Decumulating an ETF Portfolio the Right Way
Decumulation refers to the withdrawal of previously invested savings. It’s also known as disinvestment.
Money invested in ETFs can either be sold off gradually or you can live off the distributions (dividends) they generate.
The idea that high-dividend ETFs are better suited for decumulation—or that they generate higher returns—is a persistent myth. In fact, the tax treatment of partial sales can be very advantageous.
Traditional decumulation options also include fixed withdrawal plans through banks or immediate annuities, though these tend to come with higher costs and less flexibility.
For gradual decumulation, it’s important to have a rough withdrawal plan, which outlines a schedule for selling ETF shares over time.
What is decumulation?
Decumulation is the opposite of saving – it refers to the process of withdrawing saved assets. This process is also called disinvestment or asset drawdown. The goal of decumulation is to convert (in our case, ETF-invested) capital back into cash to use for living expenses, for example.
There are various strategies to draw down savings. From a tax perspective, it’s generally not advisable to liquidate all of your invested funds at once, as this could exceed tax-free allowances and trigger a large tax bill! Additionally, once fully disinvested, your capital can no longer continue to work for you.
Step-by-step: Decumulation through Partial Sales
The first option for decumulating assets is to gradually convert your invested capital into liquid funds. For ETFs, this means selling ETF shares piece by piece. It’s essential to create a plan in advance to structure these partial sales.
This begins with determining your financial needs—perhaps you have other sources of income and don’t rely solely on ETF withdrawals.
Your plan should be based on a rough time schedule.
Planning can be tricky, as it’s impossible to predict how long you’ll need this income during retirement.
Market volatility is another factor to consider—ups and downs in the stock market can significantly affect your portfolio value, especially during a market crash.
However, since passive investors usually have a long investment horizon and decumulate over decades (e.g., 20–30 years), such negative market events tend to average out over time.
Tax considerations are also important when planning gradual decumulation. If you’ve chosen a tax-optimized investment strategy, only a portion of your ETF shares may be subject to tax.
It’s also worth noting that decumulation may incur higher transaction costs than accumulation. (That’s why it’s important to understand your broker’s fee structure!)
Living off Distributions
The second way to generate withdrawals from ETFs is through distributions.
- Non-accumulating (distributing) ETFs are ideal for this strategy, as they regularly pay out a so-called distribution yield, which can be used to cover living expenses
- Dividend-focused ETFs, which invest in stocks with high dividend yields, are also suitable for such a retirement strategy.
However, this approach still involves some dependency on market fluctuations, which introduces uncertainty. Additionally, in times of economic crisis, dividend yields are often reduced—making this strategy less reliable during downturns 🤪.
Withdrawals via Distributions vs. Partial Sales
Expected returns are the same whether you withdraw capital via distributions or generate a “virtual return” through partial sales.
The key difference lies in the amount withdrawn in relation to the size of the portfolio. Only once withdrawals exceed a certain level does the portfolio begin to shrink.
Partial sales offer the advantage of more flexible tax management. They also allow investors to better balance out market fluctuations by choosing when and how much to sell.
Using “high distribution yield” as a criterion for selecting ETFs is ultimately arbitrary and can even be a disadvantage in the long term. What investors should really focus on is the total return of their investments.
De-coupling
A third variant, which is less common in the ETF sector, consists of financial products with an incorporated decoupling plan. These include
- bank payout plans
- immediate annuities
- fund payout plans (Only this type of decoupling is potentially available with ETFs)
The advantages of immediate annuities and bank payout plans are the high security of payments, while the disadvantages in all three cases are the high costs, lower returns, and lack of flexibility compared to a passive investment approach with self-determined divestment.
Conclusion: hybrid forms of fixed decoupling plans within the framework of fixed or overnight deposit investments, combined with capital market-dependent payouts or partial sales of ETFs, are conceivable, offering a certain degree of security and flexibility individually combined.