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Fianacial Planning Cases
Preparation for Post-Retirement and Long-Term Nursing
Given the longer average life span, the living expenses in post-retirement life are actually bigger. The age wherein people cannot depend only on their children and pension and they have to prepare for old age by themselves looms. According to Korea’s National Statistical Office, Korea’s population has been rapidly aging recently. In fact, the average life span in 2005 was 74.8 years for men and 81.5 years for women. This trend is escalating anxiety over life in old age given public pension’s insolvency.
When can I start to prepare for retirement?
As a proverb goes, <prepare an umbrella when it is sunny>. You probably know the proverb <The early bird catches the worm>. The preparation for old age is the same. If you start early, you can prepare for a comfortable life in old age. Even though you put aside a small amount, the compound interest will turn it into a hefty sum in the long run. For example, if you invest 200 thousand won monthly at 5% compound interest per year when you are 35 years old, you can collect 167.15 million won (before taxation) until you are 65 years old. If you start 10 years earlier under the same condition, you can collect 306.48 million won (before taxation). Each time you delay savings for retirement by 10 years, you have to save twice monthly to collect the necessary retirement amount. If you prepare prudently for the future during your working years, you can enjoy a comfortable life in old age; if not, then you can’t. Even though you think it’s too late, starting a retirement plan is much better than not starting it at all.
What points should I consider when I prepare for retirement?
First of all, you have to check in detail what your ideal retirement life is like. Do you want to travel around the world, or do you plan to work in your garden? Do you want to retire early, or do you want to take on a part-time job after you turn 65 years old? Do you have a plan of starting your own business? Do you want to move to a new home after retirement? Which objectives are financial ones that influence post-retirement life other than retirement? Do you have a plan of engaging in social service activities in old age and to write a book to look back on your life? Finally, how is your health condition? When establishing a retirement plan, non-economic and unimportant factors are actually as important as financial issues.
Wouldn’t a national pension or the retirement grants suffice?
Since the life span used to be not that long, you could live by social security system, retirement grants, and some savings and bequeath your property to your children. Today, however, you should sustain your post-retirement life for more than 25 years with the same amount of funds. Moreover, in the past, it was customary for children to support their parents. Even if they didn’t prepare enough to support their parents later, it was not a big problem for them. Now, however, there is a limit to depending on your children, necessitating that you settle a major portion of the problems yourself. With regard to the national pension for guaranteeing the post-retirement life, its fund is insufficient; hence the apparent emergence of a “high burden-low pay” structure. The government corrected the law, lowering the pension’s income substitution rate from as much as 60% to 55% until 2007 and to 50% as of 2008. As for the insurance premium, the government plans to raise it in units of 5 years beginning 2010. We also forecast the age of receiving old-age pension to be delayed gradually from 60 years to 65 years by 2034. Moreover, the higher the income prior to retirement is, the less help required from the social security system. For example, if your monthly income is more than 3.60 million won, the national pension you can get after retirement is only 30% of your income.
Why aren’t the savings after retirement enough?
After retirement, savings will be your most important support. If you don’t prepare in advance for inflation, however, the value of savings may be lost altogether, and you will be forced to live only by the social security system, retirement grants, and pension. For inflation that is relatively constant with no sharp fluctuations, it may quietly take away the money you collected after considerable efforts over time. For example, suppose you retire at the age of 63 and live on 3.50 million won monthly. . At least 1.15 million won comes from national pension (linked with inflation), and 1 million won, from personal pension (not linked with inflation). The remaining portion is paid by the 300 million won interest (5.4%) that you have collected. How’s that? Do you think it’s enough? With only 3.8% inflation per year, your savings will hit rock bottom by the time you are 80 years old.
How much retirement fund should I prepare?
