Reader note: My example in the original version of this post was poor. Thanks to Shaun and TMV for pointing this out in the comments. I have rewritten parts of the post with a better example.
Perhaps the biggest financial risk for an early retiree is sequence risk. This is selling your stocks into a bad market early in retirement. Here’s a fancy definition:
Sequence risk is the danger that the timing of withdrawals from a retirement account will have a negative impact on the overall rate of return available to the investor. This can have a significant impact on a retiree who depends on the income from a lifetime of investing and is no longer contributing new capital that could offset losses. Sequence risk is also called sequence-of-returns risk.
–Investopedia
What the heck does that mean? Consider a scenario:
- You save $1,000,000 for retirement
- On 12/31 you quit
- On 1/3, the market drops 40%, kicking your portfolio down to $600,000.
- On 1/4, you take $40,000 out of your account to fund the year
So, now you have $560,000.
Now, let’s say the stock market bounces back and appreciates 25% the rest of the year. (25% is a big number, but bull markets typically follow big drawdowns and most gains happen early in the rally) At the end of 2022, you’ll have $700,000.
How could we improve our returns? The best way to defeat sequence risk is to avoid selling stocks. Allow me to introduce you to Mr. Margin Loan.
What Is A Margin Loan?
A margin loan is a loan against your post-tax investment account. When many think about margin, they think about buying stocks with the loan proceeds. However, you can also use the money to buy houses, pay for home improvements, or in this case, fund your existence.
For a detailed explanation of margin lending, see MMM’s write-up.
Now, let’s reconsider the scenario, but using the margin loan instead of selling stocks:
- You save $1,000,000 for retirement.
- On 12/31 you quit.
- On 1/3, the market drops 40%, kicking your portfolio down to $600,000.
- Instead of selling stocks to fund your existence, you take out a margin loan of $40,000 at a rate of 2%. At this rate, you’d pay under $1,000 in interest if you held the loan for a year.
- Going with the same numbers from the example above, the market appreciates 25% and you have $750,000.
- You sell $41,000 of VTSAX and pay back the margin loan, so now have $709,000 left over.
In the margin loan scenario, you’re $9,000 ahead of where you would have been otherwise. This may not sound huge, but:
- $9,000 almost 25% of your annual spending.
- If you assume a 10% return on your investments, that $9,000 is worth $288,000 35 years down the road. This is nothing to sneeze at:
$9,000 -> $18,000 -> $36,000 -> $72,000 -> $144,000 -> $288,000
I know what you’re thinking:
But I hate debt! I paid off my house! I own all of my cars! Wah, wah!!!
The same reason you don’t want to sell your stocks back to Mr. Market in a severe downturn is the same reason you don’t do business with a pawn shop. The pawn shop is going to pay you $15 for the tool you bought for $100 a year ago. Why sell your assets back to Mr. Market when he’s not paying a reasonable price?
The Good
Margin loan rates are variable
The rates change frequently. The good news is that when bad things happen in the world and the stock market tanks, rates tend to go down. This is because governments know that keeping money cheap helps juice the economy. So, when you need money most, it’s the cheapest to borrow. Yay!
It’s really cheap to borrow on margin
Interactive Brokers is known for its great rates. Currently, you can borrow up to $100,000 at 1.58%. Between $100,000 and $1,000,000, the rate goes down to 1.08%:
While Interactive Brokers is the leader with margin lending, I negotiated a similar rate with ETrade. They even threw in a cash bonus for me to transfer my funds to them.
Note that if you’re not on Interactive or a firm that has low margins rates, you can initiate an ACATS transfer to move money without selling any assets or paying capital gains.
It’s really easy to borrow on margin
It takes about 5 minutes to log into your account and take out a withdrawal. In my experience, the money has always appeared in my bank account the next day.
Take as much or as little as you need
In my simple example above, I took out $40,000 in one chunk. In the real world, you could take out smaller amounts of money with greater frequency to minimize interest.
Margin loans don’t hit your credit
These loans aren’t reported to credit agencies. So, you can borrow money and your credit doesn’t take a hit.
