Editorial
An overview of how to draw down assets built through recurring investment, covering fixed-amount and fixed-percentage approaches, sequence risk and tax, with hypothetical figures.
Contents
Discussion of recurring investing tends to focus on the years of building up assets, but sooner or later comes the stage of starting to use them. This drawdown stage, often called an exit strategy, is in some ways as sensitive to market movements as the accumulation stage. This article sets out the main withdrawal approaches and the points about sequence and tax worth thinking through, using hypothetical numbers. It does not recommend any specific method or product.
What an exit strategy means
An exit strategy is a plan for when, how much and in what order to convert invested assets into cash. While contributing, there may be periods when prices fall and you simply keep buying. While withdrawing, however, you may have to sell even when prices are low in order to cover living costs. This is the main difference between the two stages.
Before drawing up a plan, it helps to confirm the following.
- Purpose: is the money meant to supplement living costs, or to fund a one-off expense such as housing or education?
- Time frame: over how many years will it be used, and will the remainder stay invested?
- Other income: how much comes in from public pensions, wages or other sources without touching the portfolio?
The main withdrawal approaches
Typical approaches are shown below. Each has advantages and drawbacks.
| Approach | How it works | Point to watch |
|---|---|---|
| Fixed amount | Sell a set amount every month or year | The same amount is sold even when prices are down, which can speed up the decline of the balance |
| Fixed percentage | Sell a set share of the current value | The amount received falls when the value falls, making living costs harder to plan |
| As needed | Sell only what is required, when it is required | The plan can become vague, and timing is easily driven by prices |
Some people combine fixed and percentage methods by setting an upper and lower limit. No approach guarantees a particular result.
Fixed amount versus fixed percentage with hypothetical numbers
Suppose the portfolio is worth 20 million yen and 1.2 million yen (100,000 yen a month) is withdrawn each year as a fixed amount. If the investments do not change in value at all (0% a year), the balance lasts about 16.7 years (20 million divided by 1.2 million). If we assume, hypothetically, that the remaining balance grows at 2% a year, the money runs out during the 21st year. The lower the assumed return, and the more actual returns fall short of the assumption, the faster the balance shrinks.
Now suppose a fixed 5% of the portfolio is withdrawn each year. With 20 million yen, the first year’s withdrawal is 1 million yen. If the value then falls by 20% to 16 million yen, the next withdrawal is 800,000 yen (16 million x 0.05). The balance is less likely to run out suddenly, but the income received drops, so you need to think about how to adjust your spending.
If you want to test other assumptions, a Japanese-language tool, the compound interest calculator (Japanese), lets you change the number of years and the rate.
Sequence risk and how sales can be organized
One concept especially relevant during drawdown is sequence risk. Even when the average return is the same, the balance left can differ depending on whether prices fall just after withdrawals begin or later on. If prices fall sharply early on, more units must be sold at lower prices, and the portfolio may find it harder to recover even if prices later rebound.
Some ways people try to reduce this effect are as follows.
- Keep several years of living costs in low-volatility holdings such as bank deposits.
- Shift part of the portfolio into lower-volatility assets as withdrawals begin.
- Leave room in the budget so that withdrawals can be reduced temporarily in a year when prices have fallen.
None of these removes risk altogether. They are options for softening the impact.
It is also worth separating two questions that are often mixed together: how much to withdraw, and which holdings to sell. The first is about cash flow and the second is about the portfolio’s balance. If the portfolio holds several kinds of assets, selling only the one that has risen most will gradually change its overall mix, while selling proportionally keeps the mix closer to the original. Either way, the choice changes the risk of what remains, so it is worth deciding in advance rather than case by case.
Finally, note that a withdrawal plan is not fixed once made. Spending in the first years of retirement, health, and family needs all change over time. Reviewing the plan on a set schedule, and writing down the reason for any change, makes it easier to stay consistent.
Tax and scheme points
When an investment trust is sold from an ordinary taxable account, tax of about 20.315% normally applies to the gain, which is the sale proceeds minus the acquisition cost. Hypothetically, if units bought for 600,000 yen are sold for 1 million yen, the gain is 400,000 yen and the tax is 81,260 yen (400,000 x 0.20315). With regular withdrawals, the tax on gains applies each time and should be built into the plan.
Inside a NISA account (Japan’s tax-free investment account scheme), gains on sales are not taxed, and the allowance equal to the cost of what was sold becomes available again from the following year. The rules can be revised, so please confirm the latest details with the Financial Services Agency or other official sources.
Points to consider and risks
- Market risk: if the remainder stays invested, prices can rise or fall, and how much is left cannot be predicted.
- Longevity risk: if the drawdown period turns out longer than expected, the assets may run short.
- Changing expenses: medical or care costs can raise the amount needed.
- Tax differences: the tax treatment of sales depends on the type of account.
- Regular review: checking the balance and spending, for example once a year, allows the plan to be adjusted.
There is no single right answer, and what suits a person depends on asset size, other income and expected living costs. After weighing both benefits and risks, the decision is yours. For how we handle information, see the editorial policy and the disclaimer.
About this article: This is a basic guide article. Our policy is to check the content against public sources. It is not investment advice. If you notice an error, please contact us.