Today’s retirees are expected to live longer, and they’d like to live those years to the fullest. In addition to ensuring that their retirement savings lasts, retirees want to know the best way to access cash in retirement. Let's consider 2 potential options.

Alice is retiring this year at age 65. She has accumulated $1 million in a diversified, non-qualified portfolio. She needs an additional $40,000 per year to maintain her current lifestyle. 

Option A: Liquidation

Alice decides to take $40,000 a year from her portfolio to supplement her retirement income. She anticipates needing this extra income for another 10 years. Over the decade that her money has been invested in the S&P 500® Index, her assets have more than doubled.1 Her long-term capital gains tax rate is 15%,2 so she will owe $3,675 in capital gains tax upon liquidation the first year.

If the S&P 500 keeps returning 10.28% annually, forgoing 10 years of growth on that $40,0003 would equate to an opportunity cost of $66,421. If Alice withdrew $40,000 a year for 10 years, her total cost of liquidating would be $322,950.4

Alice’s total cost of liquidating appreciated assets is $322,950.

Option B: Borrowing against assets

Instead of liquidating assets, Alice uses a securities-backed lending (SBL) solution — a securities-backed line of credit or SBLOC — to access cash in retirement  by basically borrowing $40,000 from her portfolio. Because she hasn’t sold any investments, she doesn’t face any tax consequences.

Alice would have $400,000 of additional cash over 10 years with no income or capital gains tax due. If she pays interest only on the SBLOC, the total interest expense would be $156,4005 over 10 years, saving Alice $166,550 and preserving her investment portfolio. Comparing the two options indicates that borrowing against her portfolio through a SBLOC is more advantageous than liquidating assets.

Alice saves a total of $166,5506 with an SBLOC versus the liquidating option.
Comparing the two options indicates that borrowing against her portfolio through an SBLOC is more advantageous than liquidating assets.

When the SBLOC comes due

The ability to seize opportunities without disrupting an investment strategy is a benefit of SBLOCs that’s readily apparent. But can SBLOCs be a long-term solution?

If Alice elected to liquidate a portion of her investment portfolio to satisfy the debt at the end of 10 years, she would have a SBLOC balance outstanding of $400,000 and would have paid $156,400 in interest, assuming that the interest rate stays constant at 7.82%.5 However, the investment portfolio stays intact, and that $40,000 per year that was not liquidated would have appreciated by $278,517 during that time. Assuming that Alice would fall into the 15% long-term capital gains tax bracket, she would owe $44,433 in capital gains taxes, which yields a net after-tax capital gain of $234,085. This is $77,685 more than the interest she paid on the SBL for 10 years. This example really makes clear the power of receiving compounded returns versus paying simple interest.

The tax advantage of holding on to assets

In the current tax environment, there are no estate tax consequences for Alice's portfolio of $1 million, and the same would be true even if Alice’s portfolio was worth $13.61 million.7

The cost basis of her assets steps up when Alice passes away. This means her heirs will inherit an investment portfolio whose cost basis is equal to the fair market value of the assets on the date of her death.

However, it's important to note that Alice's estate will still need to pay off the $400,000 SBLOC.

Yes, Alice can ensure that her heirs will avoid paying any capital gains taxes on the appreciation that her investments accrued during her lifetime by keeping them intact and borrowing against them with an SBLOC.

But it cannot be forgotten that the SBLOC is not assignable and will not be forgiven when Alice dies. If the estate fails to pay off the loan or fails to continue to make monthly payments, the portfolio will be seized and liquidated by the lender.

Using an SBLOC to access cash in retirement

By encouraging your clients to consider an SBLOC to access cash in retirement, you’re helping them: 

  • Maximize funding efficiency
  • Capture the spread between the investment return and the cost of financing
  • Use time to their investing advantage 

Most importantly, by implementing this approach, you’re positioning your clients’ portfolios to generate tax-efficient liquidity as they move into retirement.
Nationwide is here to help.
To learn more about securities-backed lending, visit nationwide.com/sbl.

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[1] The S&P 500 Index has returned 10.28% per year on average since 1969.
[2] An estimate of your capital gains tax liability based on your adjusted gross income, tax filing status and cost basis in your investments. Cost basis is calculated by assuming the funds have been invested in the S&P 500® throughout the investment holding period that you selected. Taxes are based on the IRS income tax rates for the current tax year.
[3] This statement is contingent upon the S&P 500 continuing to return 10.28% per year, the average since 1969. However, past performance is not an indicator of future results.
[4] $278,517 in opportunity cost of lost market returns + $44,433 in total capital gains taxes paid = $322,950.
[5] This assumes a 7.82% interest rate (SOFR of 5.32% plus margin of 2.50%).
[6] The cost of liquidating ($322,950) minus the cost of borrowing ($156,400).
[7] This statement is based on the 2024 estate tax exemption.

Representatives do not give legal or tax advice. An attorney or tax advisor should be consulted for answers to specific questions.

The purpose of a Nationwide Smart Credit line of credit must be for personal, family or household purposes and not for securities investments or to purchase or carry margin securities, which include: (1) stocks that are registered on a national securities exchange, or any over-the-counter security designated for trading in the national market system; (2) debt securities (bonds) that are convertible into margin stock; and (3) shares of most mutual funds.

California: Loans made or arranged pursuant to a California Lenders Law License. Delaware: Nationwide SBL is licensed by the Delaware State Bank CCL commissioner to engage in business in this State under license number 035414, expires 12/31/2025. Maryland: License Number 1804109. Missouri: Consumer Credit Loan Company registered by the Missouri Division of Finance, license number 367-25-8932. Oregon: License number 1804109. Rhode Island: Rhode Island Licensed Lender. Washington: License number CL-1804109. Click here for state license information and rate and fee disclosures.

Not available in Mississippi and Nevada.

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Nationwide SBL, LLC dba Nationwide Smart Credit (NMLS): 1804109 NMLS Consumer Access: https://www.nmlsconsumeraccess.org/
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