The Story of How I Arrived at Index Investing After a 15-Year Detour: Exit Strategy Utilizing Bond Investing <Reverse FIRE Realization Record 7-4>
Character count: approx. 3800 characters
Estimated time: 8 minutes
What comes after 'offense'
The time I spent opening market apps decreased year by year. I had designed it up to the point of mechanically accumulating All Country (eMAXIS Slim Worldwide Equity) in the new NISA. However, as the footsteps of my late 40s began to be heard, the next question emerged. Not 'how to increase,' but 'how to withdraw.' How can I convert money into cash without breaking the compound interest, without shaking up my life, and without raising my heart rate? The answer I arrived at was incorporating bonds as an 'exit mechanism'.
What are bonds? Making a 'promissory note' the foundation of your portfolio
In a word, a bond is a 'promissory note.' In exchange for lending money now, you are promised periodic interest and repayment of the principal at maturity. If stocks are your 'share of growth,' bonds are your 'share of the promise.' This promise-based nature becomes a mental stabilizer during the withdrawal phase. Of course, prices fluctuate. If interest rates rise, prices fall; if they fall, prices rise. However, if you hold them until maturity, the interest train arrives exactly according to the timetable. This 'timetable feeling' becomes the core of exit design.
Types of bond investment: The three-way battle of interest rates, currencies, and credit
Even when we say 'bonds,' the foundations vary. Government bonds, corporate bonds, municipal bonds; maturities range from short-term to ultra-long-term; currencies include yen, dollars, and euros... I focused on three things for my exit strategy.
Interest rates: The longer the duration, the greater the impact of interest rate fluctuations (duration), and the more volatile the price.
Currency: If denominated in dollars, currency fluctuations are added on top. Whether or not to hedge.
Credit: Theoretically, government bonds have a low probability of default. High-yield corporate bonds have credit risk lurking 'behind the yield'.
Deciding the balance of yield/stability/liquidity by combining these three points is what bond investing in the exit phase is all about.
Individual bonds vs. ETFs: 'Timetable' or 'Bulk buying'?
The greatest appeal of individual bonds is that they have a maturity date. The final yield is almost determined the moment you buy them. If you are prepared to hold until the principal is repaid, you can focus on 'continuing to receive' without being afraid of price ups and downs. On the other hand, there is the practical burden of high minimum purchase amounts, difficulty in achieving diversification, and low liquidity, which can lead to fluctuations in the sale price.
ETFs are the opposite. Diversification, small amounts, and ease of trading are overwhelming. However, because they 'do not have a maturity date,' the price will forever continue to be subject to the waves of interest rates. In an exit strategy, I felt that the usability of ETFs—being able to see monthly cash flow and sell portions when needed—was overwhelmingly advantageous.
Arriving at ETFs: Why they are suitable for the defense of those in their late 40s
I ultimately leaned toward bond ETFs. There are three reasons. First,
ease of withdrawal. Retirement living expenses are 'monthly cash.' ETFs make it easy to schedule distributions on a calendar, and if necessary, you can cover the shortfall by selling a portion. Second,
diversification and transparency. With AGG (US Aggregate Bond), you hold a wide range of US investment-grade government bonds, corporate bonds, and MBS; with TLT (US Treasury 20+ Year Bond), you can intentionally take a 'long' duration. Composition, fees, and yields are always disclosed, making them easy to monitor. Third, psychological leveling
. When you reach your late 40s, 'money that comes in as planned even in a down market' protects your heart. If you choose a monthly distribution type (overseas ETFs or some domestic ETFs), you can also design your living expenses to be based on 'dividends/distributions'.
Prioritize 'continuity' over 'maximization.' Because ETFs do not allow for deception as a defensive tool, they fit well into life planning.
Is All Country x Bond ETFs (AGG, TLT) the strongest? The idea of 'separating offense and defense'
The main engine for accumulation remains All Country (Worldwide Equity). 'Buy everything' of human growth. On top of that, place a 'cushion' and a 'lever' with AGG and TLT. My image is this.
AGG = Cushion: Suppress price volatility with medium-term duration while receiving distributions. A place to escape or wait when stocks are turbulent.
TLT = Leverage: A "long spring" whose price moves significantly during periods of falling interest rates. It has the potential to save you when stocks crash (though not perfectly).
Leave the "boredom of a bull market" to stocks, and leave the "tenacity of a bear market" to bonds. Whether this is the strongest approach depends on the market, but I feel it is highly compatible with an exit strategy in the sense that the "division of roles between offense and defense is clear."
Simulation of All Country Equity x Bond ETF: Blunting "Sequence Risk"
I checked the "feel" of this with roughly two hypothetical scenarios (prioritizing the reproducibility of daily life over playing with fine numbers).