Generally, to maintain your lifestyle after retirement, 60~80% of your income before retirement is necessary. If you want to go on a travel that you have been postponing for some time or your body is ill, thereby incurring incidental medical charges, that amount of money is insufficient. To estimate the necessary fund after retirement, the future expense amount after retirement and desirable income per each year should be calculated; you can subtract the future income such as national pension from this. Based on that, you calculate the total sum as the necessary fund for retirement to prepare it. It depends on your personal status and objective in retirement life, necessitating taking into account complex matters including inflation, investment earnings ratio, and tax matters. As financial planners, CFP certificants will calculate how much fund you will need for your monthly living expenses considering tax and inflation during a predictable retirement period (currently regarded as 90 years or 100 years) vis-à-vis a retirement objective. If necessary, to prepare for living expenses that cannot be covered by social security system or pension, a CFP certificant will check how much you need to reserve additionally from now on.
How can I prepare a retirement fund?
First, you need to establish an asset allocation strategy appropriate for your risk reserve character. The ideal asset allocation strategy is to plan a long-term (more than 10 years) asset composition. It is good to allocate and operate the deposits and risk asset such as stocks, real estate, and corporate bonds as well as asset with zero risk such as installment savings and national & public bonds. Moreover, when using deposit and installment savings, you need to choose after comparing the various products of each financial institution, in preparing your life-in-old-age fund after retirement. The best investment method is to use a personal pension product to which tax incentives are applied and a corporate pension product that will be introduced in Korea. The corporate pension product that is on sale enables investing money with taxation deferral incentives. It also enables income deduction for reserve. Moreover, tax is not imposed until you withdraw the earnings and withdrawal is performed in life in old age when income is lower; hence the relatively low tax rate applied. This means you can collect money faster when you invest in personal pension compared with the same ratio’s taxation investment.
  Personal Pension
(On sale until 2000; past)
Personal Pension
40% of paid premium;
Limited to
720 thousand won per year
100% of paid premium;
Limited to
2.4 million won per year
All amounts:
no taxation
Pension income’s
(consolidated taxation)
In case of
in the middle of the term:
receipt of lump sum pension
Imposes income tax
on interest
After 22% taxation of
other income tax,
consolidated tax
In case of
cancellation within 5 years
40% of savings amount;
(limited to 270 thousand won per year)
Penalty tax
2% additional tax for cancellation
added for total savings amount
(limited to 2.4 million won)
20 years 18 years
How can I get a pension product?
If you have a choice of getting it as a lump sum or pension, the decision depends on personal situation, self-control, psychological stability, and risk acceptance level. For separate use, you need to consider whether to pay the tax now or pay it later. For example, if you want to start a new business, it is better to get a lump sum. If you don’t need a great sum upon retirement, however, receiving money as a living allowance from a pension will postpone taxation and enable you to get fund support more steadily for a long time.
How can I invest in retirement preparation?
Please remember that you should not put all you eggs in one basket. Sharing risks entails diversified investment. The strategy should vary according to the investment period. Generally, a high investment earnings ratio is accompanied by high risk. The longer the retirement preparation period is, the higher the risk level you can undertake for high earnings. Therefore, given a long investment period, you can invest more in a long-term asset, thereby generating relatively high earnings than a conservative investment method such as CD and time deposit. This applies to retired people as well as people with still a lot of time to spare. Since retired people are likely to have their retirement period extended to more than 25 years, many CFP certificants strongly recommend investing some money in high-growth investment methods or stocks to offset losses following a long-term inflation. Moreover, investing in many asset groups including stocks, bonds, real estate, and short-term fund market through diversified investment can greatly reduce risk.
If one is in one’s early 20s and 30s, what kind of retirement preparatory strategy is recommendable?
Those years are the best time to start on retirement preparation. You may shake your head in disagreement because you think it is too early to prepare for retirement that will not come until 30 years or 40 years from now. If you start saving for retirement at this stage, however, the profit will be huge. First, subscribe to a personal pension. If possible, put aside 200 thousand won monthly to avail yourself of the maximum tax incentive. In addition, invest in high-earning stocks with long-term investment period, long-term bond, and mutual fund. When choosing an investment area, you should consider various factors including your risk acceptance level, overall financial status, and job stability. Since you started as a young age, however, even though the market is worsening, you have enough time to overcome it. As such, aggressive investment is possible. At this time, the most important thing is diversified investment. Many professionals recommend that you maintain stock investment to below 10~20% of the entire portfolio.
