How Rich Retirees Use Debt to Save on Taxes and Protect Their Investments

It might sound counterintuitive: if you’ve saved millions for retirement, why borrow money at all? Yet many wealthy retirees intentionally use debt as a financial planning tool. Strategic borrowing can help preserve portfolio value, manage taxes, and access liquidity without triggering large capital gains.

The key isn’t whether you borrow—but how and when. Here’s why financially independent retirees still use leverage, and how they do it at the lowest possible cost.

The Strategy Behind Borrowing in Retirement

For many retirees, the instinct is to pay off all debt before leaving the workforce. That’s smart for high-interest loans or unstable budgets—but not always for those with significant assets. Wealthy retirees often continue borrowing because it offers flexibility that selling investments does not.

The main reasons include:

• Avoiding large taxable sales in brokerage or trust accounts

• Keeping investments fully invested during market growth

• Accessing liquidity for real estate, business, or family needs

• Taking advantage of low interest rates or deductible borrowing options

At Greenbush Financial Group, we see this most often with clients who have appreciated portfolios or taxable trusts—they’d rather borrow temporarily than realize large capital gains and lose compounding potential.

Why Borrowing Can Be Cheaper Than Selling

Borrowing money doesn’t trigger taxes; selling investments does. If you sell appreciated assets to raise cash, you could owe capital gains tax of up to 23.8% federally (20% long-term plus 3.8% Net Investment Income Tax), plus potential state taxes.

Example:

A retiree with $1 million in long-term appreciated stock may owe over $200,000 in taxes if sold outright. Borrowing $250,000 against a portfolio or property can access cash immediately—often at interest rates of 5–6%—while deferring or avoiding that tax bill entirely.

For many, the after-tax cost of borrowing is lower than the effective tax cost of liquidation.

Common Low-Cost Borrowing Strategies for Retirees

There are several ways high-net-worth retirees access cash without disrupting their investment or tax strategy.

1. Securities-Backed Lines of Credit (SBLOCs)

An SBLOC allows you to borrow against your taxable investment portfolio, typically up to 50–70% of its value.

• Rates often range between 5–7%, depending on the lender.

• Interest-only payments are common, offering flexibility.

• No credit check or underwriting is required beyond the assets themselves.

Caution: if markets decline sharply, the lender can require additional collateral or partial repayment.

2. Home Equity Lines of Credit (HELOCs)

Even wealthy retirees may use HELOCs to fund large expenses such as renovations, second homes, or bridge financing.

• Interest may be deductible if used for home improvements.

• Flexible draw periods make it easy to access only what you need.

• Current rates vary, but fixed options can provide predictability.

3. Margin Loans for Portfolio Liquidity

Margin loans through brokerage accounts allow investors to borrow directly against securities.

• Typically used for short-term needs or opportunistic purchases.

• Rates depend on account size—often lower for high-net-worth clients.

• Requires careful monitoring to avoid margin calls during volatility.

4. Cash Value Life Insurance Loans

Retirees with permanent life insurance policies can borrow against accumulated cash value tax-free.

• No credit check or repayment schedule.

• Interest accrues against the policy, not external debt.

• Works best when used sparingly and managed over decades.

5. Family or Trust Lending

Some retirees lend to children or family trusts using IRS-approved Applicable Federal Rates (AFRs)—currently well below most commercial lending rates.

• Can serve estate-planning goals while keeping assets in the family.

• Requires formal loan documents and consistent payment terms.

When Borrowing Makes Sense (and When It Doesn’t)

Borrowing in retirement can be powerful, but it’s not for everyone.

It can make sense if:

• You have a large taxable portfolio or illiquid real estate holdings

• You expect long-term investment growth exceeding borrowing costs

• You’re managing capital gains, Roth conversions, or Medicare thresholds

It’s risky if:

• You need stable monthly cash flow

• Your investments are volatile or highly concentrated

• You’re carrying multiple types of debt already

Borrowing should support—not replace—a comprehensive income plan.

