The Retirement Plan Was Working, Until Leverage Put Everything at Risk
A couple approaching retirement at 57 appears to have done nearly everything right. They expect a $60,000 annual pension, have accumulated investment assets, receive rental income and anticipate Social Security benefits later in retirement. Their expenses are manageable, and they have saved consistently enough to leave work years before the traditional retirement age.
Then comes the temptation to improve an already successful plan.
Perhaps they borrow against their brokerage account to buy more stocks. They purchase a rental property with a small down payment, expecting appreciation to magnify their return. They concentrate a large portion of their portfolio in technology or semiconductor companies because those investments have recently performed well. They may even view a market decline as an opportunity to borrow more.
Each decision can appear rational on its own. Together, they can turn a resilient retirement plan into one that depends on favorable markets, stable interest rates and access to continuing credit.
The central challenge for people nearing retirement is often no longer creating wealth. It is preventing unnecessary risk from damaging the wealth they have already created.
A Strong Income Floor Changes the Retirement Calculation
A household receiving a $60,000 pension begins retirement in a much stronger position than one relying entirely on investments. The pension can cover a meaningful portion of recurring expenses without requiring assets to be sold during a market decline. Rental income and future Social Security benefits can strengthen that income floor further.
Suppose the couple expects Social Security of approximately $3,200 a month beginning at 67. Once benefits start, that would add about $38,400 a year before taxes and Medicare deductions. Combined with the pension, the household could have nearly $100,000 in gross annual income before taking anything from investments.
That does not automatically mean the couple is ready to retire. The pension may not increase fully with inflation, rental income may fluctuate and Social Security does not begin for another decade. Health insurance before Medicare, taxes, property repairs and other irregular expenses must also be included.
The existence of substantial guaranteed income does change the purpose of the investment portfolio. Instead of being responsible for every household expense, the portfolio can provide inflation protection, discretionary spending, emergency liquidity and an inheritance.
That should generally reduce the need to take aggressive investment risks. A household that has already funded its goals gains relatively little from doubling its wealth but could suffer significantly if leverage forces assets to be sold during a downturn.
Roth Conversions Should Follow the Tax Plan, Not a Rule of Thumb
Early retirement can create an attractive window for converting traditional retirement assets to a Roth IRA. Earned income has stopped, required minimum distributions have not yet begun and Social Security may still be several years away. Those conditions can place the retiree in a lower tax bracket than during the working years or later retirement.
A Roth conversion moves money from a tax-deferred account into a Roth account. The converted amount is generally included in taxable income for the year, but qualified Roth withdrawals can later be tax-free. Conversions can reduce future required distributions and create more flexibility for heirs, although inherited Roth accounts remain subject to distribution requirements for many nonspouse beneficiaries.
The correct conversion amount cannot be determined by saying that everyone should convert $60,000 or $70,000 annually. It depends on filing status, deductions, other income, state taxes, Medicare premiums and the size of the remaining pretax accounts.
For 2026, the 22% federal bracket for married couples filing jointly applies to taxable income from $96,951 through $206,700. The 24% bracket begins above that level. Those figures refer to taxable income after applicable deductions, not gross income.
A couple with $60,000 of pension income and $20,000 of net rental income may have room for a conversion while remaining in the 22% bracket. Another couple with the same pension but substantial dividends, capital gains or consulting income may have much less room. A large conversion could also increase future Medicare income-related surcharges once the household is enrolled.
The objective should not be to avoid taxes at all costs. It should be to pay taxes at deliberately selected rates rather than allowing future required distributions, Social Security and portfolio income to determine the result by default.
A Diversified Portfolio Does Not Need to Be Exciting
Once a retirement plan is adequately funded, portfolio design should emphasize reliability rather than entertainment.
A globally diversified mix of stocks and high-quality bonds spreads risk across companies, industries, countries and economic conditions. It will not be the best-performing portfolio in every year. That is precisely the point. The household is no longer betting its future on the continued success of one company, sector or market.
Semiconductor and technology funds may have a place in a portfolio, but they should not become substitutes for diversification. Sector exchange-traded funds can hold many companies while still exposing investors to the same economic forces, valuations and investor sentiment. When enthusiasm for an industry reverses, numerous holdings can decline together.
Concentrated positions often arise after a successful investment or business sale. An owner may hold a large amount of company stock because selling would create taxes or because familiarity makes the investment feel safer than it is. An employee may also receive stock compensation while depending on the same company for salary and benefits.
