How the Securities Loan Retirement Strategy Works

The core idea is disarmingly simple. During retirement, instead of selling €40,000 worth of ETFs to cover living expenses, you take a €40,000 loan using your €1 million portfolio as collateral. You pay interest (currently around 3.24% at Scalable Capital for loans up to €100,000), but your portfolio remains intact, continuing to generate dividends and appreciation.

Here’s why this matters in Germany: Kapitalertragsteuer (capital gains tax) clocks in at 25%, plus the Solidaritätszuschlag (solidarity surcharge) of 5.5% on that tax, pushing your effective rate to 26.375%. If your portfolio yields 7% annually, selling means you immediately lose over a quarter of your gains to taxes. Borrowing sidesteps this entirely, loan proceeds aren’t taxed as income because they’re debt, not profit.

The strategy works best when interest rates stay low and market returns remain robust. Many proponents target a 4% total spending rate, funding 3% through traditional withdrawals and the remaining 1% via margin loans. Historically, this approach would have left retirees with substantial net worth even after 30-year retirement periods, including cohorts retiring during market peaks like 1929 or 1965.

The German Tax Law Loophole (That Isn’t Really a Loophole)

German tax law doesn’t explicitly encourage this strategy, it simply doesn’t prohibit it. The key distinction lies in how the Finanzamt (Tax Office) categorizes different cash flows. When you sell securities at a profit, you realize a Kapitalertrag (capital gain) that’s subject to immediate taxation. When you take a loan, you’re accessing capital without generating taxable income.

This mirrors how German law treats other loans: a Konsumkredit (consumer loan) or Immobilienkredit (mortgage) doesn’t trigger income tax. The securities loan operates under the same principle. As one financial forum participant noted, this is precisely why wealthy families use similar structures to defer taxes across generations.

However, there’s a critical caveat: you still owe the Vorabpauschale (advance lump-sum tax) on your ETFs even if you don’t sell. This annual tax on deemed returns applies to both distributing and accumulating funds, calculated as 70% of a baseline interest rate set by the German government. For 2025, this remains a relatively small amount, but it chips away at the tax-free illusion.

Running the Numbers: When It Actually Makes Sense

Let’s work through a concrete example. Suppose you have a €1.2 million portfolio and need €48,000 annually for retirement.

The math looks compelling, but it hinges on one critical assumption: your portfolio must consistently outperform the loan interest rate. If rates rise to 5% while returns drop to 4%, the equation reverses. You’re now paying €2,400 in interest while earning €48,000, still profitable, but the margin for error shrinks dramatically.

The Margin Call Nightmare Scenario

The most obvious risk is a Margin Call (margin call). If your portfolio value drops significantly, your broker will demand additional collateral or force liquidation to cover the loan. During the COVID-19 crash in March 2020, some German investors saw their portfolios drop 35% in weeks. If you’d borrowed 50% of your portfolio value, you would have faced immediate demands to deposit cash or watch your broker sell your positions at the worst possible moment.

Conservative practitioners recommend borrowing no more than 25-30% of your portfolio value. With a €1 million portfolio, that means a €250,000 loan ceiling. This buffer allows you to withstand a 50% market decline before hitting margin call territory. But it also means you can’t fund an entire retirement solely through borrowing, you’ll still need some traditional withdrawals.

Interest rate risk compounds this problem. Unlike fixed mortgages, most Wertpapierkredite have variable rates tied to central bank benchmarks. If the ECB raises rates to combat inflation, your 3.24% loan could jump to 5% or 6% within months. Suddenly, your interest costs balloon while your portfolio might be simultaneously declining.

The Cognitive Decline Problem No One Talks About

Here’s the uncomfortable truth: this strategy requires active management into your 80s and 90s. You must monitor loan-to-value ratios, interest rate trends, and portfolio allocation. As one critic pointed out, managing margin leverage at age 85 is substantially more complex than setting up a simple withdrawal plan.

