Fortsetzung der Diskussion von Planning withdrawal strategy for parents retirement:
Thanks for the explanations @PhilMongoose and @Wolverine . Based on your explanation, this is my understanding: Dividends aren’t enough to cover expenses. Instead of selling your assets (ETFs), you continuously get and increase your margin loan to cover the delta between dividends and expenses. What I still don’t understand:
Would you never pay back any of the margin loan? This would leave it up to your heirs (or the government if you don’t have any heirs) to repay the loan, using your assets.
So far, I see this as a theoretical discussion. From my understanding, this is a very high risk strategy. You would not do this for your own investments and would neither recommend it to a typical VT-and-chill investor. Is my understanding correct?
Covering expenses with a margin loan only starts to make sense during a market crash imo, to not sell down depressed equities. Then pay it back once the market has recovered.
It will require very active management.
We don’t pay capital gains, there is no advantage for using a margin loan instead of selling assets during normal times. It’s the opposite, due to the interest + premium you pay on it. It also compounds itself.
I wouldn’t do this either probably tbh. If the market is good, no need to use a margin loan.
Also runs the following risk: you draw form a margin loan for three years or whatever, THEN the market crash comes and you are in debt + your equities going down. Not a nice situation to be in.
If you need to sell stocks to raise cash, then you want to sell at the highest price possible. Since stocks tend to go up over time, that implies all else being equal, you delaying the sale for as long as possible.
The main variable is whether the expected growth on stocks is expected to exceed margin costs.
Mostly, it is a tax optimisation strategy used by wealthy people in jurisdictions where capital gains taxes apply. I would read about the “buy, borrow, die” approach to get a better grasp on the basics.
Dividends are irrelevant. What matters is that you can sustain your margin requirements while growing your debt. Dividends aren’t needed to pay for the interests. If you don’t have new cashflows, the interests will be “paid” by increasing the debt.
One risk is in case of prolonged or deep market drawdown. In that situation, you may be forced to liquidate assets. By having postponed selling them, you end up selling them at depressed prices instead of the higher price they had at the start of the downturn. Selling regularly vs using a margin loan can be seen as the mirror to lump sum vs DCA in the decumulation phase. On average, lump sum (margin loan, provided the interests aren’t too high) wins but DCA carries you through the more damaging scenarii. In decumulation, the down periods are what “kills” you, especially if they happen at the start of your retirement. That is one reason why I would err on the side of selling regularly vs exposing myself to potentially having to do one big sell at low prices.
I would not advise it for a VT and chill investor.
I would not do it myself as if I have the temperament for investing on margin (which is what taking a margin loan to finance expenses is), I would see no reason not to do it regularly so I would select the amount of leverage I think I can afford and use that at all times.
One reason that would justify using a margin loan to finance expenses, stated by @PhilMongoose in the other thread, is simplicity (you don’t have to tamper with your allocation nor to enter sell orders). That’s fine with me if you have enough assets to be in the safe zone (make that a 2% withdrawing rate). It still requires monitoring if you are not.
If simplicity was my goal, I would use a solution like VIAC Invest that allows to automate taking out a regular amount and sell assets accordingly without resorting to debt (which is what I would recommend to a VT and chill investor if that’s the path they are after).
Edit:
Here again, my main focus and the main question I would ask myself is “am I willing to invest on margin / to use debt to leverage my investments?” Most people should not tamper with it as it introduces a very different set of risks they are likely not to be familiar with.
If you are familiar with the risks and think it is for you, then it opens a wide range of opportunities of which borrowing to pay expenses is just one. Be wary that in that world, 0 isn’t the floor. You can loose more than you have.
No one in this thread would use this strategy for her/his own portfolio. It therefore makes a more of a theoretical discussion, especially for Swiss investors, since Switzerland has no tax on capital gains and (in the future) no tax deduction on a margin loan.
It requires strict monitoring. → To me this is the opposite of simplicity.
It implies the use of market timing. → I consider this a tricky thing, especially since this margin loan strategy seems high risk to me.
tends to increase the expected return of the portfolio.
Also tends to increase the volatility.
If you’re a believer in mean reversion it may make sense to use it for withdrawals in drawdowns, but others it is pretty much like leverage in the accumulation phase.
I think each life/case is different and in some cases it makes sense.
Let’s assume you could come back to work at any point during your retirement (thus avoiding a margin call). (this is the case for people retiring really early). I think taking a loan could boost your portfolio performance
I’m sorry but somehow I don’t understand this article. I read a lot of data and statistics, but fail to understand if there are any practical conclusions or recommendation for a VT-and-chill investor.
To seconds @Tony1337 : From my understanding he doesn’t continuously increase his margin loan to pay his living expenses without ever paying back the loan, but uses margin at very specific points in time.
I believe you are being a bit too absolutist with such statements. I, for one, am using margin in CHF, at a current blended rate of 1.45%, to purchase/retain Swiss securities with relatively stable prices and decent fundamentals, paying dividends of 4% and above. This gives me a net return of 2.5%+ with a level of risk I am comfortable accepting (I could still be hit by a tomorrow, by the way…).
‘strict’ is subjective. It also depends on how much margin you take relative to the current value of your securities and, for example, how diversified your portfolio is (i.e. whether all your securities are likely to move in the same direction and by the same percentage in the event of a downturn).
I recall he uses the method I describe: he spends money and goes in to margin debt when cash runs out (in fact usually maintains negative balances). But the debt level doesn’t just go one way: the margin debt is reduced by dividend payments and mechanistic sales of positions.
If someone retired at 35yo-40yo, do you think they will never work again in their life?
Maybe some people will took a consulting gig for few months, ect. RE is not black or white, and not everything can be model in a spreadsheet.
Thanks for sharing. My statement was about a person who is using margin loan to pay for living expenses instead of reducing their investment by selling shares or ETFs. Your case is different, since you use margin to buy shares.
So far, the only person partially using this strategy to cover periods of less dividends is the former member cubanpete.
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