Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Getting your SWR using borrowed money
Old 08-02-2013, 11:01 PM   #1
Full time employment: Posting here.
 
Join Date: Aug 2009
Posts: 522
Getting your SWR using borrowed money

I was wondering if anyone had given any thought to borrowing against the portfolio ( or house etc) in down years, so that they don't deplete the portfolio, and paying it back when the portfolio had recovered. On first glance I'm sure none of us like the idea of borrowing, but maybe it's a good idea. Anyone see any problems with it?
__________________

__________________
bmcgonig is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 08-03-2013, 12:09 AM   #2
Thinks s/he gets paid by the post
Htown Harry's Avatar
 
Join Date: May 2007
Posts: 1,516
Well, I have now thought about it long enough to run this back-of-the-envelope calculation.

(Not exactly the one you suggested, but close.)

Sorry, but I am not enthusiastic. I believe varying withdrawal rates in down years is the way I will go if I
lose my nerve choose to react to market fluctuations.

Scenario 1 up year / down year /up year, with borrowing
Jan 1, 2014 portfolio value = $100,000
Withdraw 4% for 2014 living expenses = - $4000
Jan 2, 2014 portfolio value = $96,000
2014 portfolio return of 8% = +7680
Jan 1, 2015 portfolio value = $103,680
Withdraw 103% of $4000 = - $4120
Jan 2, 2015 portfolio value = $99,560
2015 portfolio return of -8% = -$7965
Jan 1, 2016 portfolio value = $91,595
Down year, no withdrawal;
Instead borrow 103% of $4120 = $4244 (@ 5%)
Jan 2, 2016 portfolio value = $91,595
2016 Market return of 8% = $7328
Jan 1, 2017 portfolio value = $98, 923
Withdraw 105% of $4244 to repay loan = -4456
Withdraw 103% of $4244 = -4371
Jan 2, 2017 portfolio value = $ 90,096
____________________________________


Scenario 2 up year / down year /up year, with no borrowing
Jan 1, 2014 portfolio value = $100,000
(same calculations for 2014 and 2015 as above)
Jan 1, 2016 portfolio value = $91,595
Withdraw 103% of $4120 = -$4244
Jan 2, 2016 portfolio value = $87,351
2016 Market return of 8% = $6988
Jan 1, 2017 portfolio value = $94339
Withdraw 103% of $4244 = -4371
Jan 2, 2017 portfolio value = $89,968


Difference in favor of borrowing: $128 on $100,000 = 0.13%
__________________

__________________
No doubt a continuous prosperity, though spendthrift, is preferable to an economy thriftily moral, though lean. Nevertheless, that prosperity would seem more soundly shored if, by a saving grace, more of us had the grace to save.

Life Magazine editorial, 1956
Htown Harry is offline   Reply With Quote
Old 08-03-2013, 02:57 AM   #3
Thinks s/he gets paid by the post
obgyn65's Avatar
 
Join Date: Sep 2010
Location: midwestern city
Posts: 4,061
The problem is that the bank charges a higher interest on your borrowed money than your investments generate.

Unless you borrow some money to buy an SPIA at a late stage in your life ? Would this work?

Quote:
Originally Posted by bmcgonig View Post
I was wondering if anyone had given any thought to borrowing against the portfolio ( or house etc) in down years, so that they don't deplete the portfolio, and paying it back when the portfolio had recovered. On first glance I'm sure none of us like the idea of borrowing, but maybe it's a good idea. Anyone see any problems with it?
__________________
Very conservative with investments. Not ER'd yet, 48 years old. Please do not take anything I write or imply as legal, financial or medical advice directed to you. Contact your own financial advisor, healthcare provider, or attorney for financial, medical and legal advice.
obgyn65 is offline   Reply With Quote
Old 08-03-2013, 09:49 AM   #4
Full time employment: Posting here.
 
Join Date: Aug 2009
Posts: 522
Maybe I would limit it to years where you would be selling stock to pay expenses, but the interest to the bank is less than the loss that I would take if I sold stock. Years with obvious benefit like down 10 or more percent ? Definitely 20 percent and years like that. Of course it all assumes that the market comes back, which is a decent assumption I guess.
__________________
bmcgonig is offline   Reply With Quote
Old 08-03-2013, 09:13 PM   #5
Thinks s/he gets paid by the post
 
Join Date: Oct 2006
Posts: 3,820
Quote:
Originally Posted by bmcgonig View Post
I was wondering if anyone had given any thought to borrowing against the portfolio ( or house etc) in down years, so that they don't deplete the portfolio, and paying it back when the portfolio had recovered. On first glance I'm sure none of us like the idea of borrowing, but maybe it's a good idea. Anyone see any problems with it?
Why wouldn't I sell bonds? It's financially equivalent to borrowing if interest rates are equal. They are likely to be unequal in a way that's unfavorable to the retiree. (e.g. I borrow at 6% to avoid selling a bond that's yielding 5% at current prices.)
__________________
Independent is offline   Reply With Quote
Old 08-03-2013, 09:18 PM   #6
Full time employment: Posting here.
 
