Living off of margin loans

[Sunset]

The strategy in general is to never pay off the debt - as long as the underlying assets grow faster than the debt your net worth continues to grow. I found some articles referring to this as strategy "Buy, borrow, die". The estate gets the stepped up basis so when they liquidate assets to pay the debt to settle the estate there is basically no capital gains tax. I don't think you need cooperating heirs - the executor should have the power to sell assets to settle the estates debt. It is possible tax laws change in the future so there is that risk.

I don't think estates get a stepped up basis as the estate is the same as the dead person. It's the heirs that inherit that get the stepped up basis.

If I'm wrong about this then what you are saying makes great sense.

 

[geeky_grrl]

I don't think estates get a stepped up basis as the estate is the same as the dead person. It's the heirs that inherit that get the stepped up basis.

If I'm wrong about this then what you are saying makes great sense.

I'm going off of the IRS instructions for estate income taxes (form 1041, schedule D). https://www.irs.gov/instructions/i1041sd

"Basis of decedent's estate property. Generally, the basis of property acquired by a decedent's estate is the FMV of the property at the date of the decedent's death, or the alternate valuation date if the executor elected to use an alternate valuation under section 2032."

Edit: Actually, 28 USC 1014 is the law controlling this and it is pretty clear. https://www.law.cornell.edu/uscode/text/26/1014
"""(a)In general
Except as otherwise provided in this section, the basis of property in the hands of a person acquiring the property from a decedent or to whom the property passed from a decedent shall, if not sold, exchanged, or otherwise disposed of before the decedent’s death by such person, be—
(1)the fair market value of the property at the date of the decedent’s death,
<snipped a bunch of alternative valuation methods>
...
(b)Property acquired from the decedent
For purposes of subsection (a), the following property shall be considered to have been acquired from or to have passed from the decedent:
(1)Property acquired by bequest, devise, or inheritance, or by the decedent’s estate from the decedent;
"""

So the estate definitely gets the step up.

 

[Golden sunsets]

Can you get a Margin loan at that rate? I am seeing 6% to 8%

+1. I checked on this very thing last week. I was told 5%-6%.

 

[Golden sunsets]

Interactive Brokers is 1.58% for < $100k and the rates go down for larger loans.

Ok but I'd be unlikely to transfer my brokerage business for the margin interest rate. DSFDF.

 

[geeky_grrl]

Ok but I'd be unlikely to transfer my brokerage business for the margin interest rate. DSFDF.

I don't have any loyalty to a specific brokerage, I can see how if you did that would change things.

I currently have accounts at Vanguard, Schwab, and Fidelity for various reasons and have used E-Trade in the past and I don't really have any love of one over another. Moving asset to a different brokerage is an annoyance but not a major hurdle to me if it would save me substantial money.

 

[RetiredHappy]

I am not touching margin loans, ever again. I lost half a million dollars because I went on margin before the dot com bust. It was an expensive and painful lesson.

 

[RenoJay]

It’s an interesting idea. I feel like the biggest risk is sequence of return. If you simply sell $60k/year of stock, you’ll sell some in good times (high stock prices) and some in bad times (lower stock prices). In your thesis though you said that when rates go up then you’d stop with the margin loans and sell stock to pay for living expenses. But I think it’s more likely that stock prices would also be lower at that same time due to the same reason that you stopped taking margin loans, I.e. higher interest rates. For such a relatively small difference in absolute value of the interest expense vs the capital gains tax, I’d likely skip the margin loans.

 

[jazz4cash]

I am not touching margin loans, ever again. I lost half a million dollars because I went on margin before the dot com bust. It was an expensive and painful lesson.

It could be helpful to others if you could add some detail. I don’t understand how a margin loan can cause losses beyond the fees.

 

[NW-Bound]

It could be helpful to others if you could add some detail. I don’t understand how a margin loan can cause losses beyond the fees.

I think RetiredHappy used margin loans to apply leverage.

It's not too different than getting a mortgage to buy a home in a hot market, while putting down for a down payment only a small percentage of the price of the home. You put down 5% for a down payment, and borrow the other 95%. When the house price goes down 30%, that loss is 6x your down payment.

Margin loans are not allowed such a high leverage factor, but getting margin calls hurts plenty.

 

[kgtest]

I am not touching margin loans, ever again. I lost half a million dollars because I went on margin before the dot com bust. It was an expensive and painful lesson.

Refreshingly honest! I'll learn my lesson from you.

