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Should You Borrow Money to Invest for Retirement?

Two Yale Professors want you to borrow money to invest in the stock market.

Economists Ian Ayres and Barry Nalebuff first pitched the idea in a 2005 Forbes column called Mortgage Your Retirement. Their philosophy is this: Young people should take advantage of the stock market’s propensity to deliver long-term gains by trading on margin. The daring econs explain themselves in a new book: Lifecycle Investing: A New, Safe, and Audacious Way to Improve the Performance of Your Retirement Portfolio.

Basically, the profs recommend twentysomethings use a margin account to borrow an amount equal to their cash retirement savings and invest the money for the long-run. In a recent Time Magazine interview, Nalebuff explains it this way:

…[W]e believe in stocks for the long run, but most people, when they have lots of stocks, don’t have the long run, and when they have the long run, don’t have lots of stocks. People seriously underinvest in the market for the first 25 years of their working life.

In theory, the concept makes a lot of sense. If an investor has the discipline to invest the borrowed money for the long run, the stock market’s long-term gains will far outpace the cost of borrowing. That’s because margin accounts can be a cheap way to borrow money. (We’re not talking about credit card rates here; in fact Ayers and Nalebuff state that this strategy is not for anybody in high-interest consumer debt).

In reality, I take issue with the strategy. Primarily, with the required discipline. Reuters blogger Felix Salmon sums up this argument perfectly:

…the amount of discipline that you need in order to successfully prosecute this strategy is absolutely enormous, and human beings tend not to be particularly financially disciplined, especially when they’re young. They’ll abandon the buy-and-hold strategy at exactly the wrong time, selling low and then buying back in at high points; they’ll start using their margin account to try to pick stocks or trade options; they’ll use any profits on expenses rather than keeping them invested and letting them compound.

Salmon concludes that the people who could take advantage of this strategy are most likely going to be extremely financially sophisticated and, consequently, will probably make tons of money in their career anyway. I agree.

You should definitely get as much money into your retirement accounts while you’re young. Take advantage of employer 401(k) matches. Max out tax-sheltered IRAs. Personally, I just wouldn’t recommend that you borrow money to do it.

What do you think?

Published or updated on April 16, 2010

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About David Weliver

David Weliver is the founding editor of Money Under 30. He's a cited authority on personal finance and the unique money issues we face during our first two decades as adults. He lives in Maine with his wife and two children.


We invite readers to respond with questions or comments. Comments may be held for moderation and will be published according to our comment policy. Comments are the opinions of their authors; they do not represent the views or opinions of Money Under 30.

  1. DIY Investor says:

    From the latter part of 2007 to March 2009 stocks dropped over 50%. If you’re 30 and can borrow $100,000 say and can handle that kind of downturn (paying interest on your loan the whole time) with a view towards the long-run I say go for it.
    One other point. The last 100 years have been special for the U.S. For much of that period the only place investors could comfortably invest was the U.S. For much of that period the world’s innovations were coming from the U.S. All of this is changing. We all like to extrapolate but some care needs to be taken – especially when it comes to asset markets.

  2. Alexis says:

    I agree…that’s a very interesting concept to borrow money for retirement. But yes, be careful & lots of research.

  3. Matt says:

    It’s an interesting concept, but it needs to be pursued carefully. You want to make sure the after tax return on your investment exceeds the interest rate on the debt. Otherwise, it’s not worth it.

  4. Nala says:

    Interesting article. I am considering returning to school and I have $75k in the bank. Should I borrow money to pay my living expenses (tuition is already paid for) and invest my savings or should i use my savings?

    • David Weliver says:

      Hi Nala, Personally, I wouldn’t borrow money for living expenses if I didn’t need to. I’d use the cash unless/until I only had $10-$15k, which I might keep for emergency use. Just my two cents.

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