Brokerage margin loans?

[buckbunny]

I like the idea of using margin loans instead of selling stocks, after retirement (much lower taxation, and no need to sell things at a bad time).

What brokers support them, in Japan?

[mighty58]

Most brokers provide access to margin (信用). But please, tell us more about your plan here... are you saying you want to use a margin loan to fund your everyday living expenses in retirement? What's the plan to pay it back?

[buckbunny]

Exactly that, yes. That strategy was discussed recently in the Rational Reminder forums, and it seemed optimal as long as your margin interest rate is much lower than your risk-adjusted expected return for the period.

[mighty58]

Sounds like a lot of downside risk to take on board for an upside potential of, what, maybe a couple thousand bucks? I'm sure if you did this in 2021 you'd be laughing to the bank, but 20-25% upside years will likely be few and far between.

[buckbunny]

I know nothing of margin interest rates in Japan but they're supposed to be much lower than consumer loans. I would thus assume a <2.5% rate. You don't need a 25% annual return to make up for that, and the average net return of stocks has consistently been much, much larger over the past decades.

I think the benefits largely outweigh the risk. Especially when you consider taxation: this is a loan, not a capital gain.

[buckbunny]

Maybe I should have added that I expect to still have some non-regular source of income in retirement
Using margin loan with no external income would be a weird idea.

[mighty58]

Well, let's circle back to my question that was left hanging then: What's the plan to pay back the loan?
If you're spending (rather than investing) the margin loan, your upside maximum is just returns (on whatever you would've sold otherwise to fund your life) minus the interest rate on the loan. So a typical 7% return on the market minus 2.5% interest is 4.5% on, say, (assuming you're not living super extravagantly) $60,000/yr = $2,700. But, then you have to pay back this loan, which you would do by selling the underlying assets that just gained 7%, and therefore you pay capital gains then. So at best you've delayed and gotten more growth than you would've otherwise.

And the risk, or course, is that there's a downturn and you get a margin call. This forces you to either keep dry powder out of the market for that eventuality, or sell at the worst time to recapitalize. That's a pretty large risk in my book, but I guess everyone has their own risk tolerance levels.

[buckbunny]

But, then you have to pay back this loan, which you would do by selling the underlying assets.

Still, it's essentially a loan against the future returns of the assets. Assuming an all-weather low-risk low-return portfolio with a growth rate still greater than the margin rate, it allows to spread your spending over large periods where the principal still accrues value.

I put the original idea here, if interested.

[mighty58]

Well, it sounds like you're downplaying (ignoring?) downside risk, inflating the potential benefits, and avoiding doing a real risk/reward analysis. And you don't need fancy charts to know this strategy will work if asset prices keep going up... of course it will. If only we could be sure.

Interesting contrast here with other threads on this board with people quoting various ratios and metrics to declare that markets are in for a big downturn. At least one of you will likely be right.

[buckbunny]

I don't know where you saw me making any assessment on downturns or upsides. If anything, I'm currently holding cash because I expect a big recession to hit this year.

I only asked about what brokers provided margin loans.

I also think that

…as long as your margin interest rate is much lower than your risk-adjusted expected return

is clear enough.