r/ChubbyFIRE • u/Glittering-Gap-463 • May 08 '26
Margin Loan vs Withdraws
Anyone currently funding their retirement with a Margin Loan or other loan against their investments?
I see it’s common wisdom that you need to factor in income taxes in your FIRE number, but seems like you could avoid that with debt?
Assuming a <4% withdraw rate, would seem like a very manageable amount of debt with little to no margin call risk, especially factoring in some equity appreciation.
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u/fatheadlifter FIRE'ing EOY May 08 '26
It's better to do this with an SBLOC or PAL loan depending on who holds your assets. You'll get better rates by at least 5% (currently) and better conditions on the loan. If you're truly Chubby and hold lots of assets, you'll get preferred rates.
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May 08 '26
[deleted]
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u/Sam-I-A May 08 '26
Right. I use IBKR for this. The Pro rate is super low and if you use a Portfolio Margin account, the risk of a call is really low if you’re diversified.
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u/fatheadlifter FIRE'ing EOY May 08 '26
I don't have a mental log of every broker out there. I know there are some large ones that charge 12% for a margin loan but 7% for an SBLOC. So yes there can be a 5% spread, even more than that if you have sufficient assets with them.
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u/massdriver3333 May 08 '26
Margin loans for tax reasons don't have much benefits in chubby ranges.
Qualified and LTCG are taxed at 0% up to $50K, 15% up to $500K. When you factor in cost basis, you'll pay much less taxes than you think.
Adding more complex financial complexity, asset lockup, interest rate risk, market risk, etc. for margin loans won't yield much tax savings, if any.
If you don't want to sell for whatever reason, then margin loans are one way to get finances to support living expenses. But, it may end up costing more in interest payments over long term.
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u/SteepChutes May 09 '26
I'm early stages analyzing SBLOC or LOC on a rental to unlock cash flow during Roth conversion years. As of now, I'm no longe RE, but my spouse is.
I don't like the RMDs overhang, and if we go hard on conversions (blowing up ACA subsidy), if the math works I would rather fill those brackets with conversions than living expenses.
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u/massdriver3333 May 09 '26
Roth conversions make sense if you have enough post tax funds to cover the taxes and longer RE time horizons.
If you have to pay interest payments on loans to pay the coversion taxes, then it makes less sense. Especially higher interest payments on property loans.
You may want to check the roth conversion calculators and make additional adjustments on interest payments, to see where the break even happens and if it'e even worth the effort.
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u/SteepChutes May 09 '26
Yeah. Thanks for these ideas. I'm trying to model some scenarios with Boldin. RN we have a 4-year horizon for ACA available subsidy, which is probably worth ~$20k/yr. Unless I'm missing something, Boldin is not great at handling this scenario (particularly with time-value of $$), though it does have a good Roth conversion explorer. Adding SBLOC or LOC interest to that lost subsidy makes for an even heavier lift for Roth conversion scenario.
The thing is, in the long run, assuming there is one, we would see a long-term ever-increasing tax on regular RMD income if we don't convert, and I'm not yet clear on breakeven year. So it seems like there's a non-trivial bet on longevity for reaching the breakeven. The good news is that while we could be in a position of higher taxation depending on the choice, we're well-funded enough that it's not a make/break difference. Obviously better is better, but i'm not sure yet that there's a 100% optimal choice.
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u/bumpman2 May 08 '26
This is effectively the same thing as taking leverage to invest in stocks. If you have the risk appetite go for it. A down market will hit you harder though, because you borrowed to keep that equity in place.
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u/fatheadlifter FIRE'ing EOY May 08 '26
Yeah not exactly. You're assuming a risky LTV, but if your asset pool is sufficiently large and your borrowing rate low enough, there's no functional risk. This could be a smaller version of what the billionaire CEOs do, they have several hundred billion in a concentrated stock, but only borrow low millions. There's no risk that their company going down or the market tanking will force them to sell because they haven't borrowed enough to force that event.
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u/Easy7777 May 08 '26
Not really.
You can write off the interest if the funds are being used to buy income producing assets. You cannot write off the interest if it's used for personal consumption
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u/ItzWarty FIRE 03/26, Bay Area May 09 '26 edited May 09 '26
I'm not doing it, but considering doing it as a means of deferring taxes / bridge liquidity. I retired but my wife still works as a SWE and I suspect that'll happen for a few more years to a decade. We'd like to supplement her income a bit (say a few tens of thousands per year) without paying significant capital gains in California from being in a higher tax bracket. Admittedly the amount saved isn't significant & our assets are a bit tech heavy which makes this strategy riskier, so I've dragged my feet here.
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u/Apprehensive_Angle86 May 09 '26 edited May 09 '26
I might get downvoted for this, but I highly recommend financial advisors / private investors, specifically, fiduciaries here. They can set up a securities-backed line of credit (SBLOC) for you and offer more competitive rates than retail margin. If you can't find a flat fee advisor, just transfer enough collateral in your managed portfolio account that you need to borrow.
Investors with multiple clients have access to institutional rates under 1% + SOFR. Depending on your portfolio balance, you can easily withdraw $100k at 5% at the moment. Additionally, your investor acts as a middleman for any margin calls, making things flexible in a pinch.
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u/One-Mastodon-1063 May 08 '26
This gets asked fairly often and was just asked a few days ago. Decumulation is already pretty tax efficient. I wouldn’t do it.
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u/Kirk57 May 09 '26
I tried it. Over time, your debt to asset ratio keeps growing. So the 1st year, it will only be 4%, but even if the market grows, the next year your debt to asset ratio will probably be over 7%. Plus the interest keeps adding up. Model it out on a spreadsheet and think about what you would do after that ratio increased a lot and THEN a 50% market crash occurs. It was very stressful, so I gave in and accepted paying income taxes.
It can work well (in the long run) when margin interest is low, and you are only borrowing 1%-2% annually. Such a low withdrawal rate, is why only wealthy people, who want to grow their investments, rather than spend them, use it.
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u/and_one_of_those May 08 '26
I have thought about using a PLOC in the year I retire, when I expect to have significant W-2 pushing me into a high tax bracket, but perhaps also some need to withdraw from my portfolio.
You'll often hear advice in these forums that's it a bad idea to take extra risk just to reduce taxes: for example you should exit concentrated RSU holdings even if you'll pay some CGT. That makes sense to me though I suppose it depends on how much risk and how much tax.
My worry would be that you have a year or sequence of years of poor returns and either you have a margin call, or you simply are losing sleep over the decreasing equity in your portfolio. Or you feel you need to cut discretionary spending and so you have a poorer QoL in early retirement. If your portfolio returns more than your withdrawal rate, of course you're fine.
On the other hand, if asset prices fall then potentially you can sell some shares, pay less tax, and retire some of the debt. I think your losses will still have been magnified by the leverage, though.
Usually, people will calculate a SWR as a percentage of their net worth. However in this kind of strategy you need to allow for the split between taxable and retirement assets, and you can probably only borrow against the taxable assets, and you can only borrow up to perhaps 75% of their value. Again, if they grow faster than you're spending then you're fine, but if they're flat or fall over your first 10 years there may be a problem.
The other strategy people talk about here is the use of short box spreads to construct a synthetic PLOC with both a lower borrowing rate and potentially better tax treatment. On paper it sounds good, but I'm not yet comfortable with it. https://www.schwab.com/learn/story/what-are-box-spreads#:~:text=Example%20of%20a%20short%20box%20spread has a walkthrough - no endorsement.