 

[RetiredHappy]

Some of you asked for an explanation. Margin loans are fine until the market collapses big time, like in the dot com crash. In order to cover your loan, you have to sell your positions. I did lose my half a million dollars which were invested in high tech companies. I had leveraged to exercise employee stock options, instead of exercising stock options to get the net gain I had proceeded to hold the stocks. I also held margin positions in other high tech companies. It was a mess. Whenever people heard about what happened to me and felt my pain, I merely said easy come easy go. Working in high tech industry, we made a ton of money which I also lost everything I had invested in my taxable brokerage account then. Fortunately for me, I still had a couple of properties and 401K. One guy I knew who was in the Silicon Valley had something like 10 collectible Ferraris. With the dot com bust, he lost all his Ferraris and home. I assumed he was highly leveraged and lost most of his money.

 

[tb001]

I think this is a much easier call if you’re in the very wealthy. Your living expenses are likely a tiny fraction of your NW, so the die part works out well for your heirs. It’s harder when you’re cutting the numbers closer.

 

[Sunset]

I'm going off of the IRS instructions for estate income taxes (form 1041, schedule D). https://www.irs.gov/instructions/i1041sd

.....

So the estate definitely gets the step up.

Great !!
This idea is looking more attractive for some folks.

Although, there is that danger in the minds of some folks like myself who borrowed money in the early 80's, when even mortgages were ~16%.

I have in the past borrowed on a mortgage to have extra $$ to put into the stock market after it fell a lot.
One could simply mortgage their house if they were fearful of high interest rates, as today it should be easy to get a mortgage at 3.5% and over time the stock would earn more (probably).

 

[SecondAttempt]

Don't over-generalize. Yes, a lot of posters see being debt free and paying off a mortgage as a big deal, but there are also many of us who are very happy seeing our money work for us, and maintain low rate mortgages, and any low rate debt we can find (0% car loan with no 'gotchas', etc).

-ERD50

I was totally debt free for almost 10 years. It felt great at first then I started thinking I was missing out on tax deductions and low rates. Now I have what I consider a healthy amount of debt compared to my assets a mortgage at 2.75% for 29 more years and a car loan in the 1s for another year or so. Meanwhile my stocks have been earning far far better.

I completely respect those who want to be debt free but I find teh current low rates a gift to be exploited.

 

[clifp]

+1. I checked on this very thing last week. I was told 5%-6%.

For Schwab customers, Schwab bank offers pledged asset collateral loans.
It is very similar to a margin loan, but with lower rates. Basically, you move some of your stocks to a separate account and then can borrow approximately 70% of the value as a loan.

If you pledge $1 million in assets. the current rate is 2.4% plus a small spread typically less than 10 basis points.
https://client.schwab.com/secure/cc/products/banking_lending/pledged_asset_line.

In my case, I'm using to provide flip financing, and for a commercial solar project. Yes, it is increasing my risk, but I'm finding it useful to help diversifying out of stocks.

Or to put it another way, interest rates are so ridiculously low, as long as I used the money to invest in various things, and not spend it, I think it is pretty safe.

 

[Bryan Barnfellow]

Interesting idea. How does deductibility of margin interest figure in? Are you also continuing investment purchases?

-BB

 

[Time2]

First, I think my money in the market will get more than 2% return, so it is a net advantage to keep the money invested rather than selling shares to live off of. It really the same argument about why it is better to keep a mortgage or have a car loan when the interest rates are low.

Second, it avoids the taxes for my lifetime. I'll never have to sell the shares and realize capital gains as long over time the stocks appreciate more than I'm paying in interest. That saves me a few thousand dollars a year in capital gains. If the current tax laws about stepped up basis at death stays the same my heirs won't have to pay capital gains either. But I don't care as much about the taxes once I am gone anyhow.

Interesting idea, and I might add a way to pay it off without generating extra taxable income. I'll use rough numbers. In my scenario you also have to have a decent amount of that in IRA funds subject to RMDs. So you Margin borrow $50k for living expenses. Then in 6 years you and the wife will start to draw SS and in 2 more years you have RMDs, You could easily have $170k of forced income, that you can't get away from. You borrow against your taxable account over then next 7 years and the amount with inflation raises each year comes to $382,000 using 3% inflation rate. (doesn't include interest) Now you're 72 you have SS and RMDs and $170,000 forced income, your spending is now $60k a year, taxes on $170k maybe $28k, so, 170k - 88k= 82k. That means you have an extra $82k of income you could not avoid, and you can apply that to your IBKR margin loan.
In reality, you did have 3 years of SS, so you didn't need to borrow the full spending amount for those 2 years, that lowers the total margin loan.
The cost: the interest on the loan, a bit of a gamble that it stays low, but I doubt it will go as high as a tax bracket.
Someone can probably hone those numbers to see what the savings are.

