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Leveraged Investments – Exit Strategies

This is another post in the “Leveraged Investments” series. Check out the previous post entitled “Interest Rate Exposure”.

One of the phases of my leveraged strategy which I have done some thinking about, but haven’t come to any conclusions is the exit strategy. My basic plan so far involves keeping the equity positions and loan in place until after I have retired and then figuring out what to do at that time.

Some of the possible options I’ve come up with:

1. Keep the equities and the loan in retirement because the dividend income can provide a portion of my retirement income.

The problem with this plan is that I don’t want the interest rate risk while I’m retired. If the leveraged portfolio is providing a few thousand dollars of income each year then that’s fine, but if that income varies with interest rates then that’s not really good income for retirement. The other problem is that I will definitely be in a lower tax bracket so the tax rebate won’t be as good as when I’m working. On the plus side the dividend tax will be lower or perhaps non-existent in retirement. Perhaps the banks will have a senior’s lending rate by then??

2. Keep the equities and pay off the loan during or close to retirement.

This would be great however there is a small problem in that I want to pay off my mortgage and maximize my rrsp above all other financial goals and it’s debatable if I would have enough money to pay off the investment loan as well if it ends up being fairly sizable. Another issue is whether this would be necessary. Depending on when I retire and what kind of lifestyle we want, the rrsp might provide all the income we need, so working an extra year or two in order to pay off the investment loan might not be required.

3. Sell all the equities over the first couple of years of retirement and pay off the loan. Then live for a year or two on the net proceeds.

This plan will work great if the stock prices are high but not so well in a bear market. The other issue is capital gains, obviously I want to spread them out but I also will be withdrawing money from my rrsp in retirement so I have to be able to balance these two actions in order to minimize the taxes paid.

4. Sell enough equities to pay off the loan and keep the remaining equities.

This could be a good option if the plan is very successful and there is lots of capital gain.

Obviously I don’t really need to worry about this for a while and the success of the plan will have a big impact on what type of exit strategy I end up utilizing.

See the last post in this series called “There’s a fine line between good and evil”.

8 replies on “Leveraged Investments – Exit Strategies”

You are right when you are saying that you should not worry about your exit strategy now. However, you should think about it 10 years before exiting the market.

The main reason being that you can get caught in a middle of a bear market with several stocks. If you plan in advance, you will have more fixed income in your portfolio that should give you a minor exposure to a bear market.

With all your calculations (especially with a 15% interest rate) you seem to be on the good way to make a solid financial plan that will earn money for you.

FB.

Thanks FB. You’re right I shouldn’t worry about it now, but I do find it interesting to to think about these things.

Mike

How about this, when your mortgage is paid off, take the dividends that you receive + your regular mortgage payment and gradually pay down your loan! That way, you get to keep your equities, and your dividends at the same time. By the time retirement comes around, you should have a large loan free portfolio.

I’d lean towards MDJ’s suggestion. If its not paid off when you retire, you could then either put just the dividend payments towards the principle (after they’ve paid off the interest) or part of them for use and part of them for living expenses or something like that.

If you used the capital gains and taxes as a guide (only sell as much of the equities as you can without a big tax hit), that might be a nice way to gradually liquidate the equities (then who cares if your in a bear or a bull, you’ll be selling over 10 or 20 years anyways).

I’d go with MDJ’s proposal as well. Retirement isn’t the time for risk taking. If I must rely on a leveraged portfolio to retire, then I’d rather postpone retirement by a few years to pay off the debt completely.

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