Join Date: Aug 2009
Posts: 522
Quote:
Originally Posted by Independent
Why wouldn't I sell bonds? It's financially equivalent to borrowing if interest rates are equal. They are likely to be unequal in a way that's unfavorable to the retiree. (e.g. I borrow at 6% to avoid selling a bond that's yielding 5% at current prices.)
Yes. Of course bonds would be sold first assuming that they hadn't tanked too. I'm talking about years where you have to,sell stocks or bonds. Since selling in down years is the reason for portfolio failure I.e., sequence of bad stock returns, I'm wondering if borrowing can alleviate that.
__________________
bmcgonig is offline   Reply With Quote
Old 08-04-2013, 07:53 AM   #7
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 16,457
Quote:
Originally Posted by obgyn65 View Post
The problem is that the bank charges a higher interest on your borrowed money than your investments generate.

Unless you borrow some money to buy an SPIA at a late stage in your life ? Would this work?
The bank doesn't necessarily charge a higher rate than your investments generate but in order to get that higher rate you need to take on more risk. My 3.375% mortgage loan rate is quite a bit less than the 13.58%, 12.41% and 7.82% my portfolio has earned in the past 1, 3 and 5 year periods and even the 5.5%total return that I use in my long-term plan, but my portfolio has much more risk and volatility than a well collateralized mortgage loan to a homeowner with a solid credit score.

Why would you think a SPIA would pay better interest than you would pay on a bank loan? I don't see any way that would work.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
pb4uski is online now   Reply With Quote
Old 08-04-2013, 11:37 AM   #8
Full time employment: Posting here.
 
Join Date: Jun 2013
Posts: 621
If you're using a reasonable SWR, then your portfolio should be able to survive a bad sequence of returns that is no worse than what has happened in the past. So no need to borrow in this case.

If the worst case occurs, where you experience a sequence of returns that is worse than anything that has happened in the past, borrowing is only going to make the problem worse, since you will be borrowing in more years than you are paying back, and just digging a bigger hole.

So if your goal is portfolio survival, I don't see how borrowing can help, and it can certainly hurt. If there is some other goal, e.g., trying to maximize how much you leave to heirs, things may be different, but I haven't thought that through.
__________________
Which Roger is offline   Reply With Quote
Old 08-04-2013, 02:33 PM   #9
Thinks s/he gets paid by the post
 
Join Date: Jul 2005
Posts: 3,862
DW decided she needed a new car in 2001 and again in 2009, great timing hon! We did <2% financing for both and ended up saving a bunch of money versus selling some of the portfolio to pay cash. So I guess we did use the OP strategy at a small level, and it worked very well. I tracked the first car fairly closely, and I think we effectively paid about half the purchase price after investment gains and loan payments were balanced out.

I also took out an extra $100k in my 2nd to last mortgage refi (and kept it in the last refi at 3.25%) and invested it. Kind of tough to do that only at market bottoms, but I'll do it anytime. Did a HELOC too until the rate went up and the house value went down.

The problem I'd have with a full scale version would be the risk of moving too far into debt as the market continued down. Way better to trim spending earlier rather than hacking it down later after reaching a credit limit and having increased expenses by the loan payment. That said, it's just a matter of getting a rate and loan period that makes investing the loan comfortable and gives a decent chance for success. I'd have jumped at another low interest loan in 2009. For just a "down year", not so much.
__________________
Animorph is offline   Reply With Quote
Old 08-04-2013, 05:53 PM   #10
Thinks s/he gets paid by the post
obgyn65's Avatar
 
Join Date: Sep 2010
Location: midwestern city
Posts: 4,061
Sorry if I was not clear but I am not a financial expert. Just asking questions and brainstorming ideas with you.

What I meant was : would it be possible (to lower your SWR theoretically) to borrow money from a bank -say $100,000 - when you are 80 years old at a rate of 5% for example, and with this money buy an annuity which will likely yield closer to 8% ? Would that be an advisable move or not? Why or why not?


