An idea for Billionaires (maybe even millionaires?)

[HBFIRE]

Question: Let’s say I am a paper billionaire (let’s say I own billions in the stock of some company). The stock provides great collateral for a personal loan. Suppose I want $10Mil each year to fund my lifestyle. I would assume I could borrow this money at some low interest rate, p, and then keep on getting new loans to pay for my new spending AND to pay back the previous loan. This is sustainable forever as long as p<growth rate of the value of the stock. Plus you are never selling your stock and paying taxes on it. Anyone know what the current value is for p? How much margin above 1year libor would such a person pay for a secured 1 year loan?

loans are not considered taxable income... so, tax-free millionaire lifestyle.

[Chris22]

I think that’s what they actually do.

[FIPurpose]

Yes this is exactly what Billionaires do and it is a big reason how they get away with paying so little in taxes.

[ChpBstrd]

We talked about this topic earlier this year when ProPublica obtained tax records - apparently from an IRS whistleblower - and revealed that billionaires are doing exactly this strategy to avoid paying taxes.

Specific questions:

1) The current value of p would be the margin loan rate on Interactive Brokers for loans greater than $1M. Currently this is 0.75%!
https://www.interactivebrokers.com/en/accounts/fees/pricing-margin-rates.php

2) This week's 1 year LIBOR is 0.32%. Presumably IB earns the spread between 0.75% and 0.32%.
https://www.bankrate.com/rates/interest-rates/1-year-libor.aspx

So yea, find something that will grow faster than 0.75% per year and it's free money, tax-free. Actually, it could grow less than that and still be sustainable if the maintenance margin is a long way down, or if you're only borrowing against a small fraction of your stock holdings.

[Morning Glory]

I heard something on npr just today about a proposed wealth tax on unrealized gains for billionaires,  designed to close this particular loophole.

[boarder42]

Question: Let’s say I am a paper billionaire (let’s say I own billions in the stock of some company). The stock provides great collateral for a personal loan. Suppose I want $10Mil each year to fund my lifestyle. I would assume I could borrow this money at some low interest rate, p, and then keep on getting new loans to pay for my new spending AND to pay back the previous loan. This is sustainable forever as long as p<growth rate of the value of the stock. Plus you are never selling your stock and paying taxes on it. Anyone know what the current value is for p? How much margin above 1year libor would such a person pay for a secured 1 year loan?

loans are not considered taxable income... so, tax-free millionaire lifestyle.

this is exactly what i plan to do with my withdrawal strategy though i'll be converting trad to roth and getting taxed on it.  you can get 1% over SOFR at most large online brokerage houses.  if the accounts get big enough maybe i can get them to negotiate a fixed rate for me.  But you don't actually have to pay back the previous loans these are interest only loans either thru margin or lines of credit where the interest is just a cost annually.  by my calculations there is a 75% chance I never have to even replenish my own taxable account with roth conversions.  and it makes withdrawals super safe. 

[Metalcat]

Yep, that's literally what they do, and we had a long thread about it last year I think.

[HBFIRE]

We talked about this topic earlier this year when ProPublica obtained tax records - apparently from an IRS whistleblower - and revealed that billionaires are doing exactly this strategy to avoid paying taxes.

Specific questions:

1) The current value of p would be the margin loan rate on Interactive Brokers for loans greater than $1M. Currently this is 0.75%!
https://www.interactivebrokers.com/en/accounts/fees/pricing-margin-rates.php

2) This week's 1 year LIBOR is 0.32%. Presumably IB earns the spread between 0.75% and 0.32%.
https://www.bankrate.com/rates/interest-rates/1-year-libor.aspx

So yea, find something that will grow faster than 0.75% per year and it's free money, tax-free. Actually, it could grow less than that and still be sustainable if the maintenance margin is a long way down, or if you're only borrowing against a small fraction of your stock holdings.

0.75%, wow!  I guess this is essentially a margin loan but can be used for lifestyle funding.   Equity monetization.  Only concern I guess is margin calls.  I guess in that event the estate just sells a portion of the holdings (zero tax since the basis was stepped up) and pays off the margin loan.  Fascinating stuff.

[boarder42]

We talked about this topic earlier this year when ProPublica obtained tax records - apparently from an IRS whistleblower - and revealed that billionaires are doing exactly this strategy to avoid paying taxes.