Scenario A: Bullish -> Bearish -> Flat (Market crash at the beginning of withdrawals)
Stocks drop 30% in the three years immediately after retirement, then remain flat. If you make fixed-rate withdrawals with 100% All Country Equity, your assets' vitality will rapidly decline due to "sequence risk" (declines at the beginning of withdrawals). Here, if you use a mix of about “sequence risk” AGG:TLT:All Country Equity = 30:20:50, the decline is softened, and you can “reduce the number of units sold.” You can cover part of your living expenses with distributions and supplement the rest by partially selling AGG. It was realistic to manage it such that TLT is kept in reserve until "that time" without selling it.
Scenario B: High Interest Rates -> Rate Cuts -> Gradual Recovery
In a phase where interest rates start to be cut after remaining high, the spring of TLT is effective. You can partially realize capital gains from TLT as a "bridge" until stocks recover, and use that for living expenses and "buying the next risk assets." The movement of "buying time with bonds and handing that time over to stocks" eases the tension of the withdrawal period.
In both cases, what worked consistently was the three-layer structure of "Cash Bucket (6–12 months)" + "AGG (2–3 years)" + "All Country Equity & TLT (Long-term)." The order of withdrawal is Cash -> AGG -> (if necessary) TLT/Stocks. Just by deciding the "order of what to sell" first, I stopped being swayed by market news.
Practical Notes: Currency, Hedging, Taxation, and Sales Flow
What often gets stuck at the exit is the "setup." I will leave the notes I wrote for myself here as they are.
Currency: US ETFs are dollar-denominated. If your living expenses are in yen, decide first how to incorporate exchange rates (e.g., accept it as "part of long-term diversification" without hedging / substitute with domestic investment trusts with yen hedging).
Distribution Taxation: Foreign ETF distributions have the issue of double taxation. If you hold them in the growth quota of the new NISA, distributions are tax-free; if in a specific account, design it based on after-tax cash.
Sales Flow: Sell only the "shortfall in living expenses from last month" at the beginning of the month. In principle, sell AGG; sell stocks and TLT "only when rebalancing is necessary."
Rebalancing Date: Once a year, on a fixed date. In years when stocks have increased too much, move to AGG; in years when AGG has expanded, move to stocks. Leave the "criteria for buying/selling" to the calendar.
When you break down what to do into "dates and order," the exit returns to the realm of design.
Even so, stocks are the protagonist: The dual-wielding of a "growth device" and a "receiving device"
I don't want you to misunderstand: the protagonist is ultimately stocks (All Country Equity). The world will continue to grow on average. I have yet to find a reason to get off that ride. Bonds are the "receiving device" that protects the protagonist. Use income to regulate the rhythm of life, and automate "trimming the one that went up and buying the one that went down" through rebalancing only when necessary. Designing an exit boils down to "reducing the number of your own decisions and making everything fall in line with the mechanism."
Small failures and my current resolution
To confess, in the past I held long-term bond funds with currency hedging under the premise of "long-term holding," and was gradually eroded during high-interest-rate periods when hedging costs piled up. The lesson is simple: "Hedging is a 'limited-time tool,' and long-term holding cannot beat the structure.". Also, I was once seduced by the allure of high-yield corporate bonds and trembled at the widening of spreads at the entrance of an economic recession. Do not mix "gears that could break" into your exit tools. This warning seems to suit me.
My current allocation and future verification
My current allocation is 40% All Country, 20% AGG, 20% TLT, 20% Cash. I adjust this balance based on the number of years until retirement, household earning power, fluctuations in educational expenses, and the remaining years on my mortgage. The goal is to minimize stress during the withdrawal phase by using a two-pronged approach of "stocks to hold for the long term" and "bonds that are easy to receive."
My management of bond ETFs is still in the "building while running" phase. Even when the stock market looks expensive, I follow the principle of never stop the accumulation / use bonds to catch my breath. I intend to observe in my own account how far TLT's "long spring" functions against changes in interest rates and economic cycles, while sticking only to this principle.
The "courage to withdraw" comes from the system
When I was young, I needed the "courage to grow" my assets. Now that I am in my late 40s, the "courage to withdraw" is more difficult. However, if distributions arrive according to the calendar and the order of sales is predetermined, no courage is required. The system calmly brings in cash.
All Country grows the future, AGG organizes today, and TLT catches the "what ifs." An exit strategy isn't flashy. That is precisely why it fits into daily life. Outside the market where the bells ring, what rings quietly every month is the notification sound of dividend deposits.
Summary: My "Exit" Blueprint (Notes)
The main engine is All Country, and bond ETFs are the "receiving device."
Three-layer structure (6–12 months of cash / 2–3 years of AGG / long-term stocks and TLT) to fix "what to sell first."
TLT is a spring. Use price increases during interest rate cut phases as a "bridge of time," and do not use it habitually without reason.
Design currency and taxes first (utilize New NISA / decide the point of contact with yen-based life).
Rebalance once a year / make selling decisions only once a month. Leave decision-making to the calendar.
It is precisely because I had an era of offense that defensive design has meaning. Accumulate with indices, receive with bonds, and return to life. That is my exit strategy. From here on, instead of chasing the market, I will simply align my investments with the rhythm of my life. I will let it ring for a long time with a quiet sound. For that purpose, today again, I check my accumulation, confirm the dividend deposit, and close the app.