This is definitely a better strategy than selling off equities in your portfolio. However, if there was a large draw-down like the dot-com bubble and then a long period where indexes also lag long term average rates of returns, the leverage strategy could become problematic and, I'm sure would be emotionally difficult.
I wonder how the 4% rule works if you use a credit line (margin, pledged asset line, HELOC, etc) to mitigate the sequence of return risk? For example, if my annual burn is $300,000 the 4% rule would say I need $7.5M to support that for a 30+ year retirement with a 95% success rate. So, in down years you would pull on the credit line vs. sell assets when they are down…any dividends paid would go to pay the interest and or the line down. You obviously wouldn’t want to over leverage the portfolio.
My margin rate is SOFR + 110 bps or 4.75% as of today. That is $14,250 in interest vs. $300,000 withdrawal of assets when prices are down. Not only to you significantly mitigate your sequence of return risk but you would significantly reduce or eliminate any tax liability because you didn’t sell anything that could had caused a taxable event. I don’t optimize for dividends but I have multiples of that interest expense so I’d be able to cover the interest and amortize the loan somewhat with the dividend income.
💯 People will be better served when they understand that the “4% rule” is not a guarantee. It’s not even a rule. Let it inform your plan, not be your plan.
This is definitely a better strategy than selling off equities in your portfolio. However, if there was a large draw-down like the dot-com bubble and then a long period where indexes also lag long term average rates of returns, the leverage strategy could become problematic and, I'm sure would be emotionally difficult.
Bookmarking this to reread later.
I wonder how the 4% rule works if you use a credit line (margin, pledged asset line, HELOC, etc) to mitigate the sequence of return risk? For example, if my annual burn is $300,000 the 4% rule would say I need $7.5M to support that for a 30+ year retirement with a 95% success rate. So, in down years you would pull on the credit line vs. sell assets when they are down…any dividends paid would go to pay the interest and or the line down. You obviously wouldn’t want to over leverage the portfolio.
My margin rate is SOFR + 110 bps or 4.75% as of today. That is $14,250 in interest vs. $300,000 withdrawal of assets when prices are down. Not only to you significantly mitigate your sequence of return risk but you would significantly reduce or eliminate any tax liability because you didn’t sell anything that could had caused a taxable event. I don’t optimize for dividends but I have multiples of that interest expense so I’d be able to cover the interest and amortize the loan somewhat with the dividend income.
Something worth thinking about…for me at least.
💯 People will be better served when they understand that the “4% rule” is not a guarantee. It’s not even a rule. Let it inform your plan, not be your plan.
Great breakdown here. I agree. Dividends should definitely be part of the strategy🔥