Specific questions:

1) The current value of p would be the margin loan rate on Interactive Brokers for loans greater than $1M. Currently this is 0.75%!
https://www.interactivebrokers.com/en/accounts/fees/pricing-margin-rates.php

2) This week's 1 year LIBOR is 0.32%. Presumably IB earns the spread between 0.75% and 0.32%.
https://www.bankrate.com/rates/interest-rates/1-year-libor.aspx

So yea, find something that will grow faster than 0.75% per year and it's free money, tax-free. Actually, it could grow less than that and still be sustainable if the maintenance margin is a long way down, or if you're only borrowing against a small fraction of your stock holdings.

0.75%, wow!  I guess this is essentially a margin loan but can be used for lifestyle funding.   Equity monetization.  Only concern I guess is margin calls.  I guess in that event the estate just sells a portion of the holdings (zero tax since the basis was stepped up) and pays off the margin loan.  Fascinating stuff.

margin calls are just on the gap in the max percentage I've covered this in detail with Etrade on my accounts. IBKR is aggressive with margin i've heard, but opening a line of credit at etrade allows me to tap more of my money up to 65% with a 5% buffer til i get a margin call and i've been able to negotiate them down to 1.5% but am planning to push them for 1%? and again all that call does is set a 3 day clock for my assets in my taxable account to be above the 70% cap.  Which if the market bounces back in that window resets the clock.  Alternatively i can just move money from my roth contributions to taxable and invest them in my chosen AA to cover this call.

[HBFIRE]

margin calls are just on the gap in the max percentage I've covered this in detail with Etrade on my accounts. IBKR is aggressive with margin i've heard, but opening a line of credit at etrade allows me to tap more of my money up to 65% with a 5% buffer til i get a margin call and i've been able to negotiate them down to 1.5% but am planning to push them for 1%? and again all that call does is set a 3 day clock for my assets in my taxable account to be above the 70% cap.  Which if the market bounces back in that window resets the clock.  Alternatively i can just move money from my roth contributions to taxable and invest them in my chosen AA to cover this call.

Thanks, is this all covered in your journal?  I'd like to read up more on this.

[boarder42]

margin calls are just on the gap in the max percentage I've covered this in detail with Etrade on my accounts. IBKR is aggressive with margin i've heard, but opening a line of credit at etrade allows me to tap more of my money up to 65% with a 5% buffer til i get a margin call and i've been able to negotiate them down to 1.5% but am planning to push them for 1%? and again all that call does is set a 3 day clock for my assets in my taxable account to be above the 70% cap.  Which if the market bounces back in that window resets the clock.  Alternatively i can just move money from my roth contributions to taxable and invest them in my chosen AA to cover this call.

Thanks, is this all covered in your journal?  I'd like to read up more on this.

not sure to what detail i've covered it as i havent actively started doing this with Etrade yet.  Waiting on my 1k free IBKR money to clear then i can move it to etrade and work out our agreement.

[PathtoFIRE]

Think I saw this exact same question come across the FatFIRE FB group, is that you? I was a little intrigued by one of the commenters there detailing their liquidity access line (LAL), something that I'd never heard of. Thought I'd throw that out there to see if anyone else had experience with that, as the discussions here a usually more in depth and helpful than on FB.

[HBFIRE]

Think I saw this exact same question come across the FatFIRE FB group, is that you? I was a little intrigued by one of the commenters there detailing their liquidity access line (LAL), something that I'd never heard of. Thought I'd throw that out there to see if anyone else had experience with that, as the discussions here a usually more in depth and helpful than on FB.

Yeah, that was me. 

[bacchi]

The margin loan interest eventually becomes tax deductible, right? Which is just billionaires rubbing salt into the wound.

What's the end result of borrowing more and more?

1) Market decline so that there's no longer any room to borrow and/or some of the loan has to be paid back; or
2) Keep borrowing in a rising market, which might even keep pace with the withdrawals; or
3) The fed raises rates.

We're right smack in 2) currently. At the IB rate, even the VTI dividend could cover the interest. We might start to see 3) next year if inflation continues.

[boarder42]

The margin loan interest eventually becomes tax deductible, right? Which is just billionaires rubbing salt into the wound.

What's the end result of borrowing more and more?

1) Market decline so that there's no longer any room to borrow and/or some of the loan has to be paid back; or
2) Keep borrowing in a rising market, which might even keep pace with the withdrawals; or
3) The fed raises rates.