Feel free to pick it apart, that's how I learn.

 

[marko]

What could possibly go wrong?

With the market and economy in such volatility, I can't think of anything more dangerous. Margin calls is what forced people to jump out of their high-rise Wall St windows back in '29.

It could work, it might not. For me, the risk would be too great. As noted above, if you have $200MM and fail you're likely not going to be in too much trouble. But if all you have is $2-3MM and things go wrong, well....

 

[Time2]

I will agree that Borrowing $382k on a $1M fund might be pushing it, at 38.2% when the max is 50%. If the market drops 23.6%, they start selling your funds. However, $1M was your starting value, 7 years later that could be close to $2M, Then you could stand a 61.8% market drop before your equity was at risk.
It is a bit risky, on the other hand you could do it for a few years and not get so deep into your margin.
I did margin my IBKR account up to about 39% for a short time, then I did a HELOC (0.99% 90 day teaser rate) and got the margin down to 23%.
This was to buy a house.

 

[ncbill]

Some of you asked for an explanation. Margin loans are fine until the market collapses big time, like in the dot com crash. In order to cover your loan, you have to sell your positions. I did lose my half a million dollars which were invested in high tech companies. I had leveraged to exercise employee stock options, instead of exercising stock options to get the net gain I had proceeded to hold the stocks. I also held margin positions in other high tech companies. It was a mess. Whenever people heard about what happened to me and felt my pain, I merely said easy come easy go. Working in high tech industry, we made a ton of money which I also lost everything I had invested in my taxable brokerage account then. Fortunately for me, I still had a couple of properties and 401K. One guy I knew who was in the Silicon Valley had something like 10 collectible Ferraris. With the dot com bust, he lost all his Ferraris and home. I assumed he was highly leveraged and lost most of his money.

And if you had borrowed less than 25% of a portfolio of equity index funds at the same time would there have ever been a margin call?

That's what's under discussion.

I mentioned much the same on another thread for a poster so they could keep mAGI low to qualify for ACA subsidies until eligible for Medicare.

 

[RetiredHappy]

And if you had borrowed less than 25% of a portfolio of equity index funds at the same time would there have ever been a margin call?

That's what's under discussion.

I mentioned much the same on another thread for a poster so they could keep mAGI low to qualify for ACA subsidies until eligible for Medicare.

If the market drops significantly, that 25% suddenly becomes a much higher percentage.

Example: $1M in portfolio, borrows $250K. Market drops by 25%, portfolio becomes $750K. That $250K now becomes 33.33%. If market drops by 30%, investment value becomes $700K, $250K is now 35.71%.

If you are disciplined, margin should not go more than 10% of the account.

 

[Time2]

If the market drops significantly, that 25% suddenly becomes a much higher percentage.

Example: $1M in portfolio, borrows $250K. Market drops by 25%, portfolio becomes $750K. That $250K now becomes 33.33%. If market drops by 30%, $250K is now 35.71%.

If you are disciplined, margin should not go more than 10% of the account.

I don't think disciplined is the right word. Most of us that got to Fire are disciplined. What is the criteria for the magical 10% number?

 

[Dash man]

Too risky for my taste, and not needed. This year alone our investments are up seven figures. I’m not adding more risk to maybe make a few more bucks.

 

[jazz4cash]

Some of you asked for an explanation. Margin loans are fine until the market collapses big time, like in the dot com crash. In order to cover your loan, you have to sell your positions. I did lose my half a million dollars which were invested in high tech companies. I had leveraged to exercise employee stock options, instead of exercising stock options to get the net gain I had proceeded to hold the stocks. I also held margin positions in other high tech companies. It was a mess. Whenever people heard about what happened to me and felt my pain, I merely said easy come easy go. Working in high tech industry, we made a ton of money which I also lost everything I had invested in my taxable brokerage account then. Fortunately for me, I still had a couple of properties and 401K. One guy I knew who was in the Silicon Valley had something like 10 collectible Ferraris. With the dot com bust, he lost all his Ferraris and home. I assumed he was highly leveraged and lost most of his money.

I requested additional info so thanks for providing clarification. I would argue the leverage is what caused the problem in your case. Margin loan proceeds used to hedge a position or maintain a moderate lifestyle are not as risky.

 

[RetiredHappy]

I don't think disciplined is the right word. Most of us that got to Fire are disciplined. What is the criteria for the magical 10% number?

The way I see it is that if you stay at the "magical" 10%, then no matter how the market drops, it is extremely unlikely you will be forced into selling any positions. YMMV.