Would You Raid the Piggy Bank or Mortgage the House?

I’ve been thinking about a retirement scenario lately, a thought experiment that says something about how I spend my morning drinking coffee in the sunroom…it probably suggests I should go for a run rather than thinking.

Picture this: You’re facing a savage 25% market drawdown that grinds on for a full decade. You’ve been sensible, maintained a proper cash and bond cushion to weather the inevitable storms, but after five years drinking latte’s and ignoring the situation, that safety net has been exhausted.

Now you’re looking at two unappetizing options. Do you start flogging your shares at depressed prices to pay for the weekly shop? Or do you borrow against your home through an equity release scheme, preserving your portfolio in hopes of a recovery?

When you sell shares during years six through ten of this hypothetical nightmare, you’re turning paper losses into permanent ones at the worst moment. Missing any recovery that might materialize in those latter years. Rather painful to contemplate.

But it has some upside. You keep your home debt free and maintain complete flexibility. No interest charges mounting up month after month. And here’s a cheerful thought, if the market never actually recovers, at least you haven’t compounded your misery by paying interest on money borrowed to avoid selling.

The alternative keeps your portfolio intact. If markets stage a comeback in years eight, nine, or ten, those shares you didn’t sell could be worth considerably more. You’ve kept your chips on the table for when fortune smiles.

The problem is you’re borrowing against your home at perhaps 4-6% compound interest for five years. That debt doubles roughly every twelve to fifteen years, even if you don’t draw down another cent. You’re essentially leveraging into equities at the very moment they’re already down 25%. I believe the technical term for this strategy is catching a falling knife while standing on a banana skin.

I admit a 25% drawdown lasting a full decade is pretty improbable . Even the Great Depression saw recovery begin sooner than that, though I’m not sure that’s particularly comforting. Although there’s Japan’s lost decade to think about.

Rather than committing entirely to one path or the other, you might consider a bit of both. Use equity release for years six and seven while markets still have reasonable prospects of recovery. But come years eight through ten, if there’s still no improvement in sight, you may need to accept that crystallizing some losses beats accumulating more debt on your home.

I’m not sure what I’d do. Probably spend the entire decade faffing about debating what choice I’d make or finding a spreadsheet wizard who could figure the best path for me. I suspect as normal I’m overthinking things but nevertheless it’s an interesting thought experiment between SORR risk and debt accumulation during retirement. In the meantime I’m going to drink another coffee and think about something more productive… But what would you do?