We're right smack in 2) currently. At the IB rate, even the VTI dividend could cover the interest. We might start to see 3) next year if inflation continues.

yes if you itemize the interest is tax deductible.  If they had gotten rid of the SALT cap in this damn bill i'd be able to deduct all my interest which is really pennies right now. 

number 3 is the risk in this strategy - but rates tend to move up slowly and you have time to pay the loans back off and switch back to a typical withdrawal strategy but I think loans up to 6% are pretty comfy for me and the last time we saw rates that high was pre 08 crash so it could take decades to get back there. 

on number 1 you can buy more shares vs paying back the loan - sell shares of contributions in a roth to buy the same shares in your taxable.  I didn't see language about elimination of the step up basis so this works for the avg middle class FIREee still.  worst case i'm selling some traditional shares off and moving that over and paying a bit more tax on that.  But i've run some worst case scenarios and its hard to even ever have to add money to my taxable account maybe 25% of cases with my personal balance at FIRE.

[secondcor521]

The margin loan interest eventually becomes tax deductible, right? Which is just billionaires rubbing salt into the wound.

yes if you itemize the interest is tax deductible.  If they had gotten rid of the SALT cap in this damn bill i'd be able to deduct all my interest which is really pennies right now. 

I'd be careful on deducting the interest.  The way I read the IRS instructions for that line on Schedule A (https://www.irs.gov/instructions/i1040sca#idm140356990616208) is that it is interest that you accrued in order to buy investments, such as buying additional stock on margin.  Deducting investment interest on an asset-backed loan to fund one's lifestyle is dubious.  Maybe billionaires deduct it, maybe they don't.  Maybe others do, maybe they don't.  Consult your tax professional I guess.

@boarder42, the SALT cap is in a completely different section of Schedule A from investment interest, so I don't see the relevance to the conversation on investment interest.  Unless you're meaning that you have mortgage interest above the SALT cap that you'd like to be able to deduct but aren't able to now.

[Morning Glory]

The margin loan interest eventually becomes tax deductible, right? Which is just billionaires rubbing salt into the wound.

That is fucking insane. We should be charging tax on margin loans, not the other way around. Maybe just a small transaction tax at loan origination, paid by the borrower.

[bacchi]

The margin loan interest eventually becomes tax deductible, right? Which is just billionaires rubbing salt into the wound.

That is fucking insane. We should be charging tax on margin loans, not the other way around. Maybe just a small transaction tax at loan origination, paid by the borrower.

Or do a version of the billionaire's tax -- charge a small cap gains rate, mark-to-market, on the assets securing the margin loan. That would encourage borrowers to keep selling assets instead of holding them until death and a step-up.

[Luke Warm]

how poor can i be and have this plan work for me and still be practical? $1 million, hundred thousand?

[bacchi]

how poor can i be and have this plan work for me and still be practical? $1 million, hundred thousand?

The sustainable amount is probably 25x so that your loans never exceed your asset growth. You can certainly do it with less but, eventually, your margin will be too high to safely pull out more. A lot of your assets need to be in your taxable account, too. It does no good to take a $40k margin loan each year with $100k in a taxable account and $1M in an IRA.

[secondcor521]

how poor can i be and have this plan work for me and still be practical? $1 million, hundred thousand?

Enough to avoid a margin call, which will in turn depend on your portfolio volatility and your withdrawal rate.  It also could depend on your relationship with whomever you are borrowing from - I'm sure an investing whale could negotiate somewhat better terms than an average joe.

I could probably make it work with my S&P500-volatility portfolio and my sub 1% WR.  But I don't really need to, and I'm unambitious enough to not be interested in trading out my simplicity for piling up more money.

As an aside to those on this thread, the mark-to-market wealth tax idea is not in the latest version of the Biden bill.

[seattlecyclone]

The margin loan interest eventually becomes tax deductible, right? Which is just billionaires rubbing salt into the wound.

yes if you itemize the interest is tax deductible.  If they had gotten rid of the SALT cap in this damn bill i'd be able to deduct all my interest which is really pennies right now. 

I'd be careful on deducting the interest.  The way I read the IRS instructions for that line on Schedule A (https://www.irs.gov/instructions/i1040sca#idm140356990616208) is that it is interest that you accrued in order to buy investments, such as buying additional stock on margin.  Deducting investment interest on an asset-backed loan to fund one's lifestyle is dubious.  Maybe billionaires deduct it, maybe they don't.  Maybe others do, maybe they don't.  Consult your tax professional I guess.

Right, the interest needs to be on loans you used to purchase investments. However money is fungible.

Suppose you buy stock on margin the week before VTSAX pays its quarterly dividends. That loan would be deductible, right? You clearly purchased stock with borrowed money. The next week, in a separate transaction, VTSAX pays a dividend and you have this dividend sent to your checking account.

As far as your bank account is concerned this is the has the same result as taking a margin loan to your checking account and reinvesting the dividend, but in the first example you can deduct the interest indefinitely.