Traditional Entsparpläne (withdrawal plans) require minimal oversight once established. You set a monthly withdrawal amount, and the broker sells accordingly. With a securities loan strategy, you’re essentially running a leveraged hedge fund out of your retirement account. If cognitive decline sets in, the consequences of mismanagement could be catastrophic.

Family members inheriting this structure face similar complexity. While in the US, inherited securities receive a stepped-up cost basis that resets capital gains to zero, German law offers no such relief. Your heirs inherit both the portfolio and the loan, and they’ll eventually pay capital gains tax when they sell. You’ve merely deferred the tax bill, not eliminated it.

German Broker Reality Check: Limited Options

The strategy’s viability also depends on access to cheap credit. Currently, Scalable Capital offers the most competitive rates at 3.24% for loans up to €100,000, with higher rates beyond that threshold. Interactive Brokers provides access for German residents but requires navigating complex US-based interfaces and tax reporting.

Most traditional German banks charge 5-7% for Lombardkredite (lombard loans), making the strategy economically unviable. The €100,000 limit at Scalable Capital also constrains the approach, you can’t fund a €60,000 annual retirement solely through their platform. You’d need multiple broker relationships or accept higher rates.

Health insurance adds another wrinkle. If you have no taxable income because you’re living off loans, you’ll still owe Krankenversicherung (health insurance) contributions. For retirees without employment income, this means paying the minimum contribution of around €200 monthly to the Krankenkasse (health insurance fund). While manageable, it’s a fixed cost that traditional retirees might cover through their pension income.

Estate Planning: Passing the Leverage to Your Heirs

The generational aspect is where this strategy truly diverges from conventional wisdom. If you die with a securities loan outstanding, your heirs inherit the portfolio with its original cost basis intact. They can either continue the loan strategy or sell assets to pay off the debt. In either case, the capital gains tax liability transfers to them.

For ultra-high-net-worth families, this Buy, Borrow, Die approach makes sense. The portfolio’s growth potential outweighs the interest costs, and the family can service the debt indefinitely. But for a typical retiree with €500,000 to €2 million, the risks often outweigh the benefits. Your heirs might prefer a simpler inheritance: a paid-off portfolio they can liquidate without navigating margin agreements.

Who Should Actually Consider This

This strategy only works for a narrow subset of German retirees:

1. Substantial portfolios: Minimum €500,000, preferably over €1 million
2. High risk tolerance: Comfortable with leverage and market volatility
3. Tax bracket: Currently paying top marginal rates (42% or 45%) on other income
4. Longevity: Expecting 25+ year retirement horizons where compounding matters
5. Financial literacy: Capable of managing complex financial instruments into old age

If you’re in the 25% capital gains bracket but have modest portfolio size, the complexity isn’t worth it. The Sparerpauschbetrag (saver’s allowance) of €1,000 per person already shelters a meaningful portion of gains. For married couples with €2,000 in annual tax-free allowances, traditional selling strategies look far more attractive.

Practical Implementation: A Step-by-Step Framework

If you decide to proceed, here’s how to implement it safely:

The Verdict: A Tool, Not a Miracle

The securities loan retirement strategy isn’t the tax panacea social media suggests. It’s a sophisticated tool that works under specific conditions: low interest rates, robust markets, large portfolios, and high investor competence. For most German retirees, the risks, margin calls, cognitive decline, and interest rate shocks, outweigh the tax savings.

Yet dismissing it entirely misses the point. Used selectively, a Wertpapierkredit can bridge income gaps in high-tax years, fund large purchases without triggering bracket jumps, or provide flexibility during market downturns. The key is treating it as a tactical supplement, not a strategic replacement for traditional retirement planning.

Before implementing, consult a Steuerberater (tax advisor) who understands both German tax law and securities lending. The €200-300 hourly fee is trivial compared to the cost of a poorly structured leverage strategy. And remember: if a strategy seems too good to be true, it usually is, especially in a tax system as thorough as Germany’s.