The risk is not that the company must fail. A prolonged decline, regulatory setback or change in industry leadership may be enough to disrupt the retirement plan. Diversifying gradually, coordinating sales with tax-loss harvesting and using charitable strategies for highly appreciated assets may reduce that exposure without requiring an indiscriminate sale.
Margin Loans Can Force a Sale at the Worst Possible Time
A margin loan allows an investor to borrow against securities held in a brokerage account. The borrowed money may be used to purchase additional investments or, depending on the arrangement, provide liquidity for other purposes.
The attraction is easy to understand. If an investor borrows at 8% and the purchased investment rises 15%, leverage increases the apparent return on the investor’s capital. The calculation becomes much less appealing when the investment falls.
Interest continues to accrue regardless of performance. As the account value declines, the brokerage firm may require the investor to deposit additional cash or securities. Firms may impose maintenance requirements above regulatory minimums and can increase their own requirements without advance notice. They may also sell assets without first allowing the customer to choose which holdings are liquidated.
Consider an investor with $1 million in securities who borrows $400,000. If the portfolio falls 30%, its value declines to $700,000 while the $400,000 debt remains. The investor’s equity has fallen from $1 million to $300,000—a 70% loss before accounting for interest.
The market may eventually recover, but the investor may not be able to wait. A forced liquidation locks in losses and removes the assets that would otherwise participate in the rebound.
Margin can be useful as short-term bridge financing when the borrower has ample outside liquidity and a clear repayment source. It is far more dangerous when used to increase permanent market exposure or support ongoing retirement spending. A retiree who depends on the same portfolio for income should be especially cautious about giving a lender the right to liquidate it.
Securities-Backed Credit Is Still Debt
Some investors distinguish between traditional margin and a securities-backed line of credit. The latter may prohibit the borrowed funds from being used to purchase securities and can provide a convenient source of liquidity without requiring an immediate asset sale.
The distinction matters, but it does not eliminate the underlying risk. The securities remain collateral, interest rates may change and a decline can force the borrower to provide additional assets or repay part of the loan. FINRA notes that securities-backed lines commonly require monthly interest payments and remain outstanding until the principal is repaid.
Borrowing against investments may make sense to cover a brief delay between the purchase and sale of a home or another clearly defined cash-flow need. It becomes more questionable when used to finance a lifestyle the household cannot support from ordinary income.
The ability to borrow is not the same as the ability to afford.
Real Estate Leverage Makes Gains—and Losses—Look Larger
Real estate investors frequently point to the power of leverage. A buyer who puts $200,000 down on a $1 million property controls an asset worth five times the initial equity. If the property appreciates 5%, the $50,000 increase represents a 25% gain on the down payment before financing costs, taxes, maintenance and transaction expenses.
The same mathematics applies in reverse. A 20% decline eliminates the original $200,000 of equity. If the owner must sell, commissions and closing costs can create a loss greater than the initial investment.
Current borrowing costs make the equation more demanding. The average rate on a conventional 30-year fixed mortgage was 6.49% as of July 9, 2026, according to Freddie Mac. Investment-property and jumbo loans may carry different and often higher rates depending on the borrower and property.
A rental property must generate enough income to cover financing, taxes, insurance, maintenance, vacancies and management. Appreciation should strengthen the investment rather than rescue one that loses money every month.
Real estate can diversify a household’s income, and a carefully selected property may produce attractive long-term returns. It is not automatically safer than stocks simply because prices are not displayed every second. The risk is often hidden in leverage, illiquidity and large, unpredictable repair costs.
Asset Location Can Improve Returns Without Increasing Risk
Investors often focus on which assets to own and give less attention to where those assets are held. Asset location attempts to place investments in accounts where their tax treatment is most favorable.
Tax-efficient stock index funds may fit well in a taxable brokerage account because much of the return can come from qualified dividends and long-term appreciation. Higher-yielding bonds or investments producing ordinary income may be better suited to a traditional retirement account. Assets with strong growth potential may benefit from Roth treatment because qualified withdrawals can be tax-free.
These are general principles rather than rigid rules. A retiree who expects to spend from a taxable account soon may need more bonds or cash there, even when another location would be more tax-efficient. Investment risk should remain appropriate at the household level rather than allowing tax considerations to dictate an unsuitable portfolio.