[secondcor521]

The margin loan interest eventually becomes tax deductible, right? Which is just billionaires rubbing salt into the wound.

yes if you itemize the interest is tax deductible.  If they had gotten rid of the SALT cap in this damn bill i'd be able to deduct all my interest which is really pennies right now. 

I'd be careful on deducting the interest.  The way I read the IRS instructions for that line on Schedule A (https://www.irs.gov/instructions/i1040sca#idm140356990616208) is that it is interest that you accrued in order to buy investments, such as buying additional stock on margin.  Deducting investment interest on an asset-backed loan to fund one's lifestyle is dubious.  Maybe billionaires deduct it, maybe they don't.  Maybe others do, maybe they don't.  Consult your tax professional I guess.

Right, the interest needs to be on loans you used to purchase investments. However money is fungible.

Suppose you buy stock on margin the week before VTSAX pays its quarterly dividends. That loan would be deductible, right? You clearly purchased stock with borrowed money. The next week, in a separate transaction, VTSAX pays a dividend and you have this dividend sent to your checking account.

As far as your bank account is concerned this is the has the same result as taking a margin loan to your checking account and reinvesting the dividend, but in the first example you can deduct the interest indefinitely.

I agree with you generally.

That being said, if that's the tax position of the people using this technique (hopefully it is, because I think your position is legitimate while others might not be), then the scope of the scheme is limited to those folks who can live off their taxable investment dividend streams.  People who own, say, 1000 shares of BRK.A would have the wealth to do it but not the dividend income.

To put it another way and to use your example of VTSAX, for every VTSAX share I might have owned in my taxable account last month, I could generate a whopping $0.3496 of tax deductible margined debt to spend.  Which is enough to pay the sales tax on one Starbucks grande mocha, or buy enough gas to drive my car about 2 miles.

[boarder42]

how poor can i be and have this plan work for me and still be practical? $1 million, hundred thousand?

Depends how much is in your total accounts. My taxable is about 400k and my total accounts are 2mm and etrade is offering at least 1.5 over sofr but I plan to get 1

[secondcor521]

The margin loan interest eventually becomes tax deductible, right? Which is just billionaires rubbing salt into the wound.

yes if you itemize the interest is tax deductible.  If they had gotten rid of the SALT cap in this damn bill i'd be able to deduct all my interest which is really pennies right now. 

I'd be careful on deducting the interest.  The way I read the IRS instructions for that line on Schedule A (https://www.irs.gov/instructions/i1040sca#idm140356990616208) is that it is interest that you accrued in order to buy investments, such as buying additional stock on margin.  Deducting investment interest on an asset-backed loan to fund one's lifestyle is dubious.  Maybe billionaires deduct it, maybe they don't.  Maybe others do, maybe they don't.  Consult your tax professional I guess.

Right, the interest needs to be on loans you used to purchase investments. However money is fungible.

Suppose you buy stock on margin the week before VTSAX pays its quarterly dividends. That loan would be deductible, right? You clearly purchased stock with borrowed money. The next week, in a separate transaction, VTSAX pays a dividend and you have this dividend sent to your checking account.

As far as your bank account is concerned this is the has the same result as taking a margin loan to your checking account and reinvesting the dividend, but in the first example you can deduct the interest indefinitely.

I agree with you generally.

That being said, if that's the tax position of the people using this technique (hopefully it is, because I think your position is legitimate while others might not be), then the scope of the scheme is limited to those folks who can live off their taxable investment dividend streams.  People who own, say, 1000 shares of BRK.A would have the wealth to do it but not the dividend income.

To put it another way and to use your example of VTSAX, for every VTSAX share I might have owned in my taxable account last month, I could generate a whopping $0.3496 of tax deductible margined debt to spend.  Which is enough to pay the sales tax on one Starbucks grande mocha, or buy enough gas to drive my car about 2 miles.

I guess there are two other options:

1.  Go ahead and margin, just don't deduct the interest.

2.  Ignore the IRS rules and deduct it anyway, hoping not to get audited.

[ChpBstrd]

how poor can i be and have this plan work for me and still be practical? $1 million, hundred thousand?

A person could technically execute this plan with $2,000 in an IB account.

However, during a bull market we often forget how leverage cuts both ways and increases the volatility of a portfolio. I.e. if your $1M portfolio is controlling $2M in stock through margin loans, a 20% correction costs you $400,000 instead of $200,000. If you are working with a withdraw rate in the 4-6% range, the leverage could turn what would have been a survivable correction into a Sequence of Return Risk incident. It's even worse if you get margin called on a dip and then miss the recovery the following month.