The Bad
Margin loan rates are variable
Didn’t I just put this one in The Good section? The rates change frequently. Just because you can borrow money at 1.5% doesn’t mean it will stay that way. I would not count on this as a long-term solution. I would borrow money in small increments (monthly?) and have a plan to pay it back when Mr. Market has stopped behaving like a pawn shop.
It’s tied to your post-tax account
You can only execute this strategy with a post-tax stock portfolio. This does not apply to a 401(k), IRA, or any other tax-advantaged account.
Your loan could get called
Don’t go anywhere near the lending limits. If your account value drops too much, your broker has the right to sell your stocks to pay back your loan. Borrow just what you need and no more.
Market timing
This strategy smells a little bit like market timing, right? I agree, but just a little.
- Don’t do this every day: This strategy is meant for only exreme situations and when the spread is large. If stocks are down 25% but you can borrow money at 1.5%, there is a good chance that you’ll come out ahead by borrowing from Mr. Margin for a short period.
- 4% Rule: And yet another mention of the 4% rule! ** yawn ** If you’re a FIRE Fan, you probably believe in the 4% rule which means that over the long term, you expect your portfolio to return better than 4%. If your confident in this, borrowing money at less than 2% to avoid selling when the markets are down 25% seems like a no-brainer.
Be Flexible
Remember that this strategy is the nuclear option. For you to need it, three events would have to happen close together:
- You are very early in retirement. Remember that sequence risk only matters early on. If you’ve retired to a market that has performed normally and used the 4% Rule for withdrawals, you’ll have a healthy buffer before long.
- The market has a big downturn: There have been 10 bear markets, corrections of more than 20%, since 1950. That’s one about every 7 years.
- You need to sell stocks in the middle of the downturn: The average breakeven time since 1928 for a bear market is a little over 2 years, but less in modern times.
I think sequence risk is overrated. Let’s say you save up $1,000,000 and three months after you retire, your portfolio drops in half. Stop freaking out! Life isn’t over! You don’t live in a binary world. You probably won’t go broke:
- Go back to work: The best time to go back to work is shortly after you left. You still have your skills and connections. Since you were able to save up a healthy chunk of money early in life, you were probably pretty good at what you did and someone would love to hire you.
- You still have $500,000: Half a million is not a small chunk of change. You could go to a coding boot camp or spend years getting another degree with that amount of money. Or, just move to a corner of the world where everything is cheaper and wait it out.
Or, hit up Mr. Margin for a quick cash infusion. When the economy starts moving up and to the right again, pay Mr. Margin back and continue with your retirement.
Disclaimer: I AM NOT a CFA, CFP, or anything like that. I’m a middle-aged dude who plays with plastic dinosaurs and has an extensive Hot Wheels collection. Please do your own research!

More 1500 Days!!!
You can also find me (and the dinosaurs) at:
Mile High FI podcast:
Also here:
- Facebook: Facebook group and page
- YouTube: My channel is mostly devoted to home improvement, but I have some other material coming up soon too.
- Instagram: Pretty pictures of dinosaurs, sunsets, and nail guns!
- Twitter: Spontaneous, often insane, ramblings
- Coworking space: On the surface, MMM HQ is a coworking space. Look a little deeper and you’ll see that we’re really building community. The members of MMM HQ are some of the finest people I know.
Join the 10s who have signed up already!
Subscribing will improve your life in incredible ways*.
*Only if your life is pretty bad to begin with.
Interesting view on using margin loans to Beat Sequence Risk. I remember reading MMM’s post on using Interactive Brokers margin loans for buying a house quickly. At the time I even thought about transferring my taxable holding over to Interactive Brokers to open up the option of cheap margin loans.
Looks like you quoted some of my negative thinking which prevented me from doing that.
“But I hate debt! I paid off my house! I own all of my cars! Wah, wah!!!”
I would also add a bunch of: What if … the markets stay down for a long time, the interest rates climb, the markets drop more and they call my margin and force the sale of stocks at an even lower price.
I see the logic of using margin and done smartly without over leveraging is great way to use borrowed money at a cheap rate. The “Be Flexible” part of your post resonates the most with me..
It’s all a calculated risk. If I did this, it would be for a very short time to ride out a particularly bad period. This is the nuclear option.