Tax-loss harvesting can also improve after-tax results in taxable accounts. Selling an investment below its cost may allow the loss to offset capital gains and, within limits, ordinary income. The proceeds can be reinvested in a similar but not substantially identical asset so the investor remains exposed to the market while complying with wash-sale rules.
The benefit is tax deferral and improved flexibility, not the elimination of an economic loss.
A Charitable Remainder Trust Is Not a Tax-Free Escape Hatch
Owners selling a business or highly appreciated stock sometimes consider a charitable remainder trust. When properly structured, the donor transfers assets to an irrevocable trust, which can sell them and make payments to designated beneficiaries for life or a specified term. A qualifying charity receives the remaining assets at the end.
The arrangement may create a partial charitable deduction and allow the trust to diversify appreciated property without paying the entire capital-gains tax at the moment of sale. That does not mean the gain disappears. Payments to beneficiaries follow tax-ordering rules and can carry out ordinary income, capital gains and other categories over time. The IRS specifically states that distributions are taxed as capital gains to the extent the trust has current or accumulated capital-gain income after ordinary income is accounted for.
A charitable remainder trust is appropriate only when the owner genuinely intends to leave the remainder to charity and accepts that the transfer is irrevocable. It should not be presented merely as a technique for avoiding tax on a business sale.
The transaction also requires legal, tax and valuation expertise. Creating the trust after a sale is already effectively complete may fail to produce the intended result, and improper control over the assets can create serious tax problems.
Life Insurance Should Solve an Identifiable Problem
Term life insurance is often the most efficient way to replace income during a family’s working years. It provides a death benefit for a defined period and generally costs substantially less than permanent coverage at the beginning.
Permanent policies can serve legitimate purposes, including estate liquidity, business succession, support for a dependent with lifelong needs or funding a charitable legacy. Their higher premiums and complexity make them less suitable when the only goal is basic income replacement.
A young family that needs $1 million of protection for 20 or 30 years may receive more coverage per premium dollar from term insurance. Buying a smaller permanent policy simply because it builds cash value could leave the family underinsured during the years when protection matters most.
Retirees may have less need for life insurance once children are independent and sufficient assets have accumulated. High-net-worth families can face different concerns, particularly when an estate contains illiquid businesses, real estate or a substantial charitable commitment.
The product should follow the need, not the other way around.
Retirement Success Can Be Undermined by the Desire for More
Investors frequently become most vulnerable after they have accumulated enough.
A person who is far behind may understand the need for discipline. Someone who has reached financial independence may begin searching for ways to turn $3 million into $5 million or to increase the inheritance left to children. Borrowing, concentrated investments and speculative real estate can seem acceptable because the household believes it has money to spare.
The relevant question is not whether the investment might succeed. It is whether success would meaningfully improve the household’s life and whether failure would damage the retirement it has already earned.
For a couple with a pension, rental income, investments and future Social Security, a globally diversified portfolio may be entirely sufficient. Moderate Roth conversions can reduce future tax pressure. Maintaining liquidity can cover the years before Social Security and protect against property or health emergencies.
Adding leverage may increase expected wealth, but it also introduces the possibility of forced sales, higher interest costs and permanent loss. Those risks become harder to recover from after employment income has stopped.
A strong retirement plan does not need to win every year. It needs to survive.
The most successful strategy may therefore appear unremarkable: maintain a diversified portfolio, convert retirement assets at deliberate tax rates, hold enough liquid reserves, limit concentrated positions and borrow only when repayment does not depend on favorable markets.
Retirement is not the point at which risk disappears. It is the point at which investors should become more selective about which risks are still worth taking.
Intended for educational purposes only. Opinions expressed are not intended as investment advice or to predict future performance. Past performance does not guarantee future results. Neither the information presented, nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Consult your financial professional before making any investment decisions. Opinions expressed are subject to change without notice.
IMPORTANT DISCLOSURES:
• Investment Advisory and Financial Planning Services are offered through Pure Financial Advisors, LLC. A Registered Investment Advisor.
• Pure Financial Advisors, LLC. does not offer tax or legal advice. Consult with a tax advisor or attorney regarding specific situations.
• Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
• Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.
• All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.
• Intended for educational purposes only and are not intended as individualized advice or a guarantee that you will achieve a desired result. Before implementing any strategies discussed you should consult your tax and financial advisors.