Billionaires also face such issues at their level, but they may be working with (a) very low WR's, allowing them to simply post more shares as collateral during downturns, (b) more lag time for their "wealth management" lenders to margin call them than, say, a retail investor using IB which automatically liquidates them, or (c) such rapidly appreciating stock prices that eventually their collateral would have to fall a huge amount to be margin called. Additionally, if it all went to shit, a billionaire could shift from a $100M/year lifestyle to a $10M/year lifestyle. I'm sure this would be exquisitely painful for them in their own way, but it's simply not the same risk as a middle class retiree going from a $50k income to a $20k income. When a middle class retirement portfolio gets wiped out, it means making tough decisions between buying shelter, food, and healthcare. No one has ever died, except perhaps from suicide, because they had to go from a $100M/year lifestyle to only spending $10M/year, but we do in fact live in a country where thousands of people die from poverty every single day (living in polluted or high-crime places, lack of shelter or healthy food leading to chronic conditions, lack of access to medical care and prescriptions, etc.).

In a nutshell, middle class and lower-upper-class people must constrain their risk tolerance in a way the super-rich don't have to worry about. For regular folks, losing half our portfolio at age 65 would be a disaster. For the super-rich, perhaps they sell that condo in Monaco they never visit anyway, lease a jet instead of owning it outright, and quit yachting.

[seattlecyclone]

To put it another way and to use your example of VTSAX, for every VTSAX share I might have owned in my taxable account last month, I could generate a whopping $0.3496 of tax deductible margined debt to spend.  Which is enough to pay the sales tax on one Starbucks grande mocha, or buy enough gas to drive my car about 2 miles.

If you owned $10 million worth of VTSAX last month that quarterly dividend would have been over $30,000. Once you get to that level of net worth, if you're going to be doing the margin loan strategy anyway, it seems worthwhile to make sure some portion of that interest is deductible if it's this convenient to do. Your lifestyle might entail spending more than $10k/month, in which case you can just take some non-deductible loans as well.

[secondcor521]

To put it another way and to use your example of VTSAX, for every VTSAX share I might have owned in my taxable account last month, I could generate a whopping $0.3496 of tax deductible margined debt to spend.  Which is enough to pay the sales tax on one Starbucks grande mocha, or buy enough gas to drive my car about 2 miles.

If you owned $10 million worth of VTSAX last month that quarterly dividend would have been over $30,000. Once you get to that level of net worth, if you're going to be doing the margin loan strategy anyway, it seems worthwhile to make sure some portion of that interest is deductible if it's this convenient to do. Your lifestyle might entail spending more than $10k/month, in which case you can just take some non-deductible loans as well.

(I should interject here that I'm fond of exploiting loopholes, so my comments here should be interpreted in the light of trying to figure out how workable this idea is, not to shoot it down.  Although finding flaws is part of my personality as well.)

OK.  So I can either collect my $30K quarterly dividend checks automatically, or do the margin thing.

Buying $30K on margin then receiving the dividend creates, at 1% interest per year, $300 of deductible interest per quarter, or $1200 per year.  If I do this margin thing for ten years, that gets me up to $12,000 per year of deductible interest.  The standard deduction for a single filer in 2020 was $12,400, obviously about twice that for MFJ and going up each year.  I guess a decamillionaire also probably pays property taxes and such, so they'd probably get the full deduction.  But even assuming a 50% rate on that $1200 per year deduction, that's $600.  I can't see a decamillionaire getting worked up over saving $600 a year.

And that ignores the hassle factor of setting up the margin loan, timing the loans, doing the bookkeeping, etc.  Sure, decamillionaires can afford it and don't have to mess around with doing their own taxes.  But there is some cost they're probably bearing to do this (could be a few hundred a year?)

There would still be the arbitrage opportunity of borrowing at 1% on assets growing at 10%, which seems to me to be the (waaaay) bigger deal.

And of course there is just the fun of exploiting loopholes, something I find myself doing even when it doesn't make that much financial sense.  I spent $200 on a hotel room the other day and took the second small bar of face soap with me.  Probably a dime's worth, but hey, it was "free" soap.

[MustacheAndaHalf]

1) The current value of p would be the margin loan rate on Interactive Brokers for loans greater than $1M. Currently this is 0.75%!
https://www.interactivebrokers.com/en/accounts/fees/pricing-margin-rates.php

Because rates are tiered, everyone pays $1.58% on the first $100k, and 1.08% on the next $900k.  I guess loans of several million would be like paying 0.75% plus $3800 in extra interest on the first million.

how poor can i be and have this plan work for me and still be practical? $1 million, hundred thousand?

