestically and internationally with my wife once a month.”
Manager Jeon Mo (51), who works in a large company in Gangnam, Seoul, only sighs when he thinks about life after retirement. Three years ago, I bought a 30-pyeong apartment in Mapo-gu, but because I didn’t have enough money to borrow money, I even had to withdraw my retirement pension to finance the purchase of the apartment. Manager Jeon said, “My actual monthly salary is about 10 million won, but after paying loan interest and living expenses, there is not one penny left in my salary account.” Although we are two years away from entering a super-aging society where the proportion of the population over 65 exceeds 25%, the preparation of Korean office workers for retirement is still insufficient compared to developed countries. According to the Organization for Economic Co-operation and Development (OECD), the income replacement rate, which is the ratio of post-retirement income to the average lifetime income of Korean office workers, is only 50.8%. In the United States, this ratio reaches 81.3%. This means that if you had an average annual salary of 100 million earned before retirement, you will receive a pension of 80 million earned each year after retirement. Hundreds of thousands of people have become ‘pension millionaires’ thanks to booming stock markets such as the S&P 500 and Nasdaq markets.
In the UK, even as house prices rise significantly, the proportion of over 65s who continue to buy homes. The number of elderly people buying their own homes using retirement funds secured through retirement pensions is increasing. Advanced pension countries, such as Australia, encourage individuals to prepare for retirement through various incentives.
The Korean government has also increased policy support for retirement preparation, such as introducing a default retirement pension option (pre-designated management system), but public perception has not changed. According to a survey conducted by Korea Economic Daily and Mirae Asset Securities on 1,000 office workers in their 40s and 50s, 3 out of 10 did not check the rate of return of their retirement pension even once during the year. Lee Sang-geon, head of Mirae Asset Investment and Pension Center, said, “The complex tax system needs to be overhauled and incentives strengthened to help people prepare for retirement funds in an aging age.”
A common US ‘pension millionaire’… “Even if the stock market is unstable, I won’t lose my pension.”
Employer goes to pension heaven… The secret to beauty is the ‘401K’ pension
In the United States, known as the ‘retirement paradise’, the number of pension millionaires enjoying a leisurely retirement life is increasing rapidly. According to Fidelity, an American management company, this year, there were approximately 378,000 subscribers of 401K, a defined contribution retirement pension (DC) in the United States, with assets greater than $ 1 million. In 2009, right after the financial crisis, the number of 401K millionaires was 21,000, which is an 18-fold increase in 14 years.
Byeong-seon Lee, director of retirement pensions at Morgan Stanley’s New York headquarters, explained, “Pension millionaires have now become commonplace,” adding, “This is a level that an American college graduate can easily achieve if he or she has worked faithfully for more than 30 years.” He added, “Due to the recent boom in the stock market, there are customers whose pension assets exceed $2 million.”
When applying for a job, consider the 401K matching rate
When talking about Americans’ generous retirement income, 401K is something that cannot be left out. Because the 401K-oriented private pension system is better equipped than other countries, you can receive more pension than in countries that rely heavily on public pensions. Americans’ public pension replacement rate is 39.2%, which is 8 percentage points higher than Korea’s rate (31.2%), but the private pension replacement rate is 42.1%, more than twice Korea’s rate (19.6%). Since its introduction in 1981, the 401K system is considered to have created a virtuous circle that supported the upward trend of the US stock market and changed the investment patterns of individual investors. The key is to build a reserve fund by matching a certain amount of severance pay between the employee and the company each month, and then have the employee invest in various assets such as stocks and use the results as a means of securing retirement. Jared Seiberg, managing director of TD Cowen, said, “These days, when looking for a job in the United States, not only the salary but also the 401K matching ratio is an essential criterion for judgment,” adding, “Companies also pay attention to qualified talent because they exclude companies that do not provide a 401K plan.” “I have no choice but to spend it,” he explained Tax benefits behind 401K are becoming a trend. The government defers taxation on profits earned from investing 401K savings as much as possible. Additionally, when imposing income tax on employees, the amount saved in 401K is excluded from the tax base. This standard has gradually risen from $7,000 a year in 1987 to the current $22,500 ($30,000 for those over 50).
Even when withdrawing savings from a 401K account after retirement, the income tax rate is kept low. If you cancel early, you’ll have to pay a 10% penalty plus high income taxes, encouraging employees to use 401Ks as retirement funds. Companies were also exempt from a special corporate tax on 401K savings, thereby reducing their tax burden. 401K became more powerful with the introduction of the automatic subscription system with the enactment of the Pension Protection Act in 2006 and the introduction of the default option (pre-designated management system) in 2007, which allows financial companies to manage the system on their behalf. if employees do not give management instructions.
Faith in the US stock market… There is no pension streak
Over the past 10 years, the average annual return on a 401K in the US has ranged from 8 to 10%. 42% of 401K pension assets are invested in stock funds, and 31% are invested in target date funds (TDF), a representative default option product.
The magic of long-term investment and compound interest created a synergy that created hundreds of thousands of pension millionaires. Recently, plans to become pension millionaires within an early time, especially among the MZ generation, have become popular on social media such as YouTube. Local experts explain that educated office workers often choose stock funds, and production workers often choose TDFs.
Funds raised through default options and 401Ks are evaluated as having established themselves as a safety net for the US stock market. The size of 401K savings increased from $4.8 trillion in 2010 to $11 trillion at the end of 2021. The size of private pension funds, including personal pension funds such as IRAs, equals $39.3 trillion (about KRW 5.25 trillion). Managing Director Seiberg said, “Even when the stock market is volatile, pension runs that break pensions rarely appear and the size of reserves is steadily increasing.” He added, “As the stock market has consistently outperformed over the past 10 years, the stability of the US stock market and retirement pension system has increased.” “This is because my faith in them has become stronger,” he said.
New York = Choi Man-soo / London = Reporter Yang Byeong-hoon bebop@hankyung.com
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