Quote:
Originally Posted by pb4uski View Post

Why would you think a SPIA would pay better interest than you would pay on a bank loan? I don't see any way that would work.
__________________
Very conservative with investments. Not ER'd yet, 48 years old. Please do not take anything I write or imply as legal, financial or medical advice directed to you. Contact your own financial advisor, healthcare provider, or attorney for financial, medical and legal advice.
obgyn65 is offline   Reply With Quote
Old 08-04-2013, 08:14 PM   #11
Thinks s/he gets paid by the post
 
Join Date: Oct 2006
Posts: 3,820
Quote:
Originally Posted by bmcgonig View Post
Yes. Of course bonds would be sold first assuming that they hadn't tanked too. I'm talking about years where you have to,sell stocks or bonds. Since selling in down years is the reason for portfolio failure I.e., sequence of bad stock returns, I'm wondering if borrowing can alleviate that.
Even if the bonds have tanked, it's better to sell bonds than to borrow.

I originally bought a bond to yield 5%. Bond interest rates have gone up to 7%, so my bond price has fallen to the point where it yields 7%. Now I decide whether to sell a bond that's priced to yield 7%, or borrow at 8% so I don't have to sell the bond. From my perspective, it's better to sell the bond.
__________________
Independent is offline   Reply With Quote
Old 08-04-2013, 08:50 PM   #12
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
brewer12345's Avatar
 
Join Date: Mar 2003
Posts: 16,391
I seem to rather vaguely recall a study that someone here or on John Greaney's site did that showed an increase in portfolio survivability in extended down periods when margin was used in bad times. You would have to do some digging and the devil is always in the details (and assumptions).
__________________
"There are three kinds of men. The one that learns by reading. The few who learn by observation. The rest have to pee on the electric fence for themselves."



- Will Rogers
brewer12345 is offline   Reply With Quote
Old 08-04-2013, 09:32 PM   #13
Thinks s/he gets paid by the post
 
Join Date: Jul 2005
Posts: 3,862
Quote:
Originally Posted by obgyn65 View Post
Sorry if I was not clear but I am not a financial expert. Just asking questions and brainstorming ideas with you.

What I meant was : would it be possible (to lower your SWR theoretically) to borrow money from a bank -say $100,000 - when you are 80 years old at a rate of 5% for example, and with this money buy an annuity which will likely yield closer to 8% ? Would that be an advisable move or not? Why or why not?
In general, no. Your heirs would certainly complain when the annuity disappeared and the debt didn't, unless the debt was unsecured (to an 80 year old?). And there are very few ways a non financial expert is going to make more than what the lender will charge you. Especially if you want something low risk.
__________________
Animorph is offline   Reply With Quote
Old 08-05-2013, 05:25 PM   #14
Thinks s/he gets paid by the post
obgyn65's Avatar
 
Join Date: Sep 2010
Location: midwestern city
Posts: 4,061
And for those of us who do not have heirs ? Is it an approach we might wish to consider ?
Quote:
Originally Posted by Animorph View Post

In general, no. Your heirs would certainly complain when the annuity disappeared and the debt didn't, unless the debt was unsecured (to an 80 year old?). .
__________________
Very conservative with investments. Not ER'd yet, 48 years old. Please do not take anything I write or imply as legal, financial or medical advice directed to you. Contact your own financial advisor, healthcare provider, or attorney for financial, medical and legal advice.
obgyn65 is offline   Reply With Quote
Old 08-05-2013, 09:14 PM   #15
Thinks s/he gets paid by the post
photoguy's Avatar
 
Join Date: Jun 2010
Posts: 2,301
Quote:
Originally Posted by obgyn65 View Post
What I meant was : would it be possible (to lower your SWR theoretically) to borrow money from a bank -say $100,000 - when you are 80 years old at a rate of 5% for example, and with this money buy an annuity which will likely yield closer to 8% ? Would that be an advisable move or not? Why or why not?
Sounds great. But how are you going to convince a bank to give you such a loan? The only way I could see this happening is if it was secured by another asset with a lien (in which case it's more like a reverse mortgage).
__________________
photoguy is offline   Reply With Quote
Old 08-05-2013, 09:26 PM   #16
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
brewer12345's Avatar
 
Join Date: Mar 2003
Posts: 16,391
At one point a few years ago there was an arbtrage one could do with insurance products. It worked best for a healthy male in his 70s. The game worked like this:

- Take a lump sum from a maturing CD and buy a SPIA from the dumbest/most generous insurer.
- Use some of the payouts from the SPIA to buy a guaranteed universal life policy from the cheapest/dumbest insurer that would pay out the principal amount of the CD that was invested in the SPIA.
- Payouts from the SPIA would exceed the cost of the insurance by a significant amount at the time, well above the interest that could be earned by rolling over the CD.

The market has rationalized now and this game is no longer possible, but from time to time stuff like this pops up and is worth at least investigating.
__________________
"There are three kinds of men. The one that learns by reading. The few who learn by observation. The rest have to pee on the electric fence for themselves."