The sustainable amount is probably 25x so that your loans never exceed your asset growth. You can certainly do it with less but, eventually, your margin will be too high to safely pull out more. A lot of your assets need to be in your taxable account, too. It does no good to take a $40k margin loan each year with $100k in a taxable account and $1M in an IRA.

No, because the 4% rule assumes withdrawing assets, which stop growing.  A margin loan lets those assets grow indefinitely, so they can support a greater than 4% (25x) withdrawal rate.

For example, $1M in Vanguard Total World ETF and no cash.  Portfolio Visualizer shows 9.75%/year average for the past ~50 years.  Using that average for 3 years, assets grow by $97.5k, then $107k, and finally $117k through compounding.

Now the margin loan of $40k (1/25th), with $40k of withdrawals and $632 interest owed.  Year 2, $80k has been withdrawn, and another $1274 interest added.  Once the loan passes $100k, you can view it as $500/yr and 1.08% on the full amount.  Withdrawals of $120k plus a total of $3,280 interest.

After 3 years, this example has assets of $1.32M and a $123k loan.  The net value of the account climbed 20%, which is like 6.2%/year compounded.  It seems from these calculations that margin loans in retirement could support a higher than 4% withdrawal rate.

A margin loan also greatly reduces sequence of returns risk.  Say the assets drop by 50% in the first year.  That's still $500k in assets and $40.6k in margin loan.  No assets are being sold in a downturn, so they can make a full recovery.

[boarder42]

Correct if someone saves to a 4% swr them this system makes it very very easy to grow that wealth indefinitely. And reduces sorr risk assuming the down turn is early. It practically eliminates 2-3 years sorr risk. Then depending on the size of your taxable assets that allow you to use this margin and what early perform was it increases risk in years 5-10 or so this shifts alot based on the sequencing.

I've run these numbers with my asset allocation. And at the ripe old age of 90 I get 50MM in loans with 100MM lowest 10% worst case investments account size. 50MM is at 7% interest on the loan or margin. 

[scottish]

1) The current value of p would be the margin loan rate on Interactive Brokers for loans greater than $1M. Currently this is 0.75%!
https://www.interactivebrokers.com/en/accounts/fees/pricing-margin-rates.php

Because rates are tiered, everyone pays $1.58% on the first $100k, and 1.08% on the next $900k.  I guess loans of several million would be like paying 0.75% plus $3800 in extra interest on the first million.

how poor can i be and have this plan work for me and still be practical? $1 million, hundred thousand?

The sustainable amount is probably 25x so that your loans never exceed your asset growth. You can certainly do it with less but, eventually, your margin will be too high to safely pull out more. A lot of your assets need to be in your taxable account, too. It does no good to take a $40k margin loan each year with $100k in a taxable account and $1M in an IRA.

No, because the 4% rule assumes withdrawing assets, which stop growing.  A margin loan lets those assets grow indefinitely, so they can support a greater than 4% (25x) withdrawal rate.

For example, $1M in Vanguard Total World ETF and no cash.  Portfolio Visualizer shows 9.75%/year average for the past ~50 years.  Using that average for 3 years, assets grow by $97.5k, then $107k, and finally $117k through compounding.

Now the margin loan of $40k (1/25th), with $40k of withdrawals and $632 interest owed.  Year 2, $80k has been withdrawn, and another $1274 interest added.  Once the loan passes $100k, you can view it as $500/yr and 1.08% on the full amount.  Withdrawals of $120k plus a total of $3,280 interest.

After 3 years, this example has assets of $1.32M and a $123k loan.  The net value of the account climbed 20%, which is like 6.2%/year compounded.  It seems from these calculations that margin loans in retirement could support a higher than 4% withdrawal rate.

A margin loan also greatly reduces sequence of returns risk.  Say the assets drop by 50% in the first year.  That's still $500k in assets and $40.6k in margin loan.  No assets are being sold in a downturn, so they can make a full recovery.

When would you expect to get a margin call as your assets dropped in value?   That would screw up your plan, but I guess you're probably ok if you've got $123K on margin with $500K in assets...

[Rdy2Fire]

I'm not even close to a billionaire and this is what I did last couple of years as I was able to get a loan (my holdings as collateral) for 1.2% seemed like free money to me so I took it

[HBFIRE]

I'm not even close to a billionaire and this is what I did last couple of years as I was able to get a loan (my holdings as collateral) for 1.2% seemed like free money to me so I took it

Very nice.  So its able to fund your lifestyle completely?

