Basics of Retirement Fund Planning — How Much Will You Need

Retirement fund planning starts not from total assets but from 'how much you spend in a year.' After retirement, you do not spend 100% of your pre-retirement income. This is because items such as commuting costs, national pension and retirement pension contributions, and child-rearing expenses decrease.

So many financial plans use the concept of the 'income replacement ratio.' It means what percentage of pre-retirement income the income needed after retirement is, and it is commonly set at 70–80% as a baseline. For example, if the pre-retirement annual income was 50 million won, then after retirement you assume roughly 35–40 million won of annual spending.

Once you have set annual spending, you multiply it by a 'multiple' to estimate the required asset size. The most widely known multiple is '25x.' If annual spending is 40 million won, then 40 million won × 25 = 1 billion won becomes the target.

Why specifically 25x? This is the arithmetic flip side of the '4% rule' we will cover later. If you withdraw 4% of assets each year, the assets needed are 1 ÷ 0.04 = 25 times annual spending. In other words, 4% withdrawal and 25x assets are the front and back of the same statement.

However, 25x is only a 'rule of thumb' derived from U.S. past data, not an absolute formula. If the retirement period is longer than 30 years (early retirement) or you want a lower withdrawal, you may need 30x or more.

You do not have to fill the entire target amount with your own investment assets alone. Korea's retirement income is usually designed in a three-tier structure. Tier 1 is the national pension, Tier 2 is the retirement pension (accumulated by the employer), and Tier 3 is personal pensions (IRP, pension savings, etc.).

The national pension's 'nominal income replacement ratio' is 40%, rising to 43% from 2026 (the contribution rate is also raised in stages from 9% to 13%). However, this 40–43% assumes '40 years of enrollment.' Because the actual average enrollment period is short, the realized replacement ratio is estimated at roughly 22–30%.

Therefore, the amount you actually need to prepare with your own investment is 'target spending − the portion filled by pensions.' To the extent the national pension and retirement pension cover part of it, the amount to prepare purely with personal investment can be less than the full 25x.

The target amount is not 'calculate once and done.' When prices rise, the same lifestyle costs more money, and the longer life expectancy grows after retirement, the more funds you need to last.

So in retirement planning, the habit of thinking in 'real (inflation-removed) purchasing power' rather than nominal amounts is important. Also, rules like 4% and 25x are only the average results of past U.S. markets and are not guaranteed as-is to an individual who retires at a specific point. In the next articles, we unpack one by one where this rule came from and what limits it has.