How Rich Retirees Keep Borrowing Costs Low

Wealthy retirees often have access to rates below what most consumers see because they borrow against assets, not income. Lenders view a $3 million portfolio differently than a paycheck.

Ways they minimize cost include:

• Negotiating private banking relationships for rate discounts

• Keeping large asset balances at lending institutions

• Using securities-based lines instead of personal loans

• Deducting certain interest payments when eligible under IRS rules

At Greenbush Financial Group, we often coordinate between a client’s lender, tax preparer, and investment advisor to ensure each borrowing decision fits their larger tax and income strategy.

The Bottom Line

Even for retirees who are financially independent, liquidity and tax management matter. Borrowing can be a smart, temporary tool to access cash without dismantling a well-built portfolio. When used strategically, the right type of low-cost loan can help preserve wealth, reduce taxes, and maintain flexibility.

The key is to treat debt as part of a coordinated plan, not a shortcut. A thoughtful lending strategy can make your money work harder—even when you no longer need a paycheck.

Rob Mangold

About Rob……...

Hi, I’m Rob Mangold. I’m the Chief Operating Officer at Greenbush Financial Group and a contributor to the Money Smart Board blog. We created the blog to provide strategies that will help our readers personally, professionally, and financially. Our blog is meant to be a resource. If there are questions that you need answered, please feel free to join in on the discussion or contact me directly.

FAQs: Borrowing in Retirement

1. Why would a wealthy retiree take on debt?
   To access liquidity without selling investments and triggering capital gains taxes.
2. What’s the difference between an SBLOC and a margin loan?
   Both use investments as collateral, but SBLOCs are separate from trading accounts and often carry more flexible terms.
3. Can retirees deduct interest on borrowed funds?
   In some cases, yes—if the loan proceeds are used for investment or home improvement purposes.
4. Is borrowing against investments risky?
   It can be if markets decline and collateral values drop, so monitoring and limits are essential.
5. What’s the cheapest way for retirees to borrow?
   Securities-backed credit lines and family lending arrangements typically offer the lowest rates for high-net-worth households.

Will Home Equity Loan Interest Be Deductible In 2019+?

The answer............it depends. It depends on what you used or are going to use the home equity loan for. Up until the end of 2017, borrowers could deduct interest on home equity loans or homes equity lines of credit up to $100,000. Unfortunately, many homeowners will lose this deduction under the new tax law that takes effect January 1, 2018.

Old Rules

Taxpayers used to be able to take a home equity loan or tap into a home equity line of credit, spend the money on whatever they wanted (pool, college tuition, boat, debt consolidation) and the interest on the loan was tax deductible. For borrowers in higher tax brackets this was a huge advantage. For a taxpayer in the 39% fed tax bracket, if the interest rate on the home equity loan was 3%, their after tax interest rate was really 1.83%. This provided taxpayers with easy access to cheap money.

The Rules Are Changing In 2018

To help pay for the new tax cuts, Congress had to find ways to bridge the funding gap. In other words, in order for some new tax toys to be given, other tax toys needed to be taken away. One of those toys that landed in the donation box was the ability to deduct the interest on home equity loans and home equity lines of credit. But all may not be lost. The tax law splits "qualified residence interest" into two categories:

• Acquisition Indebtedness

• Home Equity Indebtedness

Whether or not your home equity loan or HELOC is considered acquisition indebtedness or home equity indebtedness may ultimately determine whether or not the interest on that loan will continue to be deductible in 2018 and future years under the new tax rules. I say "may" because we need additional guidance form the IRS as to how the language in the tax bill will be applied in the real world. As of right now you have some tax professionals stating that all interest from homes equity sources will be disallowed beginning in 2018 and other tax professionals taking the position that home equity loans from acquisition indebtedness will continue to be eligible for the tax deduction in 2018. For the purpose of this article, we will assume that the IRS will continue to allow the deduction of interest on home equity loans and HELOCs associated with acquisition indebtedness.

Acquisition Indebtedness

Acquisition indebtedness is defined as “indebtedness that is secured by the residence and that is incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer”. It seems likely, under this definition, if you took out a home equity loan to build an addition on your house, that would be classified as a “substantial improvement” and you would be able to continue to deduct the interest on that home equity loan in 2018. Where we need help from the IRS is further clarification on the definition of “substantial improvement”. Is it any project associated with the house that arguably increases the value of the property?

More good news, this ability to deduct interest on home equity loans and HELOCs for debt that qualifies as “acquisition indebtedness” is not just for loans that were already issued prior to December 31, 2017 but also for new loans.

Home Equity Indebtedness

Home equity indebtedness is debt incurred and secured by the residence that is used for items that do not qualify as "acquisition indebtedness". Basically everything else. So beginning in 2018, interest on home equity loans and HELOC's classified as "home equity indebtedness" will not be tax deductible.

No Grandfathering

Unfortunately for taxpayers that already have home equity loans and HELOCs outstanding, the Trump tax reform did not grandfather the deduction of interest for existing loans. For example, if you took a home equity loan in 2016 for $20,000 and there is still a $10,000 balance on the loan, you will be able to deduct the interest that you paid in 2017 but beginning in 2018, the deduction will be lost if it does not qualify as "acquisition indebtedness".

Partial Deduction

An important follow-up question that I have received from clients is: “what if I took a home equity loan for $50,000, I used $30,000 to renovate my kitchen, but I used $20,000 as a tuition payment for my daughter? Do I lose the deduction on the full outstanding balance of the loan because it was not used 100% for substantial improvements to the house? Great question. Again, we need more clarification on this topic from the IRS but it would seem that you would be allowed to take a deduction of the interest for the portion of the loan that qualifies as “acquisition indebtedness” but you would not be able to deduct the interest attributed to the “non-acquisition or home equity indebtedness”.

Time out……how do you even go about calculating that if it’s all one loan? Even if I can calculate it, how is the IRS going to know what portion of the interest is attributed to the kitchen project and which portion is attributed to the tuition payment? More great questions and we don’t have answers to them right now. These are the types of issues that arise when you rush major tax reform through Congress and then you make it effective immediately. There is a laundry list of unanswered questions and we just have to wait for clarification on from the IRS.

Itemized Deduction

An important note about the deduction of interest on a home equity loan or HELOC, it's an itemized deduction. You have to itemize in order to capture the tax benefit. Since the new tax rules eliminated or limited many of the itemized deductions available to taxpayers and increased the standard deduction to $12,000 for single filers and $24,000 for married filing joint, many taxpayers who previously itemized will elect the standard deduction for the first time in 2018. In other word, regardless of whether or not the IRS allows the deduction for home equity loan interest assigned to acquisition indebtedness, very few taxpayers will reap the benefits of that tax deduction because your itemized deductions would need to exceed the standard deduction thresholds before you would elect to itemize.

Will This Crush The Home Equity Loan Market?

My friends in the banking industry have already started to ask me, “what impact do you think the new tax rules will have on the home equity loan market as a whole?” It obviously doesn’t help but at the same time I don’t think it will deter most homeowners from accessing home equity indebtedness. Why? Even without the deduction, home equity will likely remain one of the cheapest ways to borrow money. Typically the interest rate on home equity loans and HELOCs are lower because the loan is secured by the value of your house. Personal loans, which typically have no collateral, are a larger risk to the lender, so they charge a higher interest rate for those loans.

Also, for most families in the United States, the primary residence is their largest asset. A middle class family may not have access to a $50,000 unsecured personal loan but if they have been paying down their mortgage for the past 15 years, they may have $100,000 in equity in their house. With the cost of college going up and financial aid going down, for many families, accessing home equity via a loan or a line of credit may be the only viable option to help bridge the college funding gap.

About Michael.........

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.