Security-Backed Line of Credit (SBLOC)

Security-Backed Line of Credit

 

     I have had several clients reach out in the past month asking about a SBLOC

(Securities-Backed Line of Credit). This concept isn’t new, but thanks to TikTok and

social media, it has become more commonly known. The hype behind the concept

goes something like this “Elon Musk and Jeff Bezos don’t sell their stock to provide

income for their lifestyle. They borrow against their stock and avoid paying the

capital gains tax. This gives them tax-free income while they live, and when they pass

away, their stock gets a step-up in tax basis.”

 

     Here are the deeper concepts: First, those billionaires (or mega millionaires) will

be subject to estate taxes unless they make other shifts to mitigate those taxes. Second,

they are still paying interest on any dollar they borrow. Borrowing isn’t free and has a

cost and a risk. Third, to “safely” borrow from assets like stocks, bonds, life

insurance or even real estate, you need to make sure you have sufficient funds

(coverage or equity) to avoid losing everything.

 

     With real estate, most people see the risk of borrowing and not being able to afford

the interest. When borrowing against stocks, the risk comes from the volatility of the

stock market. If the underlying stock loses value due to any reason, then you may be

forced to liquidate your stock (at the worst time) to satisfy the loan. If the same value

fluctuation occurs with a piece of real estate, the bank doesn’t come and sell your

house; you can technically have negative equity and hang on during a bad market

downturn. That same market downturn when borrowing against your stocks would

trigger the lender to sell all your stocks when they have negative value. This could

be much more devastating and should be seen as much riskier.

 

     There are times and cases when it might make sense to borrow against your stock.

One important criteria is to have significantly more stock value than the value you are

borrowing. You don’t want the value of the underlying stock to ever dip anywhere

near the borrowed amount. You might also consider this strategy when you retire and

borrow against rather than sell your appreciated stock. This adds different risks

because you will be dependent on the yearly withdrawal for your lifestyle. Keeping

the withdrawal rate at or near 1% of the stock value is approximately where you want

to target. This eliminates this strategy for 90% of retirees who need a much higher

withdrawal rate in retirement.