[PKFFW]

No, because the 4% rule assumes withdrawing assets, which stop growing.  A margin loan lets those assets grow indefinitely, so they can support a greater than 4% (25x) withdrawal rate.

For example, $1M in Vanguard Total World ETF and no cash.  Portfolio Visualizer shows 9.75%/year average for the past ~50 years.  Using that average for 3 years, assets grow by $97.5k, then $107k, and finally $117k through compounding.

Now the margin loan of $40k (1/25th), with $40k of withdrawals and $632 interest owed.  Year 2, $80k has been withdrawn, and another $1274 interest added.  Once the loan passes $100k, you can view it as $500/yr and 1.08% on the full amount.  Withdrawals of $120k plus a total of $3,280 interest.

After 3 years, this example has assets of $1.32M and a $123k loan.  The net value of the account climbed 20%, which is like 6.2%/year compounded.  It seems from these calculations that margin loans in retirement could support a higher than 4% withdrawal rate.

A margin loan also greatly reduces sequence of returns risk.  Say the assets drop by 50% in the first year.  That's still $500k in assets and $40.6k in margin loan.  No assets are being sold in a downturn, so they can make a full recovery.

A timely article that might be of interest.  Seems the situation is not quite so clear cut....

https://earlyretirementnow.com/2021/11/16/leverage-in-retirement-swr-series-part-49/

[Rdy2Fire]

I'm not even close to a billionaire and this is what I did last couple of years as I was able to get a loan (my holdings as collateral) for 1.2% seemed like free money to me so I took it

Very nice.  So its able to fund your lifestyle completely?

Well to be honest that wasn't my initial goal. My goal or reasoning was to keep my money working the way it was rather then sell or move investments that were making MUCH more then 1.2%. With that said, yes I took enough to fund me for 2 years.

When it was due, I took dividend $$ and some funds from positions I had exited and paid it off. I could have extended it and taken more but that that point it would have been just over 3% (still a good rate) and I thought I'd wait to see if the rate would be offered again. Had I given it more thought initially I could have taken more, for 5 yrs at 1% and probably should have.

[MustacheAndaHalf]

No, because the 4% rule assumes withdrawing assets, which stop growing.  A margin loan lets those assets grow indefinitely, so they can support a greater than 4% (25x) withdrawal rate.

For example, $1M in Vanguard Total World ETF and no cash.  Portfolio Visualizer shows 9.75%/year average for the past ~50 years.  Using that average for 3 years, assets grow by $97.5k, then $107k, and finally $117k through compounding.

Now the margin loan of $40k (1/25th), with $40k of withdrawals and $632 interest owed.  Year 2, $80k has been withdrawn, and another $1274 interest added.  Once the loan passes $100k, you can view it as $500/yr and 1.08% on the full amount.  Withdrawals of $120k plus a total of $3,280 interest.

After 3 years, this example has assets of $1.32M and a $123k loan.  The net value of the account climbed 20%, which is like 6.2%/year compounded.  It seems from these calculations that margin loans in retirement could support a higher than 4% withdrawal rate.

A margin loan also greatly reduces sequence of returns risk.  Say the assets drop by 50% in the first year.  That's still $500k in assets and $40.6k in margin loan.  No assets are being sold in a downturn, so they can make a full recovery.

A timely article that might be of interest.  Seems the situation is not quite so clear cut....

https://earlyretirementnow.com/2021/11/16/leverage-in-retirement-swr-series-part-49/

Billionaires don't need to accumulate!  :)  What I described is for someone already holding retirement assets, who takes out a margin loan to fund their living expenses.  You're thinking of someone early on using margin to increase their returns, which also risks wiping out the whole account.

[MustacheAndaHalf]

1) The current value of p would be the margin loan rate on Interactive Brokers for loans greater than $1M. Currently this is 0.75%!
https://www.interactivebrokers.com/en/accounts/fees/pricing-margin-rates.php

Because rates are tiered, everyone pays $1.58% on the first $100k, and 1.08% on the next $900k.  I guess loans of several million would be like paying 0.75% plus $3800 in extra interest on the first million.

how poor can i be and have this plan work for me and still be practical? $1 million, hundred thousand?

The sustainable amount is probably 25x so that your loans never exceed your asset growth. You can certainly do it with less but, eventually, your margin will be too high to safely pull out more. A lot of your assets need to be in your taxable account, too. It does no good to take a $40k margin loan each year with $100k in a taxable account and $1M in an IRA.

No, because the 4% rule assumes withdrawing assets, which stop growing.  A margin loan lets those assets grow indefinitely, so they can support a greater than 4% (25x) withdrawal rate.

