Invest, Borrow, Die: Using a Credit Line to Bridge Early Retirement

You’d like to stop working at 55, but the pension, Social Security, and required withdrawals are years away. Selling appreciated stock to cover the gap means paying tax on gains you might never otherwise realize. The alternative, nicknamed “invest, borrow, die,” deserves a sober look, not a sales pitch.

How “invest, borrow, die” works

The idea has three parts. Invest: hold appreciated assets instead of selling them. Borrow: when you need cash, borrow against those assets rather than selling, so no gain is realized. Die: under current law, heirs generally receive inherited property with a basis equal to its fair market value at the date of death (IRC §1014). The gain built up during your lifetime is never taxed as income, and the estate can repay the loan.

The usual tool is an asset-backed line of credit, often called a securities-based line of credit (a revolving loan secured by the stocks, bonds, and funds in a brokerage account). FINRA explains that these lines typically lend 50% to 95% of eligible collateral at variable rates tied to prime or SOFR plus a spread, and can’t be used to buy securities.

One caveat: pre-tax IRAs and 401(k)s don’t get a step-up; they’re taxed as income in respect of a decedent (§1014(c)). This is a strategy for taxable accounts.

The bridge: from early retirement to the income that starts later

For many executives, the more practical use is the gap between the last paycheck and the income that starts later.

• Social Security can start at 62, but for anyone born in 1960 or later a benefit claimed at 62 is permanently reduced by about 30% compared with full retirement age, 67 (SSA). Waiting past 67 adds 8% a year until 70 (SSA).
• Required minimum distributions (RMDs, the withdrawals the IRS requires from pre-tax accounts) begin at 73 for people born 1951–1959 and at 75 for those born in 1960 or later, under SECURE 2.0 (2024 final regulations; IRS).

Selling appreciated stock triggers long-term capital gains tax of 0%, 15%, or 20% (IRS Topic 409), sometimes plus the 3.8% net investment income tax above certain income thresholds. Withdrawals from a traditional IRA before 59½ are taxed as ordinary income and generally carry an additional 10% tax unless an exception applies, such as separating from an employer in or after the year you turn 55 (that employer’s plan only) (IRS). Borrowing avoids both taxes for now, in exchange for interest and risk.

A HYPOTHETICAL example: sell or borrow from 55 to 62

Hypothetical assumptions (illustration only; not a forecast):

• $3,000,000 taxable portfolio with a $1,200,000 cost basis.
• $120,000 a year of spending for seven years (ages 55–61), taken at the start of each year. A hypothetical pension starts at 62.
• Sell: shares sold each year, with a hypothetical 18.8% tax on the gain portion (15% plus 3.8%; actual rates depend on income).
• Borrow: each year’s spending drawn on a credit line at a hypothetical 6.5% rate, held flat, with interest added to the balance and no payments.
• Two return paths: a steady 6% a year, and the same 6% except a 30% drop in year 2.
• No fees, inflation, dividend taxes, or state tax.

With steady returns, borrowing comes out about $130,000 ahead even though the loan rate exceeds the return, because about $119,000 of tax was never paid and the untouched shares kept compounding. But $249,000 of the $1.09M loan is interest. With a bad year early on, the edge reverses: borrowing ends slightly behind, and the loan has grown to 37% of the collateral.

The borrowing path also still carries about $3.3M of unrealized gain. It disappears only if the shares are held until death and the step-up still exists.

HYPOTHETICAL ILLUSTRATION. The figures above are hypothetical and for illustration only. They do not reflect any actual investment, account, client, or product, and they are not a prediction or guarantee of future results. They are based on simplified assumptions (listed above) that will differ from real-world conditions, including actual returns, inflation, fees, and taxes. Actual results will vary, and losses are possible.

The risks are real, and they arrive together

• Variable rates. If rates rise, so does the cost.
• Maintenance calls and forced sales. If collateral falls, the lender can demand more collateral or repayment, typically within two or three days, and FINRA notes it can sell your securities, often without notice. A forced sale at the bottom realizes the very gains you meant to defer.
• Compounding interest. With no payments, a balance at 6.5% doubles in about 11 years. A seven-year bridge can quietly become a 20-year debt.
• Tax law can change. The step-up has been rewritten before: for deaths in 2010, executors could elect carryover basis instead.

Many investors who use these lines borrow well below the lender’s maximum, keep cash on hand for interest, and decide in advance when they’d pay the loan down.

Where this fits in a whole-picture plan

This is a sequencing decision, not a product. It touches tax brackets, Social Security timing, Roth conversions, estate documents, and your tolerance for market risk. As we wrote last week, a straight line is not a plan; this strategy deserves a tax-aware range of outcomes, including the bad end.

Your assets stay in your name, at your custodian, though pledging them gives the lender rights worth reading closely. And because our fees aren’t tied to your assets or a loan balance, we earn the same whether you borrow, sell, or do neither. FINRA notes that isn’t always true elsewhere.

Questions worth asking your advisor

1. What loan-to-value would trigger a maintenance call on my account, and how far would markets have to fall to reach it?
2. How does borrowing compare with selling or 401(k) withdrawals after 55 in my tax brackets, and when would I claim Social Security?
3. What is the exit plan: paid down from a pension, sold over time, or repaid by the estate?
4. Is anyone compensated based on the size of the loan?

If you’d like to talk through how this applies to you, Todd’s email is on the contact page.