If I am in my 30s and 40s, how can I prepare for retirement?
Since you have built an impressive career at this time, your income has probably increased as well. At this time, considerable expenses are incurred in preparing the mortgage loan’s repayment, education fund for children, and marriage fund preparation as well as your own fund for business except savings for retirement. Such preparation may clash with the savings for your retirement in many cases. Most CFP certificants stress that retirement preparation is the more urgent matter in this case. If the education fund for children is necessary, children can settle the problem by themselves. Among them, however, inevitable expenses are also incurred. Moreover, the possibility of an accident wielding a serious influence on assets cannot be discounted, causing the plan to go haywire. Therefore, subscribe to income compensation insurance and health insurance in preparation for income loss and life insurance (it can also be in preparation for your spouse’s retirement). These will prevent you from withdrawing your retirement preparation fund even if anything should happen to you.
What is the ideal retirement preparation strategy for people in their 50s?
This is the time when you can collect a retirement fund as a final step; it is also usually the time you earn the biggest amount of money. At the same time, several major & important home expenses such as education fund for children and marriage fund either have already occurred or will occur. Above all, increase the savings for retirement by more than 20% of your income. You have to consider subscription to long-term nursing insurance as well. In addition, you need to pay more attention to investment at this step. Professionals recommend transferring a high-risk investment to a low risk-asset (with generally low earning). Nonetheless, they recommend maintaining part of risky assets such as stocks and real estate to prepare against inflation. This is because a long-term investment period remains until you receive actual cash after retirement. Moreover, this is the time for you to consider seriously what kind of retirement life you want and how much money you need to invest for such. Imagine yourself doing a rehearsal; next, picture your ideal retirement life. Afterward, think of the actual financial source to provide such. Consult with CFP certificants as to which one you can use as an asset management method for reducing tax.
How can I implement an investment strategy after retirement?
For a retirement plan, regular adjustment is continuously necessary even after retirement. The most important thing at this stage is to decide how much you have to withdraw from your retirement fund and from which account will you have to withdraw the money. According to the advice of most professionals, the living expense’s withdrawal ratio in a retirement fund should not be higher than 4~5% to avoid depleting the fund in a regular market change. The retired people who withdraw money at a higher ratio should reduce such so that their account does not suffer from a serious loss even though the market suddenly goes wrong. A general advice for determining the account from which you need to withdraw money first is to withdraw the taxation asset first so that the taxation–based asset increase continuously. Note, however, that this method does not always work. In case a retirement fund consists of bonds and stocks, if you withdraw bonds first, the stocks’ ratio increases in assets later; thus resulting in the risk of lowering asset values. As such, it cannot be a reasonable withdrawal method. At this time, a conservative investment is needed. Thus, you have to secure a certain level of liquidity. Professionals recommend keeping cash or liquid asset that will cover 2~3 years’ living expenses. Still, the answer that applies uniformly to all does not exist. Many things vary according to your income source, risk acceptance level, age, living expenses, and child’s inheritance.
How long should I prepare for long-term nursing cost?
Thanks to the development of medical technology, we can live much longer. Still, living long does not mean we live without any illness in times of good health. During the period when one out of three persons aged 66 and up is alive – in some other cases, during his/her lifetime -- he/she needs long-term nursing in any type. Note, however, that most people don’t prepare for long-term nursing following old-age diseases. Worse, they don’t like to talk about it. The nursing cost depends on the seriousness of the disease and degree of discomfort in daily life and the time you need nursing. In case of dementia, when you need person-to-person nursing, you generally need 1.5~2 million won monthly. If one nurse takes care of many old patients, the cost decreases. This is only the nursing cost, however. In nursing, the drug cost, medical treatment cost, and hospital charges are included. These costs are increasing everyday. Another problem is that many people expect too much when it comes to the government’s role concerning long-term nursing.
How can I prepare for long-term nursing cost?
The following are some methods of preparing for long-term nursing cost, although each one has a limit:
National Health Insurance.
Many people think that the government will pay for the cost if they need long-term nursing. According to Korea’s National Health Insurance, however, the cost of medical supplies of the elderly such as artificial teeth and hearing aid is included in the medical insurance pay. Moreover, the share of only those aged 65 and above is reduced when they use a medical institution. It does not introduce a public long-term nursing system such as that in Japan and Germany, however.
Personal income and savings.
If your income is sufficient, and you save much money, you can generally undertake the long-term nursing cost. Note, however, that the incidence of disease among the elderly increases rapidly; the cost required for long-term nursing is increasing continuously. Although we cannot know for sure the exact statistics in Korea, the USA’s Alzheimer’s association predicts the cost of lifetime nursing for Americans suffering from Alzheimer’s disease (a kind of dementia) to reach 200 million won. It also claims that 1/3 of families spent all their savings on nursing and medical treatment.
Life insurance.
A life insurance subscriber can get a loan from an insurance contract to prepare the fund necessary for nursing. Some straight life insurance products provide the insurance money’s expected use. Nonetheless, we can get straight life insurance’s expected service only if the general hospital’s medical specialist diagnosed the remaining life of the insured as 6 months. Moreover, in the case of the insurance money’s expected use, the initial insurance’s subscription objective such as guarantee of the bereaved family’s standard of living may be compromised. On the other hand, CI insurance (major diseases insurance) is the developed country’s insurance that settles a consumer’s medical cost by paying in advance a certain amount of insurance money in case the insurance subscriber contracts fatal diseases, undergoes surgery, and develops a disorder. For CI insurance, however, the insurance money is paid only in case the subscriber contracts serious diseases such as cancer, myocardial infarction, and stroke -- which are designated in the contract -- and undergoes related surgery.
Long-term nursing insurance.
The best choice is to buy long-term nursing insurance, which prevents your spouse and children from depleting their assets and prevents children and other relatives from collecting the investment fund for nursing and canceling the life insurance or trust. Although it has been introduced only recently in Korea, many insurance companies are selling various types of long-term nursing products. Thus, when subscribing to long-term nursing insurance, you need to purchase the product appropriate for you after comparing the payment condition, insurance subscription condition, and premium level. In such case, getting help from a professional CFP certificant is the most effective way.
What is long-term nursing insurance?
It is possible to subscribe to long-term nursing insurance until the age of 70. To check your health condition, you need to attach a medical certificate with a written application. When the insurance subscriber cannot eat by himself/herself, put on clothes by himself/herself, use the toilet by himself/herself, take a bath by himself/herself, and cannot lead a daily life, payment is offered. In the case of foreign countries, medical service such as rest home’s medical treatment is provided as payment for long-term nursing insurance; in Korea, however, payment is in the form of cash. Long-term payment is paid once in case of a long-term nursing situation, whereas long-term pension is paid by pension every year when the person is alive and in a long-term nursing situation. Simply put, Korea’s long-term nursing insurance has been introduced only recently. Thus, the insurance company can pay the insurance money or premium in the future according to a risk ratio. Accordingly, the premium may be expensive, or the subscription fee may be reduced; moreover, the actual long-term nursing loss may not be absorbed; thus limiting the nursing cost’s payment period by 10 years or paying the money until the age of 80. Thus, a check is necessary.
What kinds of welfare support systems for the elderly are there?
The following are the general support systems for the welfare of the elderly:
Home protection business.
It is a home business operated in the home of the elderly and the service of social welfare personnel, nurse, and home servants who took professional education and training by visiting such homes. For example, a public & medical welfare service is provided, e.g., home servants’ dispatch, home nursing service, lunch box delivery, rest protection, home repair, safe nursing service, and nursing in preparation for death.
Regional & social protection service.
This is a service offered by the regional & social welfare center or welfare center for the elderly. Generally, it is a service offered for elderly people by the welfare center for the elderly, daytime protection center, short-term protection center, hall for the elderly, restaurant for the elderly, public health center, and mental & medical center. Note, however, that the elderly do not live there.
Group house service.
It is a program spread and developed rapidly in the USA and Great Britain but not actively spread in Korea yet. It is also a group house protection business designed to protect the weak elderly with initial and intermediate-level functional limit due to their weak bodies.