For example, $1M in Vanguard Total World ETF and no cash.  Portfolio Visualizer shows 9.75%/year average for the past ~50 years.  Using that average for 3 years, assets grow by $97.5k, then $107k, and finally $117k through compounding.

Now the margin loan of $40k (1/25th), with $40k of withdrawals and $632 interest owed.  Year 2, $80k has been withdrawn, and another $1274 interest added.  Once the loan passes $100k, you can view it as $500/yr and 1.08% on the full amount.  Withdrawals of $120k plus a total of $3,280 interest.

After 3 years, this example has assets of $1.32M and a $123k loan.  The net value of the account climbed 20%, which is like 6.2%/year compounded.  It seems from these calculations that margin loans in retirement could support a higher than 4% withdrawal rate.

A margin loan also greatly reduces sequence of returns risk.  Say the assets drop by 50% in the first year.  That's still $500k in assets and $40.6k in margin loan.  No assets are being sold in a downturn, so they can make a full recovery.

When would you expect to get a margin call as your assets dropped in value?   That would screw up your plan, but I guess you're probably ok if you've got $123K on margin with $500K in assets...

Well in the 1920s, even that would have been wiped out by 90% drop in stock values.  I think those times are gone with all the lessons learned and institutional help the markets get (like in 2008, and 2020).  If you visit Portfolio Visualizer, you can view 1972-2021 returns, and see the largest withdrawal period in that time:
https://www.portfoliovisualizer.com/backtest-asset-class-allocation#analysisResults

What I see is 50.89% max drawdown since 1972.  If that happened in your first 1-2 years, your $1 million drops to $491k, but your margin loan is at most $81k.  So you have 6x more assets than debt, and are fine.  You can run scenarios to see if it should work according to history - but there's always uncertainty in future returns.

Further along, after 10 years with a market going up 10%/year, your $1 million becomes $2.6 million.  Maybe margin loans now cost 2% from $100k-$900k, so the $400k borrowed has become $500k.  Even then, a 50% drop leaves $1.3 million in assets versus $0.5 million in margin loan debt.

In another thread I learned people are starting to negotiate margin rates with Schwab and Fidelity.  So if you consider margin for leverage or living expenses, try asking for a lower rate first (check on IBKR's rates, so you can use those).

[PKFFW]

Billionaires don't need to accumulate!  :)  What I described is for someone already holding retirement assets, who takes out a margin loan to fund their living expenses.  You're thinking of someone early on using margin to increase their returns, which also risks wiping out the whole account.

Maybe we read different articles?  It's in the title...."Using leverage in retirement".  The article is about taking a margin loan to fund your retirement expenses, and thereby hopefully protect against SORR and possibly even eek out a bit higher SWR, and using your portfolio to fund the margin requirements.  The following paragraph sums it up...

What’s the maximum size of the loan at the end of the 30-year horizon? No bank would give us a loan worth the entire 3x initial capital. Interactive Brokers, for example, mandates a minimum 25% margin requirement for stocks and mutual funds. In other words, if we start with a $1m portfolio that grows to $3m after 30 years, we’d need at least $750k net equity in the account at T=30, limiting the loan to “only” $2.25m in the final year. But even that is pushing it. Prudent investors would likely target a much lower leverage ratio for several reasons:

[MustacheAndaHalf]

Billionaires don't need to accumulate!  :)  What I described is for someone already holding retirement assets, who takes out a margin loan to fund their living expenses.  You're thinking of someone early on using margin to increase their returns, which also risks wiping out the whole account.

Maybe we read different articles?  It's in the title...."Using leverage in retirement".  The article is about taking a margin loan to fund your retirement expenses, and thereby hopefully protect against SORR and possibly even eek out a bit higher SWR, and using your portfolio to fund the margin requirements.  The following paragraph sums it up...

This thread is "An idea for billionaires", not what you're posting about.  The first post in this thread starts with:

Question: Let’s say I am a paper billionaire (let’s say I own billions in the stock of some company). The stock provides great collateral for a personal loan. Suppose I want $10Mil each year to fund my lifestyle. I would assume I could borrow this money at some low interest rate, p, and then keep on getting new loans to pay for my new spending AND to pay back the previous loan.

[PKFFW]

This thread is "An idea for billionaires", not what you're posting about.  The first post in this thread starts with:

Ok, fair enough.

Seems pretty obvious that if you ever accumulate "Billions in stock", it will be easy enough to borrow $10mil against it and pay whatever interest rate asked without issue.