How Retirement Pay Is Managed

Anyone who works for a company will one day stop working and retire.
At that point, a person who has submitted a resignation can receive retirement pay, so let's look at how retirement pay is received.
Retirement pay is a payment received from the employer when a worker retires, and its purpose is to provide the worker with stable funds for life after retirement.
So how is this retirement pay managed?
Retirement pay can be divided into two types: DB and DC.
DB (defined benefit) is a method in which the company manages the funds directly and pays out the retirement pay. Retirement pay is calculated as follows.
Retirement pay = average monthly wage over the last 3 months * years of service
For example, if worker A, whose current annual salary is 60,000,000 won, receives retirement pay after working for 10 years, the retirement pay is
calculated as 5,000,000 won (average monthly wage over the last 3 months) x 10 (years of service), which comes to about 50,000,000 won.
The important thing is that this amount is received as a lump sum upon retirement. Before retirement, it is only calculated and is not deposited into my account.
DC (defined contribution) is a method in which you manage the retirement pay yourself. The formula is the same as for DB, but there is a big difference.
For example, if worker B, whose current annual salary is 36,000,000 won, is on a DC plan, the retirement pay received is
calculated as 3,000,000 won (average monthly wage over the last 3 months) x 1 year, which comes to 3,000,000 won.
The one year's worth of retirement pay calculated this way, 3,000,000 won, is deposited into your account every year.
In other words, with DC, money is deposited into my account every year, and you manage this money yourself.
Because of this difference in method, DC allows you to manage the funds yourself.
So which type of retirement pay management is better?
There is no right answer. But you can compare and think it through.
Worker A currently has an annual salary of 60,000,000 won and has worked for 10 years. In next year's salary negotiation, the wage increase rate was set at 2%.
Then the retirement pay also increases by about 2%. Worker B has the same annual salary of 60,000,000 won, but the increase rate in next year's salary negotiation is 10%.
Then worker B also receives about 10% more retirement pay.
If both of them want to switch from DB to DC, who would benefit more?
For the person whose salary rose by 2%, after switching to DC, earning a return of more than 2% over one year means a better return.
But worker B would have to earn more than 10%, and earning more than 10% in one year will not be easy.
If you are considering switching your retirement pay management method, you should first consult the person in charge at your company, but even if switching is possible, you must also consider your own salary increase rate in this way.
Because retirement pay must be received through the worker's own IRP account, opening an IRP account is essential for workers.
And to withdraw the retirement pay deposited into the IRP account, you must close the account, and a 16.5% tax is imposed upon closing.
If you do not withdraw the retirement pay as a lump sum but instead receive it as a monthly pension after age 55, only 3.3% to 5.5% tax is imposed within the deduction limit, so please compare the two.