In the USA, its authorities provide various types of houses including life support house for the elderly, union house for the elderly, house for the elderly, house for the disabled elderly, group protection house, and boarding protection’s house.
Facilities’ protection house.
It is the last option that the elderly requiring long-term protection can use. In case there is no family member who will take care of the elderly requiring 24-hour medical treatment, nursing, and rest service due to serious weakness and chronic retrogression, and the service resources for the elderly at home are not sufficient, they enter the facilities for accommodation and protection. There are professional hospitals for the elderly, general rest house, special nursing home, rehabilitation hospital for the aged, and mental hospital.
What kinds of welfare facilities for the aged are there?
Although they are not yet spread more widely compared to developed countries, the facilities for nursing the elderly and its nursing method are expected to be expanded further by the time you retire. Accordingly, you can choose the method appropriate for you whether you live in your home or whether you use the facilities. In this case, you need to consider various needs such as economic meaning as well as life condition, health management, and lifestyle.
Institution for the elderly with no charge and with actual charge.
It is an institution that provides accommodation and meals and other conveniences, accommodating the elderly aged 66 and above as the basic life guarantee beneficiaries with no charge (institution for the aged with no charge) or the elderly belonging to the low income-bracket with a minimal charge (institution for the aged with actual charge). You need to apply for admittance with a city hall, district office, county office, and village office.
Home welfare institution with no charge and with actual charge.
It is an institution that provides various services for the elderly who live home and have difficulty leading daily life; it includes home servant dispatch facilities, day-time protection facilities, and short-time protection facilities. In the case of home servant dispatch facilities, the home servant meeting a certain education requirement does kitchen work, cleans house, provides support in housework, performs counseling and education, and serves as someone the elderly can talk to. Day-time protection facilities accommodate the elderly with weak body and the disabled elderly during daytime, providing services such as meals, bath, comfort, entertainment, and nursing. Short-time protection facilities are short-time entrance & protection facilities in case the protector cannot take care of the disabled elderly due to vacation, diseases, etc. These facilities also provide for basic life guarantee beneficiary services with no charge, targeting the elderly belonging to the low income-bracket and offering them services with actual charge. Even for those in the middle-class or higher class, they can get the service with actual charge.
Professional rest institution for the aged.
It is an institution that provides meal service, rest, and other conveniences with little or no charge, accommodating the elderly with serious diseases such as dementia and palsy. The requirements for admittance are the same as that of the rest facilities for the aged.
Silver town.
It is a type of residence facilities for the aged with a charge. As a complex for the elderly, it is equipped with various facilities such as residence, medical facilities, and rest facilities (leisure, sports) and service function as necessary for residing in groups or living alone. It is not a single building; rather, the silver town consists of single house, apartment, row houses, nursing facilities, and rest facilities; thus forming a mutual cooperation system. Recently, with the service reinforced, it is being developed to accommodate a welfare house for the elderly with a charge (rent and on sale for the elderly, providing residence and conveniences necessary for life). Other amenities include medical service facilities. It is a mix type having a welfare house for the elderly with charge and medical facilities and rest facilities with charge. The guarantee money and living cost differ according to each of the facilities upon entry; generally, however, the guarantee money is 100~200 million won. Living and management expenses are 700~800 thousand won monthly. The expenses increase if medical service is added.
Retirement garden.
Unlike an urban silver town, a retirement garden is a place where the elderly can live peacefully by operating a small garden or a farm where they can raise crops and breathe fresh country air. It targets people aged 62 and above and who do not have difficulty living alone and have healthy bodies. The rent varies according to each of the facilities, but the guarantee money for rent is 30~80 million won. Monthly management fee and meal fee reach approximately 500 thousand won.
Professional rest facilities for aged with actual charge.
It is called a nursing home, which provides meals, rest and other conveniences. It accommodates the elderly who suffer from dementia and palsy. The nursing home is also for people who are not hospitalized for a long time but require continuous medical treatment at home. In other words, it can be a cross between a hospital and a home. The cost is similar to that of silver town, but the care fee and nursing fee are added.
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