- Will Rogers
brewer12345 is offline   Reply With Quote
Old 08-05-2013, 11:08 PM   #17
Thinks s/he gets paid by the post
 
Join Date: Jul 2005
Posts: 3,862
Quote:
Originally Posted by obgyn65 View Post
And for those of us who do not have heirs ? Is it an approach we might wish to consider ?
With no heirs I might very well consider going all annuities! It seems like the only way to spend down to zero relatively safely. Although I'd always like a significant portfolio value for the unexpected.

I have thought of doing this:

I have a big mortgage at 3.25% that I will not be paying off anytime soon. Scaling the value, lets say I borrowed $1M and it costs $4352.06 per month, $52,224.72 per year principal and interest. I could take that $1M and buy an annuity that paid out something above 5.25% yearly and use the extra as monthly income. When the mortgage was paid off, I'd have a really big income boost. Although I'd have to wait just about 30 years, so that's probably not going to happen.

This is what I didn't like:

If I wanted to sell the house, I'd have to take out a loan! The loan payoff money is in the annuity and dribbling out monthly. That's the main killer right there. This is a permanent arrangement.

An SPIA is a bond-like investment (bond-like returns) with an insurance aspect. I'd rather put the $1M in equities, more risk and hopefully more return. Easily possible to take a 5.25% withdrawal (not inflation adjusted) and have $1M left (default FIRECalc says 98.2% chance I'll have something, with an average of $1.6M at the end of 30 years adjusted for inflation. I used $52,224.72 as "off-chart spending" with no inflation to match the mortgage). That makes the annuity look pretty unappealing.

I saw a 25 year period certain only (no lifetime guarantee) annuity on immediateannuities.com that would probably do the job in a few more years, but with a yearly payout of 5.87% I don't think the internal rate of return is even 3.25%. But if interest rates increase some more, this might eventually do the job. And if rates go bonkers I might consider doing something like this. A certain gain, even if rates go even higher. This is the cleanest loan/annuity match, but it will always depend on rates going up, because the bank's loan and annuity charges will ensure this is a losing proposition normally. That's why I said "generally no" this doesn't work.

If we die with a normal SPIA before the mortgage is paid off we may have lost the bet and our estate is smaller. Maybe not a factor in your case. Still, you may be enriching the annuity provider and screwing the loan provider when you die, assuming an unsecured loan. Or some poor executor has to sell the house and pay the debt for a mortgage loan, or sell the P.C. annuity to pay off the loan, or whatever.
__________________
Animorph is offline   Reply With Quote
Old 08-06-2013, 09:15 AM   #18
Thinks s/he gets paid by the post
 
Join Date: Oct 2006
Posts: 3,820
Quote:
Originally Posted by Animorph View Post
With no heirs I might very well consider going all annuities! It seems like the only way to spend down to zero relatively safely. Although I'd always like a significant portfolio value for the unexpected.

I have thought of doing this:

I have a big mortgage at 3.25% that I will not be paying off anytime soon. Scaling the value, lets say I borrowed $1M and it costs $4352.06 per month, $52,224.72 per year principal and interest. I could take that $1M and buy an annuity that paid out something above 5.25% yearly and use the extra as monthly income. When the mortgage was paid off, I'd have a really big income boost. Although I'd have to wait just about 30 years, so that's probably not going to happen.
The SPIA would pay the interest on your mortgage. How were you planning to pay the principal?
__________________
Independent is offline   Reply With Quote
Old 08-06-2013, 10:37 AM   #19
Thinks s/he gets paid by the post
 
Join Date: Jul 2005
Posts: 3,862
Quote:
Originally Posted by Independent View Post
The SPIA would pay the interest on your mortgage. How were you planning to pay the principal?
The numbers I gave were principal and interest. If the SPIA internal rate of return was also 3.25%, the growth of the SPIA pays the interest and the return of principal pays the loan principal. A perfect match, barring tax effects.

But my first point was way off. Late at night and actually the last thing I added. I could sell the house as long as it wasn't underwater, though the equity might not be much.
__________________
Animorph is offline   Reply With Quote
Old 08-06-2013, 01:13 PM   #20
Thinks s/he gets paid by the post
 
Join Date: Oct 2006
Posts: 3,820
Quote:
Originally Posted by Animorph View Post
The numbers I gave were principal and interest. If the SPIA internal rate of return was also 3.25%, the growth of the SPIA pays the interest and the return of pr00incipal pays the loan principal. A perfect match, barring tax effects.

But my first point was way off. Late at night and actually the last thing I added. I could sell the house as long as it wasn't underwater, though the equity might not be much.
I find the mortgage rate amazing. You're saying that on a $100,000 loan your interest and principal payments are just $271 per month (or $3,252 per year)?
__________________

__________________
Independent is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


 

 
All times are GMT -6. The time now is 06:42 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.