ERN wrote a great post on this same topic, seems fairly pessimistic about it.
https://earlyretirementnow.com/2021/11/16/leverage-in-retirement-swr-series-part-49/
I took a look at Big ERN’s post and it looks like he’s talking about borrowing over long time horizons. For example:
“The lesson so far: fully funding your retirement through a margin loan and completely forgoing any withdrawals seems too risky.”
Big ERN doesn’t advocate funding retirement through margin and neither would I. I’d only borrow for a short period of time to ride out a particularly rough period.
Big ERN also makes a good point that the incredibly low rates that we have access to may not last. If rates go nuts, this strategy holds less value.
“In the original version of the Bad Case Scenario, we had $805,600 at this point. Using the margin loan, we have $959,000 now, a difference of $153,400. Yowsers!”
Wow – do the fed always step in when you take out a margin loan?? Sign me up!
Perhaps compare apples with apples?
Yep, you were correct. I updated the post with a better example.
Personally I prefer to use a margin loan (or other collateralized loan) to purchase assets. Preferably assets that are uncorrelated in performance from the assets you’ve pledged as collateral. I.e. borrow against stocks to buy real estate, or vice versa. It’s hard for me to stomach borrowing money for expenses, specifically. There’s zero return there! Is this just a mental block I have? Thoughts?
Oooh, I love hitting up my margin account for short-term real estate loans like we’ve talked about.
The scenario that I described in the post has a different context is the nuclear option. I don’t think most would ever have to use it, but it could be pretty useful if you happened to retire to a bad market.
Further reading:
A history of bear markets
Breakeven points of bear markets
That linked post doesn’t even pass the smell test. According to the ‘breakeven’ chart, one market peak was March 2000 and the ‘breakeven’ column suggests the market had recovered in four years.
In March 2000 the SP500 was at 1500 and in March 2004 the SP500 was at 1100. Even with reinvested dividends March 2004 was way, way down.
To regain the 2000 peak took THIRTEEN YEARS not four. Given that I can’t help but regard that entire website with great suspicion.
I’m curious to know how Ben Carlson generated that data. He’s a CFA and I have a lot of respect for his work, but I couldn’t replicate his data.
However, I also don’t think it took 13 years to come back to breakeven. I charted the S&P 500 on Morningstar (I *think* this service accounts for dividend reinvestment) starting from a $10,000 investment on 3/24/2000 and I’m back to $10,000 in October of 2006.
Of course, there was another drop after that, but I’m back to $10,000 in 2011. The 2011 date is probably the same as your 2013 date, but with dividend reinvestments.
https://dqydj.com/sp-500-return-calculator/
This calculator suggests 13+ years for inflation adjusted returns, dividends reinvested.
The morningstar calculator says nothing about being inflation adjusted. In nominal dollars I think your above chart is correct, but when inflation is taken into account things get grim.
Of course the 2000 + 2007 bear markets would have terminated any attempt at living off margin loans as well.
“In the original version of the Bad Case Scenario, we had $805,600 at this point. Using the margin loan, we have $959,000 now, a difference of $153,400. Yowsers!”
The original version of the Bad Case Scenario you had $805,600 at the end of the year because the market gained 6% on your net worth of $760,000.
Using the margin loan you had $959,000 at the end of the year because the market bounced back 20%.
Maybe you need to have the market appreciate the same % in each case to compare apples to apples.
If the original version of the Bad Case Scenario you had $760,000 and the market bounced back 20% just like in your margin loan scenario, then the Base Case Scenario would leave you with $912,000 at the end of the year. Significantly less then the margin loan scenario, but not nearly close to the $153,400 difference than stated.
Ahhh, makes sense. Thanks for the explanation. I updated my numbers.
I couldn’t read the entire article since the whole premise and original arguement is completely flawed so there’s no point in drawing any conclusions. Case in point: Why would anyone withdraw $40,000 at the beginning of the year? This is not how anyone operates. People pay for expenses as they arise thereby reducing the risk of withdrawing large sums at unfortunate times. The idea here is equivalent to dollar cost averaging when purchasing stocks. This would happen in retirement naturally when spending. So why spend on margin?
AJ, it’s too bad you didn’t give the article a chance. If you had read for another 2 minutes, you would have arrived at this: