The Power Of Zero Show

David's first appearance on the podcast was one of the most downloaded episodes. Back in 2014, David wrote the Power of Zero book and since then the national debt has grown considerably. We are now at $28 trillion in debt and the primary problem is that much debt is only affordable as long as interest rates stay historically low. At some point in the near future, the US will no longer be able to borrow money at the current rate and this will result in the cost of servicing the national debt will grow and consume more and more of the national budget. Many experts are saying that tax rates will have to raise dramatically or the US will go broke as a country. Everybody has been saving the lion's share of their money in tax-deferred accounts. In doing so they are entering into a partnership with the IRS where the IRS gets to vote on what percentage of your profits you get to keep. The best way to insulate yourself from higher taxes is to get into the zero percent tax bracket. Taxes are evolving at a rapid pace. We have to approach retirement with a sense of flexibility and be nimble enough to make changes to the strategy. Joe Biden's tax plans are going to have major repercussions for every American, whether that is now or eight years from now. David's belief is that Joe Biden is going to extend the tax cuts under budget reconciliation for another 8 years and if that happens the government is going to have to crank taxes up to make up for lost time. Everyday Americans need to take advantage of the current historically low tax rates, stretch out their tax obligations out over the next few years, and position as much of their money to tax-free. Historically, the highest marginal tax brackets are bellwethers for all other marginal tax rates. Maya MacGuinneas did a study that showed that the government would have to raise taxes on everyone making above $40,000 to 40% just to prevent the debt from growing each year. Even though Joe Biden has made the promise that he's not going to raise taxes on the middle class, mathematically it's just not tenable. If he refuses to broaden the tax base sooner rather than later, the fix on the back end is going to be much more aggressive. Raising taxes can be a catch-22, where it stifles economic growth and lowers revenue in the end. The reality is that there are not a lot of good choices to fix the situation, but the later we wait the harder the choices are going to become. Harvard Business School did a study to discover at what point do people feel comfortable with the amount of money they have saved and whether they will run out of money. Nearly everyone said they were worried. Ultimately, the study asked the question "do you need to have $15 million in your investment portfolio to feel like you won't ever run out of money before you die, or is there another way to mitigate longevity risk?" People's greatest fear in retirement is running out of money before they die. In today's financial planning world, not a lot of people can mitigate tax-rate risk and longevity risk within the same financial plan. If you have a stream of guaranteed income from social security, an annuity, or a company pension can be the difference between being comfortable in retirement and not worried about running out of money and the fear that your money won't last. Saving more money doesn't solve your longevity risk. It's not about your assets in retirement, it's about your income. The people that have guaranteed streams of income are happier in retirement and they generally live longer lives than people that don't. Even high net worth people can benefit from guaranteed streams of income because it gives you permission to take much more risk in your stock market portfolio. Even if they don't need the income, they can take it and reinvest it. Sequence of return risk references the order of which you experience returns in your stock market portfolio. If you have a sequence of negative returns early on in your retirement, it can send your portfolio into a death spiral from which it never recovers. Sequence of return risk can be devastating. The 4% Rule used to be the prevailing wisdom for people taking money out of their stock market portfolio. As recently as 2010, those projections are outdated and the 3% Rule has become the norm. The problem with this approach is that it is extremely expensive. Having an annuity is your tax-deferred bucket, which 97% of people do, you are exposing yourself to tax-rate risk as well as social security taxation risk. Using a piecemeal internal Roth conversion to convert it tax-free insulates you from rising taxes. The problem comes from not being able to do that Roth conversion all at once and you need another solution for the first five to seven years of retirement. This is where a time-segmented approach can come in.

Roth IRA's have been trending on Twitter recently because it was discovered that Peter Thiel accumulated over $5 billion in his Roth IRA. Peter Thiel was one of the original founders of Paypal in 1999 when the Roth IRA was still in its infancy. At that time, his salary qualified him to contribute to his Roth IRA and he placed 1.7 million shares of Paypal into his account. The shares started off at the value of one-tenth of one penny ($1700), and after Paypal went public, those same shares rose to over $50 each. With all this wealth in his Roth IRA, Peter Thiel used it as a slush fund for his other investments. In 2004, Mark Zuckerberg solicited a $500,000 investment from Peter, made within his Roth IRA, and that went on to grow considerably. By the end of 2012, Peter Thiel's Roth IRA was valued at roughly $1.7 billion. Mitt Romney did something similar, where he put undervalued shares into his own Roth IRA, which ended up creating a lot of negative press for him. By 2019, a large majority of Peter Thiel's investments took place under the umbrella of his Roth IRA. He has over $5 billion spread across 96 different sub accounts reflecting different investments in different companies. Peter Thiel plans on living to 120 and is making investments in antiaging technologies. In that situation, by the year 2087 he would have roughly $263 billion in his Roth IRA. In 2010, Congress removed the income threshold that prevented people from converting to a Roth IRA. This led hedge fund managers and venture capitalists to convert portions of their existing IRA, but Mitt Romney did not. Mitt now has around $100 million in his traditional IRA. In a rising tax rate environment, Mitt should have adopted the Peter Thiel approach. Under Joe Biden's tax proposals, Mitt stands to lose upwards of 70% of that money upon distribution. The best course of action for Mitt would be to bite the bullet and convert all of that money in a single year. Even with all the taxes he would pay now, it pales in comparison to what he would pay once Joe Biden's tax reform bill comes into play. According to the Power of Zero principles, Mitt is foolish to have that much money in his IRA. He should take advantage of the tax year of 2021 because it's never going to be a better rate than 37% for him. One thing you can draw from the Peter Thiel approach is the power of the Roth IRA. Once you put the after-tax dollars in, they grow in a tax-free way no matter what you invest them in. Contrasted with Mitt Romney, the larger his wealth grows, the larger his tax bill grows. He will probably end up paying at least 50% in taxes by the time he needs to take that money out, unlike the venture capitalists like Peter Thiel, Warren Buffet, and others that have taken advantage of the Roth Conversion.

Americans have over $30 trillion sitting in 401(k)'s and IRAs, and people are waking up to the fact that those accounts are in the crosshairs of the US government to solve their debt problems. In a recent interview with Maya MacGuineas, she said the fiscal condition of the US and what's going to happen over the next 10 years is terrifying. The Biden administration will likely try to kick the can down the road and that's only going to make the fix more draconian. The political class is hyper focused on the top 1% of earners right now, but everyone needs to understand that when tax rates go up, they tend to go up for everyone. In 1960, the highest marginal tax bracket was 89% with the lowest at 22%. The highest rate tends to be a harbinger of what all the other tax rates are doing. In Maya's study, she found that the US government would have to tax the highest earners at a rate of 103% just to prevent the debt from continuing to grow. It's not enough to tax the rich. There will come a time when everybody is going to fall under the scope of the IRS and will have to pay up. The national debt that the government references is not the true national debt. If we did our books like every other country in the world, which includes unfunded liabilities, we would have a very different number. The true national debt is around $180 trillion and 8x-9x the GDP. You can't control your payroll tax or your sales tax, but you can control the money you have in tax-deferred accounts. The true purpose of a retirement account is not to give you a deduction, it's to maximize your cash flow at a period of time in your life when you can least afford taxes. The way most people are planning for their retirement is backwards. Unless you can predict what tax rates are going to be in the year you take money out of your retirement account, you don't really know how much money you have and that makes it very hard to plan. We have an aging population in the US which is creating a demographic time bomb. As the Baby Boomer generation retires, later generations have to shoulder the brunt of that increased burden on social programs like Social Security. These programs only survive when subsequent generations are larger than the previous, which has not been the case for decades. We are not having as many children as we have had in the past and that's making those social programs more unsustainable. There will not be enough people in the future generating enough taxes to pay for everything we've already promised. When the programs were created, the variables were very different. People didn't live as long and they had more children. That is not the reality of the situation now, but nothing about the programs has changed. We have three possibilities for when tax rates are going to go up. The first is when the tax cuts expire in 2026. The second is the tax cuts get extended to 2030. The third, proposed by Ed Slott, is that the government will come to its senses and, starting next year, tax rates will go up for everyone.

President Joe Biden has recently proposed a $6 trillion budget designed to make the US more competitive. Spending is already on an unsustainable trajectory so we need to examine the impact this budget proposal will have on the fiscal outlook of the country. A lot of people believe a $6 trillion budget is too much, too soon and will exacerbate the debt problem in the long run. The budget proposal introduces budget deficits over the next several years, financed mainly by additional debt. This will result in over $15 trillion in additional debt by the end of the decade resulting in a national debt of roughly $42 trillion by 2030. The assumption being made is that this level of debt is sustainable because of the belief that interest rates will stay relatively low. Should that assumption not hold true, this level of debt will cause some major issues for the US economy. The stated goal of the budget is to help Americans attain a middle class lifestyle and to make the US more competitive globally. The proposal hasn't been voted on yet. The budget focuses on infrastructure projects, as well as shoring up of social programs like affordable childcare, universal Pre-K education, and a national paid leave program. Joe Biden campaigned on the promise that middle income earners will not have to pay for this additional spending. Biden plans to raise taxes on corporations and high-income earners and expects his plan to be offset by those additional taxes over the next fifteen years. The debt continues to grow each year because of the unfunded liabilities within existing social programs like social security. The budget proposal does not address this. It's important to note that the proposed budget allows the middle income tax cuts that Trump signed into law to expire. There are sources in the White House that say that Biden will address these tax cuts at some point in the future. By 2024, debt as a share of the economy would rise to its highest level in American history, eclipsing a World War II-era record. Another worry is that the new level of spending will become the new normal going into the future. Joe Biden believes that this additional spending can be financed by an economy that is growing by just under 2% per year. We also need to be concerned about inflation. As businesses recover from Covid, people are making money again but that money is chasing fewer goods and causing prices to rise. Additional spending by the government will further increase the money supply and accelerate the inflation. If you had any doubt that tax rates will not be dramatically higher down the road than they are today, this budget calls for it. By 2030 there will be so much debt the government will be forced to broaden the tax base. Experts are no longer talking about passing the debt onto the next generation. More of them are talking about how the current generation will have to pay for it. If you have money in a 401(k) or IRA the government's crosshairs are focused on your accounts. We need to keep an eye on the fiscal trajectory of the country because that's a barometer for where tax rates are going to be over the course of the next 10 years. Mentioned in this Episode: Biden's Plan: President to Propose $6 Trillion Budget to Boost Middle Class, Infrastructure - https://www.nytimes.com/2021/05/27/business/economy/biden-plan.html

Politicians are in a state of mind where they are not interested in fixing the problem, which means that the fix on the backend is going to have to be more aggressive and draconian. The damage the debt does is, in many ways, invisible to the average person. We have had decades to fix the debt problems but politicians have failed to do so. If we made these changes to something like Social Security years ago, we could have fixed it without affecting anyone depending on the system, but that is not the case anymore. If you look at where we're headed, we will continue to see lower growth in the economy going forward. Economic growth, mobility, and income growth will be slower than it otherwise would have been. One of the real major concerns has less to do with economics than it does with national security. The US will not have the economic dominance that it had in the past that secured its geopolitical place in the world and will find itself falling behind places like China. We need to begin thinking more about the long-term changes in the nature of work due to technology. We need a social contract that reflects and recognizes these changes so people can work effectively and productively with the changes that are happening more and more rapidly. As our fiscal health weakens, our ability to meet the challenges of this century is greatly diminished and we will be dangerously weak for it. Modern Monetary Theory says that you can't default when you borrow your own currency., which is true, but just because we can't default, that doesn't mean we have a healthy economy. MMT recommends fiscal policy to control inflation, which means basically raising taxes. The trouble with that idea is that there aren't any politicians willing to raise taxes, let alone cut spending or both. MMT proponents don't understand the dangers of inflation. Inflation can wipe away your entire savings and create an economic recession that is difficult to escape and painful for everyone. Borrowing during the downturn is not an example of MMT being correct. MMT is dangerous because it's so seductive. Who doesn't want to be able to spend as much as you want indefinitely with no consequences? But just because you want it to be true that doesn't make it true. Economists need to be unbiased and neutral when it comes to political ideology. There are politicians in power right now that recognize the threat of the national debt, but there are also groups that are working against the effort. Many politicians are willing to do the right thing, but they can't do it in isolation. There is no point in having people who are willing to do the right thing get destroyed politically without achieving anything. Part of the problem is that the national debt does lend itself to grassroots outrage. Ideally, there is some leadership at the top to champion the cause.There are a lot of great members in congress and there's a real chance for them to come together, but we are going to have to figure out how to come together as one country to solve these big problems if we want to see them rise to that challenge. Mentioned in this Episode: Committee for a Responsible Federal Budget - crfb.org

Maya is the President of the Committee for a Responsible Federal Budget. The committee itself has been around for a couple decades at this point and came about after several members of Congress left and realized how difficult it really is to be fiscally responsible with a government budget. It's very difficult to govern in a fiscally responsible manner in a political environment because, in many ways, those two things are completely at odds with each other. Fiscally responsible is simply the notion that you will be paying for your budgetary items yourself and not pushing the cost onto the future. Politics puts pressure on politicians to promise as much as possible and defer the cost to someone else. In terms of where we are now, the current fiscal path is dire. We have just come out of one of the times to borrow and borrow we did. The US borrowed $6 trillion in response to the pandemic and the debt-to-GDP ratio is about to reach its highest point in history. The difference between the last time the debt-to-GDP ratio was this high (after WW2) and now that demographic is working against us. We are now slated to be running budget deficits of well over $1 trillion indefinitely and the debt-to-GDP is on a trajectory to grow faster than the economy every year from now on. When your debt is growing faster than your economy is the definition of unsustainable. In order to flip that and have the economy grow faster than the debt, we need to bring our deficits and debt trajectory down. When Maya started looking at this problem she was mainly concerned with the economic risks like inflation and debt crowding out investment, and those risks still exist today, but now we are also dealing with polarization. We are so polarized now that both sides of the aisle care more about beating the other party than doing what's good for the country. One of the easiest ways to win over the public is to give them things for free, and this tactic happens on both sides. If we don't get a handle on the dividing mentality that runs politics right now, we are not going to be able to solve the debt problem. We have to look at the costs to taxpayers to figure out if a proposal is worth it, but when you push the cost onto the future and borrow money to pay for it the cost calculation is thrown off. The truth is that there isn't enough money in the pockets of the wealthy if you want to expand the government. Taxing the wealthy would not bring the debt to a manageable level, and certainly not if you want to expand government programs. Universal broad-based taxes will have to be part of the picture, along with reductions in spending. Politicians need to be honest with voters about paying for the things that they want and how much they cost. We can't stay on the path we are on because it will do too much damage to the economy and our strength, and it will hurt families in an ever growing way. Maya used to be confident that lawmakers would eventually be able to compromise and come up with a plan, but not so much anymore. Politicians are being pulled to the extremes and it's no longer a given that they will be able to come together for the good of the country. If we hadn't postponed everything, we would have had much easier choices to make. Now, we will probably need another revenue source like a VAT or carbon tax. The solutions are available, but the political environment and leadership isn't.

In Prosperity in the Age of Decline, the authors are predicting that 2030 will be the opening year of the greatest depression since 1930. Dr. Kotlikoff believes that it might not wait until 2030. China is already beginning to overtake the US in terms of GDP. By the end of the century, the US will no longer be the dominant economic superpower. It's not looking good in terms of projection. For a depression to occur, there would usually have to be an event or collapse beforehand, which is definitely possible. There are too many examples of hyperinflation over the course of history for the proposition that we can just print our way out of our problems to be true. There is still time to correct our mistakes. We need an independent party to run and expose Americans to the truth of the fiscal condition of the country. One of the problems we are dealing with right now is the marginal taxation of the poorest Americans. Roughly 25% of the poor are facing marginal taxes of .70 on the dollar. We need an incentive system that helps people instead of punishing them. There isn't much political will to change things. Dr. Kotlikoff wrote a bill to force the CBO to do fiscal gap accounting each year and it only garnered the support of eight senators. To right the ship of state, we need to broaden the tax base. Dr. Kotlikoff suggests putting everybody into a 30% marginal tax bracket while incorporating a progressive system so that the poor are differentially helped. With a few other tax structures and some reform of the welfare programs, it would be possible to get the fiscal gap under control. Reforming healthcare should be a major focus. If we could reduce the spending on healthcare to only 14% of GDP, the US would still have a very good healthcare system and be able to reduce spending considerably. Politicians need to be honest about the fiscal condition of the country if there is ever going to be momentum to change. There are a number of ideas being floated that can help reform healthcare and other social programs, but as the years go on, the options become slimmer. Politicians need to get out of the way and let economists propose solutions that can actually help people. Economics brings an entirely different way to bring financial planning to the table when compared with the industry, which is heavily focused on selling more products. Dr. Kotlikoff has a financial planning software tool you can access at maxify.com to help ensure a smooth retirement.

The official debt-to-GDP numbers are on track to be 110% by the end of the year, which is nearly a 30% increase over the last decade. The trouble is this calculation doesn't count unfunded obligations like Social Security. Economic theory doesn't differentiate between official borrowing and unofficial borrowing. The government has left a number of things off the books in order to keep the public in the dark about the true costs of what they are doing. Fiscal gap accounting puts everything going in and going out on the books and looks at the difference between the two streams. Right now, the US is counting the official debt of one year worth of GDP. This leaves another seven years' worth of GDP that we are not counting which is the real problem. In terms of fiscal gap, the US is in twice as bad a shape as the worst country in the European Union. In absolute numbers, the national debt is closer to $160 trillion than the $22 trillion that is officially reported. One proposed solution from the Modern Monetary Theorists is to simply print 8 years' worth of GDP, but that's not really an option and would likely result in immediate hyperinflation. The money printed since 2008 is already beginning to have an effect on consumer prices, and printing money is only a temporary solution. Printing money is a form of taxation. While the US needs to collect more in receipts, printing money comes with inflation and that can take on a life of its own. Once people begin to expect a period of inflation, the Federal Reserve can't do much other than accommodate those expectations. Programs like Medicare are paid in kind. If we try to inflate our way out of our Medicare problem the cost of the program will rise commensurately. When we look at what the government has been doing as a whole, it looks like Modern Monetary Theory has already taken hold. MMT proponents don't sound like regular economists. They're actually closer to religious fanatics or political ideologues than economists. The idea behind MMT is that as long as the printed money results in increased economic output we won't see inflation. In order to judge inflation, we have to look at what would have taken place had the money not been printed. The big danger is a sudden spike in either prices or just the general awareness of the US government's true fiscal situation. Like going bankrupt, right up until the day you lose everything it can all appear to be working just fine as you continue to spend down your borrowed money. Historically, MMT has not played out well for countries that tried it. The process is like a slow-growing cancer. It may take decades to take its course but the effects will become obvious and pervasive eventually. There are no great choices. To reverse course it would require either imposing a lot of pain on a small subset of people or accepting an environment of permanently high taxes forever.

Brian Beaulieu is in the business of predicting economic trends. He's been forecasting trends for the past 39 years and he's very transparent about his methods. Brian is politically agnostic and aims to be as objective as possible. He doesn't make money if the market goes up or down, he makes money by being right. Between March 20th and 28th of 2020, his GDP retail sales forecast came out with a 98% accuracy. When it comes to long-term trends, there are only a few ways they can play out. In terms of accuracy, Brian forecasted the great depression of 2008 and 2009 at the tail end of 2003, so their clients were well prepared when the crash hit. Back in 1987, a month before the stock market experienced a short but rapid decline, Brian warned his clients to get out and saved them from heavy losses. Brian's team has a unique methodology as well as business cycle theories which help them achieve such a high level of accuracy. By using a system of leading indicators, Brian can forecast major market trends with confidence. Business cycles don't turn based on old age, but that does produce imbalances which accumulate eventually causing major trends. Overall, Brian and his team have had an average accuracy of 94.7%. It's not particularly useful to read financial publications when it comes to trying to make predictions. Publications like the Wall Street Journal are in the business of selling ad space and have financial biases. They often look for data that reinforces what they already believe, and if they don't play that game, then their subscription base dwindles. Financial publications are interested in articles that get clicks, not in predicting the future. Brian knows that he's not immune to that, which is why he tends to be very dogmatic about his leading indicators. Humans have a tendency to think linearly. Financial behavior has a recency bias and whatever we have experienced most recently has the strongest imprint on us. This leads people to think that next month will look a lot like last month, and next year will look like this one. Most Millennials and Gen Xers have only experienced falling interest rates. Because they haven't experienced a rising interest rate environment they can't figure out ways to take advantage of it. If the success of stimulus spending is defined by people receiving a check and thinking fondly of the political process, then the most recent stimulus was indeed successful. Long-term, the stimulus has made the forecasts worse and someone is going to have to pay for it. People are aging, and as a population gets older they spend less and cost more. We are not going to get out from underneath those healthcare costs until 2036. Another issue is that the government has refused to fund Social Security, Medicare, and Medicaid. When interest rates start to rise again, the government is going to find itself in the position of not being able to afford both the mandatory and discretionary items. Most people like to think that rising healthcare costs are due to litigation or the greed of pharmaceutical companies, but the truth is more complicated than that. All these trends are going to line up around the time when the US national debt is so large that it becomes untenable. Advocates of Modern Monetary Theory believe that because we can print our own money that we don't have to worry about that, but history tends to disagree. What happens when the rest of the world stops lending the US money at the current interest levels? Over the next 8 years, Brian does not expect any politicians appearing with the political will to change the trajectory of the country until it's too late. Since the inflation from stimulus spending is not immediately present, people are going to believe that they can print money indefinitely with little to no consequences. Even with Covid-19, the level of stimulus hasn't changed the date of Brian's prediction. In order to prepare, you need to make as much money as you can in the intervening years and invest in assets that do well when the US dollar is declining. Around 2029, you should flip into assets that will protect you during a period of deflation. The goal is to preserve your cash on the way down, and then in 2036 get ready to begin buying assets and stocks when things get back on the upswing. Mentioned in this Episode: ITReconomics.com

There is a new bill moving through Congress right now that has bipartisan support and is fairly likely to pass in its current form. We can get a good sense of what the bill is intended to do by looking at the title page. The stated goal of the bill is to increase retirement savings, and to simplify and clarify retirement plan rules. Change #1 is that the bill enacts changes to required minimum distributions and does so according to a schedule that depends on how old you are now. This change will affect roughly 20% of IRA owners who don't need their RMD's to cover their lifestyle expenses and they will be able to push their RMD's further into the future. Change #2 involves catch-up provisions for IRAs, and that includes Roth IRAs. This section of the bill indexes IRA catch-up contributions for inflation, which brings them up to par with other retirement investment accounts. Change #3 are age-sensitive changes to catch-up provisions for traditional retirement plans. This change only affects people who are currently between the ages of 62 and 64 and says that starting in 2023 your catch-up provisions for traditional plans go from $6500 to $10000. This provides a narrow window for people who are just on the threshold of retiring but need to make greater contributions. Change #4 requires all catch-up contributions to be made to Roth accounts. Roth IRA's are so beneficial to people, especially in a rising tax rate environment, that many people believe that at some point they will be taken away, but the truth is that the government loves the Roth IRA. It provides the short-term infusions of cash that the government and politicians desperately need today rather than decades from now. Change #5 is that retirement plan employer contributions can be designated to Roth accounts. Is a rising tax rate environment, this is exactly what we want. With a 30-year time horizon, this will allow us to squeeze the most efficiency out of our retirement dollars. This will probably result in you having to pay taxes on the matched amount, but given the historically low tax rate environment that we are in that's still a good deal. Change #6 are changes to the penalties for failure to take required minimum distributions. Instead of being penalized by 50% for failing to take your RMD by the required date, the penalty is reduced to 25%. The penalty becomes 10% if you correct that within three years. This sounds like an improvement but it may also mean the IRS is less likely to waive the penalty than they were previously. One of the biggest takeaways from these changes is that the government loves Roth IRAs. They love it because it gives them revenue immediately, during their tenure in office, and we love it because it allows us to take advantage of historically low tax rates before they go up for good. Mentioned in this Episode: H.R. 2954: waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/documents/BILLS-117hr2954ih.pdf Jeff Levine on Twitter: @CPAPlanner

With the recent release of the US Census we are getting a picture of the upcoming demographic time bomb facing the country. The 2020 census revealed that there are 331 million US residents, which represents a 7.4% increase since 2010. This is significant since this period is the second slowest rate of growth we have experienced as a country since the Great Depression and roughly half the growth rate we experienced during the 90's. When you combine the lower birth rate and declining immigration with a rapidly aging population, it indicates that we are entering a period of substantially lower population growth. If it stays this low, it could mean the end of American exceptionalism in this regard. The US population has always outpaced the growth of other developed countries but that's no longer the case. This means that the US is losing one of its major competitive advantages. The question is why we are experiencing low population growth? Fewer births and more deaths reflect a reality where more people are delaying child bearing and delaying marriage, as well as a rise in drug and endemic-related deaths. The average age of Americans also continues to rise because of this trend. The current birth rate of America is 1.7, which is below the threshold for the replacement rate of 2.1. Historically, the answer to this demographic quandary has been immigration, but we haven't seen the immigration levels we've had in the past. Fewer birth rates in Mexico and a generally improving economy means that the historical source of the majority of immigration is lower than usual. The growth rate of our nation is as tepid as it's ever been at any point in our history, and we are likely to see a slowdown of economic output as a result. We have more people above the age of 80 than we do below the age of 2. There will come a time when we sell more adult diapers than baby diapers. With fewer people in the country producing fewer goods and services we will see a lower GDP over time. Other countries are facing the same issues and have begun offering incentives to young people to encourage a higher birth rate. From an economic perspective, we are going to have a hard time funding social safety nets and entitlement programs for citizens of the US. Ideally, every generation is bigger than the previous generation. It should look like a pyramid with more younger people at the bottom but the current reality is an inverted pyramid. With 78 million Baby Boomers, there are not enough younger people working to support Social Security, Medicare, and Medicaid. This means that we will need massive infusions of cash to pay for these programs. The only real solution for retirees facing this sort of demographic time bomb is to save in tax-free vehicles. If you're one of the 95% of Americans that have the majority of their money invested in tax-deferred vehicles, it's time to take advantage of today's historically low tax rates. Given Joe Biden's position on taxation, you probably have until 2030 to get most of the heavy lifting done. 2030 will be a perfect storm. Demographics, underfunded entitlement programs, and economic events will converge and could lead to a depression the likes of which we haven't seen for 100 years. We cannot ignore demographics because in many ways they describe what the future will look like.

This is an apolitical podcast. The goal is to call out fiscal irresponsibility no matter what side of the aisle it's on. It's less about politics and more about math. Joe Biden recently came up with a proposal to reform capital gains taxes. The increased revenue that is thought to come from this reform is earmarked to pay for childcare, universal pre-kindergarten education, and paid leave for workers. The state of capital gains taxes currently is that if you are in the 10% or 12% tax bracket you don't pay any capital gains taxes. It currently sits at 20% for people above those brackets and for people making more than $250,000 per year there is an additional surtax of 3.8%. This puts the baseline for wealthy Americans at 23.8%. When it comes to capital gains tax, there are four different taxes that may come into play. The first is at the federal level, then there are also state capital gains taxes and local capital gains taxes in some parts of the country, and finally the Obamacare surtax. The Biden proposal basically says that anyone who makes more than a million dollars per year would see their federal capital gains tax go from 20% to 39.6%. If you lived in New York City and included the other governmental layers of capital gains taxes, this would result in a total capital gains tax of 58.2%. Residents of Portland, Oregon would be looking at a capital gains tax of 57.3%. This doubling of the federal capital gains tax rate would generate roughly $1 trillion in additional revenue. This proposal will not likely pass through the usual route and would likely have to come through budget reconciliation. In its current form, the proposal will not likely pass because there are Democrats who believe that the tax is too high. Most people see the bill as the initial salvo in the negotiation process and the end result will be somewhere in the middle. Compared to other countries, this proposal would put America at the top of the list for capital gains taxes. If you make more than a million dollars per year, this proposal will likely affect you quite a bit. If you make less than that, you won't have to worry about it. If you're concerned about capital gains tax rates, you need to stop accumulating huge amounts of money in your taxable bucket. Raising capital gains taxes is not going to solve our country's problems. We need to see broad base increases in taxes across the board and dramatic reductions in spending. If you want to protect yourself from the inevitability of higher capital gains taxes, you need to stop accumulating money in your taxable bucket and take advantage of all the tax havens that are available to you. The Roth IRA and Roth 401(k) are great options and allow you to put a lot of money into tax-free vehicles. There are unlimited amounts of money that can be converted to the tax-free bucket with Roth conversions. The LIRP is the great antidote to taxation in the taxable bucket. Someone is going to get your money, you might as well get something useful in exchange for it. There are no income limitations or contribution limits with the LIRP. Whether you make a million dollars a year or not, there are a number of alternatives to situate assets to grow tax-free wealth without having to worry about what's coming down the pipe with regards to taxes. One of the fundamental issues with these tax raises is that they are always earmarked for some new initiative and never aimed at restructuring or fixing the entitlement programs that are driving the fiscal problems in our country.

If you want to maximize the amount of money you can safely spend in retirement some economists say that you should sell some of your bonds and replace them with annuities. According to Tom Hegna, there is only one mathematically ideal retirement plan and annuities are a key component. While you are working, a diversified portfolio of stocks and bonds is the most efficient way to save for retirement, but once you retire the rules of the game change and you need to start thinking about distribution. Tax rate risk is not the number one risk in retirement, longevity risk is more frequently cited by retirees as the number one risk they are most concerned about. In retirement, you should not have a lot of bonds in your portfolio. There is a simple guideline that you can use to determine how much income you need to guarantee with an annuity. Look at your lifestyle and subtract your guaranteed streams of income, like social security or rental income, and whatever is left should be guaranteed with an annuity. Everything else goes into the stock market portion of your portfolio. If you have your lifestyle expenses guaranteed, you have the luxury of watching your stock market portfolio recover after a down year. If you have money accumulated in a life insurance retirement plan, you can take tax-free loans out of that life insurance as well. The last thing you want to do is to cover discretionary expenses by taking money out of your stock market portfolio while the market is down. Annuities are a form of longevity insurance. It offloads your longevity risk to an insurance company which can manage better than you can. The alternative is relying on the 3% rule to avoid running out of money in retirement, but accumulating enough money to make that a viable choice is very difficult. Annuities will extend the life of your investments more effectively than a well-allocated balance of stocks and bonds. The bottom line is that bonds and stocks do not mitigate longevity risk and actually expose you to a number of other risks that can threaten your retirement. If you have longevity in your family or anticipate living a longer life, annuities reward you for doing so. The stock/bond approach penalizes you the longer you live. There are instances where you don't need an annuity. If you have plenty of income to pay for essential expenses there may be no need. You need to cover your fixed expenses with income that will last the rest of your life. However, this approach can spook some investors since the only money left over with this strategy is invested in the stock market portfolio. Social security is an inflation-adjusted income annuity itself and it's generally best to max it out by not claiming it until age 70. If you want to get an idea of how long you will live, go through the underwriting process of the life insurance retirement plan. The very best annuity you can buy is to delay social security. Replacing the bond portion of your portfolio with annuities runs counter to much of mainstream financial thought but it really is a great strategy for mitigating longevity risk. All these strategies are true, but if you take your guaranteed stream of income from your tax-deferred bucket you can unleash a chain of unintended consequences which can bankrupt your portfolio years in advance. Once taken, income from your tax-deferred bucket is stuck and is exposed to tax-rate risk for the rest of your life. It's also counted as provisional income which will dramatically increase the likelihood that your social security will be taxed. When there is a hole in their social security and guaranteed income, most Americans are forced to spend down their stock market portfolio. You can end up spending down all your other assets seven to ten years faster this way. Bonds and cash are not a great place to store your money in retirement. If your lifestyle expenses are covered you have the luxury to leave most of your money in the stock market and can take more risk. If you want the dollars that are earmarked for your discretionary expenses to last the full arc of your 30-year retirement, you can't have a lot of money in bonds. Mentioned in this Episode: The Case for Replacing Some Bonds With Annuities - https://stockxpo.com/the-case-for-replacing-some-bonds-with-annuities

Bernie Sanders is heading up the proposals regarding estate taxes, and his proposals are deviating to some extent from what President Biden has campaigned on. Joe Biden's plan says that the estate tax exemption, which is currently $11.7 million as a single person, or $23.4 million as a married couple, will be reverted back to its 2009 levels. Anything above and beyond those limits would be taxed at a rate of 40% and as high as 45%. Bernie Sanders' proposal begins at 45% and goes up as the amount being passed on increases. When Bernie Sanders ran for president he proposed a maximum estate tax of 77% at the highest tax bracket but has since toned it down. He is targeting the top .5% of all Americans with this tax and has promised that 99.5% of the American people will not see their taxes go up under the plan. The wealthy already pay a tremendous amount of taxes. The 657 billionaires that are in America will end up owing $2.7 trillion in estate tax under the current tax law, and that money has already been accounted for. Bernie Sanders' proposal would generate an additional $430 billion in revenue and would be earmarked for additional proposals, not to pay down the existing debt. This is essentially rearranging the deck chairs on the Titanic. It doesn't change the overall trajectory of the US and does nothing to shore up the programs that are driving all of the debt on the government's balance sheet. It's not about what your estate is worth now, it's about what your estate is worth when you die. You may not have an estate that would be taxed now, but you need to project out what your estate could be worth in the future. Another question is what the estate tax exemption will be at this point. When a country is going insolvent, it looks at quarters to raise revenue to keep itself solvent and that could be the estate tax again in the future. There are ways to mitigate the risk of estate taxes but it requires a long runway and careful planning. It involves shifting money, gifting money, and even loaning money into a trust. The specter of a much lower estate tax exemption means we are going to have to start addressing ways to mitigate tax rate risk when we have 20 to 30 years of runway to be able to position into the right types of accounts.

Modern Monetary Theory (MMT) is a pernicious threat to the Republic and has become a popular theory among left-leaning economists. MMT is less an economical theory than it is a political theory. There are politicians in certain quarters that truly believe that MMT will solve all of our economic problems. They believe that the debt doesn't matter, printing money has no consequences, and if we want something we can borrow or print as much as we need with no adverse effects. America is already in dire fiscal straits and if we adopt MMT as the prevailing economic policy, it will send the country into a tailspin from which it will probably never recover. MMT says that as long as a country's debt is denominated in its own currency, that country can borrow as much as it wants. Such proponents also believe that you can print as much as you want with no inflationary consequences. The idea is that the additional money printing will grow the economy, and that will prevent inflation from taking hold. The loudest supporters of MMT come from the progressive wing of the Democrat party, which is the basis for such programs as the Green New Deal, Universal Basic Income, and Free College and Healthcare. The claims of MMT are not only flatly false, they are dangerous. To understand MMT's appeal, you have to understand the three basic ways you can eliminate debt. The first is by reducing fiscal deficits by either raising taxes or cutting spending. The second is to grow our way out of the debt. Lastly, you can use central banks to print money. MMT proponents will often point to Japan as an example. Japan has a 250% debt-to-GDP ratio so it would seem like a good example of MMT working, but Japan has also taken steps to cut spending, raise taxes, and hold interest rates close to zero for decades. If interest rates ever return to historical levels, Japan, like most countries, would be in trouble. There are certain special qualities that allow the US to continue to borrow at lower rates, the main one being the reserve currency status. Eventually, interest rates will encompass the federal budget of the US government and this could cause a crisis of confidence which could threaten the reserve currency status. MMT advocates deny the existence of that limit and therefore propose to borrow to infinity. They also ignore the history of debt and inflation, with Weimar Germany being a salient example of a country trying to print its way out of a debt problem. At the end of 1923, German currency was worthless with $1 US being equivalent to 4,210,500,000,000 German Marks. Weimar Germany wasn't the only country to experience hyperinflation. Brazil, Zimbabwe, and Venezuela have experienced extremely high levels of inflation in the recent past, with Zimbabwe's economy essentially falling apart so completely that the US dollar had to be substituted for their currency. The real mystery is how MMT has such a following despite not having a foundation in reality. The theory has more in common with a moral ideological movement than it does with economics. You can't borrow in perpetuity, because eventually the people loaning you the money will become skeptical of your ability to pay the money back. Interest rates will eventually rise and inflation will follow shortly after. There are only a few different ways we can solve our problem. We can either cut spending, raise taxes, or some combination of the two. MMT is a dangerous fairy tale that could be more dangerous if it becomes more popular. Mentioned in this Episode: nationalaffairs.com/publications/detail/the-weakness-of-modern-monetary-theory

Now that Joe Biden has the pandemic relief bill behind him, he can begin to focus on his tax plan which he heavily campaigned on before the election. Joe Biden's pledge that nobody making less than $400,000 per year will face tax increases has a small asterisk next to it. That threshold only applies to families, and if you are filing as an individual, your threshold is $200,000, which means it will come into play for a much larger number of people. He is still planning on increasing the taxes on corporations, going up from 21% to 28%. For all intents and purposes, this will be felt like a stealth tax for most people since this will likely result in prices going up. If you make more than $400,000, your tax rate will rise from 37% to 39.6%, but he also wants to cap itemized deductions at 28%. Joe Biden tends to view the current system of 401(k) deductions as unfair to people in lower tax brackets, so he's also planning on leveling that out. This will ultimately result in getting the 401(k) deduction on the front end. That makes much less sense if you are in the 26% tax bracket or above. You are much better off taking the Roth approach and paying taxes on those dollars today so they can grow tax-free in the future. The arrival of the tax bill is still up in the air until we have more information regarding the vaccine rollout. Social Security is also a major focus for a number of reasons. Biden has discussed some major changes to the taxation scheme for the Social Security Payroll tax to try to shore up the coming shortfall. Social Security was previously projected to be insolvent by 2034 and Medicare by 2026. Those projections have been revised to 2031 and 2022. As a president, they typically try to accomplish their biggest changes in the first 100 days in office, which is why there is such a big emphasis on tax reform so early in Biden's administration. All these changes are likely to take place this year because of the Democrats only needing a simple majority to make it happen. For those who make more than $1 million per year, he wants to make it so that capital gains are taxed at ordinary income. He has also talked about raising the estate tax rate, which could impact people looking to pass their businesses and wealth onto the next generation. There has also been discussion around eliminating the state and local taxes deduction, but that could be seen as a tax break for the wealthy, which is something that he's trying hard to avoid. More recently, one of Joe Biden's big initiatives is a $2 to $3 trillion infrastructure package, which may be combined with his tax legislation proposals. This indicates that any tax increases coming down the pipe are not going to be earmarked to pay down debt or shore up the things that will be driving debt going forward. There is currently nothing in the works to shore up Medicare or Social Security to any real extent or paying down the national debt. Joe Biden is currently contemplating extending the Jobs Act tax cuts implemented by Trump and pushing them back all the way to 2030, at which point they would revert back to 2017 levels. 2030 is likely to be a point of reckoning for America. The country will probably be in such dire straits by then that the government will have to raise taxes across the board on every tax-paying American. Ed Slott believes that the math will force the government to raise taxes on Americans starting next year, but David disagrees. If you raise taxes on mainstreet America before you are absolutely required to do so, you will probably be voted out of office, but that time will come. There is a slim possibility that we will see higher taxes for people making less than $400,000 as Americans begin to recognize that there is just not enough revenue to pay for all the entitlement programs. We will see the tax reform bill over the next couple of months, and it will probably be pushed through budget reconciliation. In terms of the extended tax cuts, assuming they come to pass, you now have nine years to shift your money to the tax-free bucket which could be very beneficial. The lower the tax bracket you are in as you shift money to tax-free, the more money that stays in your pocket, and the longer your retirement savings lasts.

If you have a history of premature death or cancer in your family you may still be a good candidate for an annuity. If your spouse has longevity it can still be a good option. Even if you're not in the best health there are still annuity products with certain features that can still make sense. Some people always want to have control of their money, but they have to realize that an annuity is not giving up control, it's about taking control over your risk. Annuities give you control over longevity risk, the risk of deflation, withdrawal and the sequence of returns risks. You're simply taking key risks off the table. The people who buy annuities are the people that want to have control of their future. Annuities are not meant for all of everybody's money. Most people should put 20% to 40% of their portfolio into annuities. If they did that it would solve most people's retirement issues. Life insurance is a great bond substitute for younger people, once you're 65 and above you can replace it with some time of income annuity. The way an income annuity functions inside a portfolio are like a triple A-rated bond with a triple C rated yield and zero standard deviation. This makes them a much better alternative to bonds. Most people don't realize that they can lose half their money in a government bond because of the risk of interest rates rising, which is a risk that's not present in life insurance and annuities. You aren't getting any younger and you can't take your money with you. This means you are supposed to spend your principal. If you have life insurance in place it allows you to spend your money guilt-free in a way where everyone wins. Annuities are ordinary income, but most people overestimate the amount of capital gains they are receiving. If you're in a mutual fund or managed money account, a lot of the time it's actually ordinary income because of the turnover within the fund. When it comes to the stepped-up cost basis the only area that applies is in unrealized capital gains. Most people think the stepped-up cost basis applies to their whole account but they actually paid for it in taxes for all the years they have it. It doesn't matter whether it's Republicans or Democrats, both parties spend like drunken sailors. Both parties are spending too much and borrowing to pay for everything. If you look at Modern Monetary Theory closely it only works as long as interest rates are low. Once interest rates start to rise they advocate for slashing spending very strictly which is the source of the problem. We are always willing to take the easy road (spending) but we're not willing to do the hard things (cutting expenses). It's hard to predict where the economy is headed over the next ten years because of the crazy amounts of unprecedented money printing recently. 1 out of every 5 dollars in America's history were printed in the last 12 months. They can keep printing money in the short-term but they can't do it indefinitely. Tom believes that at some point in the next ten years taxes will go, the market will crash, and there are good odds of another great depression-style event. People need to move from the mindset of building wealth to protecting wealth, and that's what life insurance and annuities can do. Another interesting point is that in the state of Arizona, the money you put into annuities is protected from lawsuits. Protecting your wealth is more important than building your wealth. Mentioned in this Episode: For advisors interested in learning more about Tom's training materials, go to tomhegna.com/webinars

Popular speakers in the financial and retirement space like Ken Fisher and Suzy Orman have made annuities rather unattractive. The major objection has to do with the supposed fees of the product, even though many of the annuity options are not actually fee-based products. Ken Fisher has high fees, just like other investment options like commodities, hedge funds, and real estate. Variable annuities have higher fees than mutual funds but they also come with guarantees, and he's essentially convincing people to move from those guaranteed products to another high fee fund. People often say they want no fees, but if that was the case they would just put their money into a savings account. It's not about the cost of the fees. Its about the value you're getting in return for the cost. Life insurance and annuities are not a religion and don't require your beliefs. They are both basically risk transfer vehicles. An annuity is essentially a guarantee that you will never run out of money as long as you live. With all the medical breakthroughs that have happened recently, people are living longer lives, which is only increasing the odds of falling prey to the number one risk in retirement. Tom believes that you should spend all your money and leave life insurance to your kids. Leaving your IRA to your kids is not a great vehicle to transfer your wealth. People have been programmed to spend their paychecks while they are working while not touching their 401(k)s and IRAs while they are working, but once they retire they have to switch their mindset. You should use your money to actually enjoy your retirement. Any money that you want for retirement is appropriate for an annuity, especially after the age of 59 and a half. Annuities are not meant for a down payment on a house or your children's college education, but depending on your goals, annuities can be one of the best places to put your retirement money. If you're young and want to save as much as possible without losing what you have, an annuity is a great option. It would be possible to purchase a significant stream of money by the time you're retired and it wouldn't be that painful if you spread it out over your working years. People need to start thinking about income, rather than accumulating a big pile of money by the time they retire. Tom owns eleven annuities but he has even more in cash-value life insurance. Tax-free income in retirement is going to be vital, and people are not prepared for how much taxes are going to go up in the near future. If taxes go up and the market crashes, there are going to be a lot of people who are going to suffer. Liquidity is not a one time event, it's a lifetime event. When you buy additional lifetime income you are increasing your lifetime liquidity. Annuities are a long-term plan. That money is not for emergency expenses. The overall strategy is not all or nothing. You can't put all your money into an annuity or life insurance, they are all part of a balanced portfolio. If you guarantee a portion of your income in retirement by way of an annuity, it will free up the money in your stock market portfolio to continue to perform for you. Life insurance and annuities are permission slips. They give you the ability to spend all of your money and invest more aggressively elsewhere. Tom has been a proponent of investing 1% of your portfolio in Bitcoin which fits right into his overall strategy. Having guarantees in your portfolio gives you that kind of option. In this low interest rate environment annuities are more efficient than normal because the interest rate matters less and less as you get older. You also have to compare the other options. Why be in the market when you can guarantee a 12% payout rate for the rest of your life? Mortality credits are extra money from the risk pool that you get paid the older you are and the longer you live. Because the insurance companies can predict mortality in a large group pretty accurately, they can price the plan differently and afford these kinds of payouts. Mentioned in this Episode: For advisors interested in learning more about Tom's training materials, go to tomhegna.com/webinars

The amount of money that we've printed over the course of the past year and what we'll print in 2021 is equivalent to the entire economy of Japan. Van Mueller believes that at some point in the future the US dollar will no longer be the reserve currency, and when that happens the standard of living for Americans will go down almost immediately. Every country is printing money and destroying their currency's purchasing power, but the US is doing it on a scale that's unheard of. If you talk with the right specialist, they can show you a strategy where you won't be hurt by these economic shifts. Leadership is the key missing factor in solving these problems. If we had politicians that were willing to make tough decisions we could salvage our country but those are few are far between, and people need to elect the ones that show leadership. There is no end of the world situation. Eventually, the US will fix everything, either through great leadership or a great calamity. For the people that don't strategize and plan for the upcoming changes, they will have a lower standard of living. If you want a better standard of living you need to plan now. The debt will never be paid back and we can make a number of assumptions from that. The government will do everything they can to keep interest rates low and there will likely be a ton of volatility in the markets over the next ten years. There are products and strategies that allow you to win in any circumstance, but you have to take the time to build these strategies or these forces will destroy everything you've worked for. Studies have shown that 93% of Americans take Social Security to their detriment instead of their benefit. If the goal is to maximize retirement income you should be maximizing your Social Security. There are all kinds of planning opportunities if you understand the right questions to ask. If you really want to know how long you're going to live, go through the life insurance underwriting process. Almost everyone is willing to have the conversation of how to keep their wealth to their family's benefit instead of sending it to the government, a hospital, or a nursing home. Based on the math, if you're married and don't do any planning, and you have two children, if you both pass away the IRS is going to be the primary beneficiary of your money and not your children. 99% of Americans don't understand tax law and don't realize the government's need for revenue in the future, and if they don't plan for that there are going to be a lot of people's hopes and dreams decimated by that. If you're an advisor, talk to your dry cleaner, your mechanic, and anyone that you know and ask them some simple questions because chances are they have no idea what's coming. This is the greatest time ever to be an insurance or financial professional. This is also the greatest time ever to own cash value life insurance. There is nothing else that can compete based on what the American government is about to do to people. Mentioned in this Episode: Van Mueller's newsletter and audio training for financial advisors can be found at vanmueller.com

The general public should definitely be paying attention to the impact of inflation and what's driving it. The government has gone to such ridiculous measures printing money that by the year 2029 the government will literally have to print the entire budget of the United States. Instead of inflation, we should be thinking of it in terms of a stealth tax. The M2 money supply is a good barometer for inflation statistics and by 2029 they are expecting the current M2 money supply to exceed $122 trillion, a near ten-fold increase from what's in circulation today. This increase in the money supply reduces every single American's purchasing power and constitutes an additional tax over and above the existing taxes. If you can reduce or eliminate your income tax liability, you are offsetting some of the damage of reduced purchasing power. It's vital to understand that not only is the government going to increase your income tax, they are also going to dramatically increase your stealth tax by decreasing your purchasing power. There are solutions to these situations that allow you to win, not just reduce the pain. The secret is in taking action before these problems can impact you. Truthinaccounting.org was created by accountants to give people an accurate picture of the financial state of the federal and state governments. The situation is bleak with the vast majority not being able to pay their bills already. We will be about $87 trillion in debt by 2029. We are going to have to deal with a new financial world that requires some strategies that protect you from the ridiculousness of government. States and cities are unable to print money, so the only way to pay their bills is to increase taxes, reduce benefits, borrow more money, or a combination of all three. The bailout precedent has already been set, but even if they get a bailout you will still be impacted. Even if the benefit remains, they are going to increase the taxes on it and reduce your purchasing power at the same time. If you add up all the money that the US government has ever printed, you will find thatover 40% of it was printed in the year 2020. They now have an unlimited printing machine that they are going to use regardless of the damage it's going to do to you, your children, and your grandchildren. The debt we talk about is not even the full picture because it does not include all the unfunded obligations. Most people expect to inherit their money all at the same time, regardless of the taxes they will have to pay. This usually doesn't end well. Van helps his clients to eliminate the income tax burden completely. It makes much more sense to pay taxes at the grandparent's historically low tax rates and reposition the money to tax-free now, instead of having to distribute the money all at the same time because of the Secure Act. Covid-19 has changed everything, but nobody knows just how much yet. The latest jobs report indicated that another 792,000 people have filed for unemployment. This means that 49% of all the workers in the US have filed for unemployment since the pandemic began. There are many jobs and industries that are not coming back or will be operating under a completely new paradigm. Even if we taxed every person who made more than $100,000 by 100% it would barely make a dent in the yearly federal budget. 81% of Americans make less than $75,000 a year, so anyone who makes more than that has a major target on their back. The government needs revenue, and they aren't going to wait. Over the next 25 years there are going to be 140 million Americans over the age of 65 and they are going to need money to pay those people. We don't have a tax problem, we have a spending problem. It's easy to blame taxes, but if we spent what we brought in and lived within our means we would be in a completely different scenario. The trouble is no one has the political will to say no. Mentioned in this Episode: Van Mueller's newsletter and audio training for financial advisors can be found at vanmueller.com

Some people have a concern about the implications of the tax arbitrage they could be receiving if they just waited. This is the key to the Roth plans and Life Insurance vehicles that Ed described. The big myth is that you will be in a lower tax bracket when you retire. If you let your IRA just continue to grow, at age 72 the plan will be out of your control, and you will be forced to take the money out at the prevailing rates, whatever they are at the time, for the rest of your life. For married couples, there is another problem they don't think about, and that's that one spouse usually dies first. This means the surviving spouse becomes a single taxpayer again. This means they will have the same assets and income but at much higher rates. If you don't pay the taxes now, there will always be uncertainty. If you lock them in now, you will never have to worry about taxes again. Most retirees don't suddenly begin spending like rock stars. If your single child inherits a million dollar IRA, they are going to be forced to realize it as income over the course of 10 years when they are probably at their highest earning potential, at a period of time when they can least afford to pay the taxes. If you don't need some of your money in retirement, doing a Roth conversion on that money is like a gift to your children and grandchildren. You can give them a tax-free account which can be coupled with a tax-free life insurance plan to maximize the benefits. We are in a period of historically low tax rates, and in a rising tax rate environment, it only makes sense to pay the taxes now and get the money moved to tax-free. Yet 90% of all retirement dollars are in tax-deferred accounts. Most people believe that tax rates are on the rise, yet still have the majority of money in tax-deferred accounts. The secret to having more later is to pay the tax now. All the good things in life you pay for upfront, but it's the bad things that you defer that end up costing you. If you take care of the problem early, you have less to worry about. Like spending money on dental care, waiting until the very end makes the problems more painful and more expensive. Covid has led to people running to their estate planners. It has put more attention to making sure people have a plan in place in case they die or get sick. When you combine that with the additional $3 trillion dollars in debt the US government has accumulated, we are going to have to face the day of reckoning much sooner than we thought. Just like stocks, with taxes we should buy low and sell high. Right now taxes are low, and they may never be this low again in our lifetime. A good analogy is like paying off the mortgage to your house. When you finally make that last payment and own your house free and clear, it's a great feeling. You can get that same feeling by paying the taxes now and owning your investments tax-free forever. You can do everything right when it comes to your IRA. You can build and save and invest well, but if you don't protect it, all your family will remember about you is that you blew it. The people with the most money want the best trained advisors. Ed has several opportunities for advisors to learn how to help people keep more of their money and other tax planning technologies. All people want larger inheritances, more control, and less tax. You control your rate and which advisor you work with. Only invest with an advisor that invests in their education. The problem with the tax rules in the tax code is that they are rigid and unforgiving. You need to get the right answer the first time. Mentioned in this Episode: The New Retirement Savings Time Bomb by Ed Slott can be pre-ordered on Amazon here: https://www.amazon.com/gp/product/B07TSZSSY5/ref=dbs_a_def_rwt_bibl_vppi_i0

Ed Slott has a new book coming out called The New Retirement Savings Time Bomb. It's the updated version of the original book written 20 years ago where the time bomb was the tax building up in your IRA account. If you didn't know how to plan, you could be hit twice and lose up to 80% and 90%. Some of the Estate taxes have gone away since then, but there are other new threats to your retirement savings than ever before. Congress always needs money, and they will always go for the lowest hanging fruit, which is your retirement savings. It's like a deal with the devil, getting those deductions on the front end with the hope that you will be in a lower tax bracket. This assumption is where the danger lies. The Secure Act has ironically made your retirement savings less secure. The biggest threat is the elimination of the stretch IRA and the estate implications. Every plan needs to be reviewed and revised, maybe scrapped altogether for different thinking entirely. Congress needs money, which means tax rates are going to go up and that people will have less money in retirement. What is driving the need for these huge infusions of cash? Deficits and debts are the issue. The government has been recklessly spending for decades, and now it's only increased with the effects of Covid-19. When most people think of compound interest, they think of how Albert Einstein is the 8th wonder of the world. It's great when it's working for you, but awful when compounding is working against you. Compounding debt is the real issue. The math doesn't discriminate. The math bears it out that we will never see tax rates as low as they are today. We need a more stable and secure plan for the future. The history of tax rates shows that we could return to where rates were as high as 90% for the top tax brackets. You may only have one more year to take advantage of these historically low tax rates. People have to realize that they are in control of their tax rates. Taking advantage of the current low tax rates is the best tax planning you can do. Always pay taxes when the rates are the lowest. That may mean paying some taxes now, but you have to remember that taxes are a bill that won't go away. The concern about losing out on compounding interest when converting to a Roth IRA is a myth. If you are truly comparing apples to apples, there is no loss when using the same rates of return and taxes, but if rates go up, then everything changes. When rates go up, everything tax-free becomes more valuable. When you have money in your IRA, it is accruing to the benefit of the IRS. When you convert now, you are claiming your portion of the money, as well as the future interest. Taxes have to be paid for. It's not if, it's when. Why not pay them while they are on sale? Even in the worst case scenario, by converting now you lock in a zero percent tax rate for the rest of your life, which is not a bad consolation prize. After the Secure Act, using a trust to protect your money after death is no longer viable. Regardless of what happens with tax rates, this is going to become a huge burden for a number of people, and this makes a permanent life insurance policy even more attractive. People don't care about the vehicle. They want the results. They want low taxes, larger inheritance, and post death control, and a permanent life insurance plan that fits the bill. Mentioned in this Episode: The New Retirement Savings Time Bomb by Ed Slott can be pre-ordered on Amazon here: https://www.amazon.com/gp/product/B07TSZSSY5/ref=dbs_a_def_rwt_bibl_vppi_i0

Joe Biden's tax proposal has serious implications for anyone attempting to use the Power of Zero paradigm for their retirement planning. We know that the current tax cuts enacted by President Trump will remain at their current levels for the next five years and will revert to what they were in 2017 starting January 1, 2026. This tax sale gives us a historic opportunity to take advantage of low tax rates when we are executing a shift between the tax-deferred and tax-free buckets. If you wait until 2026 to shift that money, the tax brackets will go up and it will cost you significantly more. The Democrats won the runoff elections in January which have created an opening for Joe Biden to bring about the tax initiatives that he campaigned on. Joe Biden wants to raise taxes on anyone making more than $400,000 per year. Not only that, but you will pay a FICA tax on any dollars above the $400,000 mark of 14%. Right now, Joe Biden has to go through the budget reconciliation process to effect a permanent tax cut, but he can use the same process to extend the current tax cuts. For all intents and purposes, Covid has thrust us into a recession. This means that Joe Biden will not likely raise taxes until 2022. Joe Biden could create a tax cut that would last for 8 years essentially extending the Trump tax cuts for another 3 years. For people making less than $400,000, their tax brackets would stay historically low almost until 2030. This gives you 8 years to get your shifting done and allows you to spread out the burden even more. David calculated the benefits of an additional 3 years when shifting $1.5 million to the tax-free bucket. The difference is an 11% difference in taxes that you would have to shift the money in a shorter time period. This won't be a great deal if you make more than $400,000 or if you are planning on shifting enough money to put you above that threshold. The reality is that tax rates are likely to be much higher in 2030 and beyond. Even if the dates are pushed back, it only kicks the can further down the road. When taxes are on sale, every year counts. As of Jan 1, 2018 you are on the clock. By keeping tax rates low for middle America the day of reckoning is a bit further away, but the fix will have to be much more draconian. Joe Biden is not fixing the root of the problem. In order to balance the budget by raising the tax rates on everybody, tax rates would have to go up to 49% across the board. Simply taxing the top 1% is not enough in order to get the revenue we need to right our financial ship. The tax base has to be broadened and everyone will have to pony up eventually. David believes that Joe Biden will work through the budget reconciliation to extend the Trump tax cuts by the end of 2021, despite that it's the opposite of what we need to do to fix our financial situation. If you're looking to get into the zero percent tax bracket this will be a great opportunity to stretch out your tax burden over a longer period of time. The Covid stimulus and vaccine are the priorities right now, but once those are dealt with he's going to start tackling tax reform.

There are some basic updates and thresholds you need to be aware of if you're interested in implementing the Power of Zero strategy. The first change is that your standard deduction went from $24,800 to $25,100. This may not seem like a big deal but does mean that you can have a larger amount of money in your IRA by the time you're 72. The Roth IRA rules are not being changed at all, despite other account types having their thresholds changed. There haven't been any dramatic increases within the tax brackets yet, just the usual adjustments to keep up with inflation but there are still numbers you need to pay attention to, particularly where the 22% and 24% tax brackets start. The 24% tax bracket is still the sweet spot within the tax code. It's only 2% more than the 22% tax bracket but allows you to convert nearly an extra $150,000. In the grand scheme of things when we are trying to protect ourselves from the impact of tax rate risk the 24% tax bracket is an important tool. The Roth income limit phase-out range has shifted slightly, this means that when you reach the top of that range your ability to contribute to a Roth IRA reduces commensurately. If you exceed that range your options include a backdoor Roth or a LIRP. As we go forward into 2021 you are likely to see changes to the deductibility of your 401(k). Joe Biden plans to level the deductibility around 26%, which means that at higher levels of income the 401(k) becomes less attractive and you should forego that deduction and put that money into your Roth 401(k). You are likely to see a change in the marginal tax rate for people making more than $400,000 per year. In an article by the Committee for a Responsible Federal Budget, they did some studies that showed that at a certain level of tax will depress economic growth. It appears that the Biden administration may have taken their cues from the study. For example, if you live in California and add up all the taxes proposed by the Biden administration (39% Federal, 13% State, 3.8% Obamacare surcharge, +14% New Biden Tax Increase) it approaches the threshold that studies show directly impacts the economy. We are also likely to see forgiveness of federal student loan debt up to $10,000. Other people are lobbying for up to $50,000 of student loan forgiveness. If you have $10,000 or less in student loans, avoid making payments on those loans until the Biden administration confirms their plans over the next 6 months or so.

Due to low prevailing interest rates, the federal government has restricted the ability of industry experts to show the robust rates of return that LIRPs are capable of. When the Consolidated Appropriations Act was passed in the final hours of 2020 it amounted to a Christmas miracle, and it will be immensely positive for LIRPs and will position them to thrive in an environment of low-interest rates. Section 7702 is the section of the tax code that governs the tax treatment of life insurance and it hasn't been changed in decades. The tax limitations within the section are calculated by asking a simple question. Namely, at what premium level will the policy stay in force based on the life insurance expenses and assumed interest rate? Baked into the 7702 code was the assumption that your cash value would grow at either 6% or 4%, depending on premiums. When you put money into a life insurance policy, there is a relationship between how much money you can contribute and the death benefit that you are purchasing. This is because the IRS wants to define how much tax benefit you can get, this was directly affected by the assumed interest rates. On page 4923 of the Consolidated Appropriations Act that was passed at the last moment of 2020 we find a hard coded rate of 2% for 2021 and a floating rate based on prevailing interest rates in 2022 and beyond. This essentially means that you are going to be able to put considerably more money into a life insurance policy for the same death benefit. The expenses of these life insurance policies are relatively fixed, which means you are incentivized to put in as much money as you can to maximize your return. For people between 40 and 55, the amount you can contribute has increased anywhere from 60% to 100% with triggering a modified endowment contract which would result in the distributions becoming taxable as regular income. The end result is that LIRPs are going to become more efficient going forward. Bobby Samuelson runs some calculations in his article to illustrate the differences between the past regulations and the recently passed act. Using the new 2% hard coded interest rate, the scenario illustrates that you could contribute significantly more money while still maintaining the preferential tax-free treatment, while also increasing the rate of return. This allows you to also increase the distributions over the life of the program. Because of this act, all policies will now have more efficient cash value growth, which means the LIRP will be an even more attractive alternative to those who are using it as an accumulation and distribution tool. Other countries will eventually stop loaning the US money as we experience a sovereign debt crisis, which means that interest rates won't stay low for very long. The long and short of it is we should feel better and more optimistic about LIRPs now than we ever have. The ACLI and Finesca were primarily responsible for the new act by persuading legislators to lower the hard coded interest rate and linking it to prevailing rates in the future. This change will not affect any existing LIRPs that are currently in force but there is still some uncertainty regarding whether increasing the death benefit of an existing policy will be affected by the new legislation. This is great news for anyone who has a LIRP or is considering one to maximize their tax-free benefits. Mentioned in this Episode: https://lifeproductreview.com/2021/01/05/257-the-section-7702-christmas-miracle

Things may seem bleak when you look at the numbers, but there are solutions that we can implement that could help our situation and ultimately prevent the worst outcomes when it comes to the national debt. David Walker's book was divided into three parts: a wake up call, a call to action, and a way forward. He has a number of solutions that he's proposed that meet six principles. Any solution would have to be: pro-growth, socially equitable, culturally acceptable, have mathematical integrity, be politically feasible, and have meaningful bipartisan support. We have to agree that the real metric to measure is debt-to-GDP and we need to get it to a sustainable level within a reasonable period of time. We also have to recognize that this can't be done one reform at a time and needs to be addressed as a package. Medicare seems like the hardest nut to crack because it is tied to demographics and health care costs grow faster than inflation, which prevents the US government from printing their way out of the problem. Most Americans agree regarding gradually increasing the age of retirement over several years which was done in the 1980s Social Security reform package. Increasing the the taxable wage base cap and adjusting the benefits paid out (e.g., higher replacement rate for lower income and somewhat lower for higher income individuals) are reasonable solutions for Social Security. When it comes to healthcare there are a number of more complex issues to deal with. The first is that the US government has overpromised on healthcare. Government needs to determine a reasonable, affordable and sustainable level of healthcare that should be available to everyone and government needs to have a budget. Government will do more for the poor, disabled and veterans. The US is the only country on the Earth that doesn't have a budget for healthcare, which is one of the reasons that there are so many healthcare horror stories in the US. If interest rates simply return to 2003 levels, the cost of servicing our current debt quintuples. Interest rates are not going to stay low, they are going to go up. The only question is how much and how fast. David Walker believes that we will not default on the debt because federal debt is guaranteed by the U.S. Constitution. The responsibilities of the federal government envisioned by the founders took up 97% of the budget in 1912. This has fallen to 29% of the budget, and was declining as of 2019. The higher the debt-to-GDP goes, the higher that taxes are likely to be, and the lower the level of economic growth we are likely to achieve. The longer we wait to solve the problem, the higher that taxes are likely to go as well. The biggest deficit the United States has is a leadership deficit. We have too many people living for today and not enough people focused on how to create a better tomorrow. The two party system is part of the problem. 43% of voters are unaffiliated, and are largely unrepresented. It ultimately falls onto the President to make this issue a top priority. We need a mechanism that engages the American people in unprecedented ways and sets the table for tough fiscal choices in Congress (e.g., a Fiscal Sustainability Commission), and the sooner we do it the better off we'll be. President Biden needs to deal with this problem because we only have one President at a time and one bully pulpit where the message can really make an impact. We need a number of political reforms because today we have a Republic that's not representative of, or responsive to, the general public. David recommends redistricting reform, integrated open primaries, ranked choice balloting, campaign finance reform, and 12-year term limits. Career politicians are not what the US needs. It's not what the founding fathers intended and it's one of the many things that we need to change to revitalize our republic. On a personal level, we need to focus on our families and our clients. We can't control what happens in Washington but we have to take steps to hold our elected officials accountable as much as we can.

David Walker is a certified public accountant and has spent many years in public accounting. He's run three federal agencies, two in the executive branch and one in the legislative branch. As the Comptroller General of the United States he was the chief performance and accountability auditor of the US. More recently, David Walker has run two non-profit companies and been a distinguished visiting professor at the US Naval Academy and has been on a number of boards and advisors groups dealing with a number of issues facing the US. Historically, there have been four things that have defined a superpower and the question is whether the US will still be a world superpower by the year 2040. The four main things are global economic, diplomatic, and military power, and global cultural influence. Under these definitions, in the years after World War 2 the US was the only country to qualify as a superpower, but in modern times China is beginning to overtake the US in many of those areas. China has already passed the US in terms of GDP on a Purchasing Power Parity basis. They have more embassies around the world than the US does. China is currently the #2 military power in the world today but they are dedicated to becoming #1, and they are spending a lot of money on it. Culturally, Chinese investors own the largest movie chain in the United States as part of their effort to have a cultural impact. Economics, demographics, and foreign alliances are starting to work against us instead of for us. It's important that we wake up, learn from history, and heed the lessons from our nation's founders, and that we start to change course so that we can remain a superpower and make sure our future is better than our past. The reasons that we are currently having problems today is because we have strayed from the values on which the US was founded. We have also not heeded the prescient warnings of George Washington: to avoid foreign wars, not have excessive debt, to avoid regionalism and factionalism. We are actually experiencing the same challenges as the Roman Empire did before it fell. It's important that we learn the lessons of history so that we can do what is necessary to stay great and ensure greater opportunities for future generations. We were on an unsustainable fiscal path before Covid-19, and now we are in much worse shape. Debt-to-GDP in 2020 increased by 20% which is the most important metric we need to be paying attention to. It's clear that additional legislation will be passed now that Biden will be President and the democrats control the House and the Senate. We will defeat Covid-19 but once we do, we need to put a mechanism in place that will allow us to make the tough choices that will get the debt-to-GDP ratio to a reasonable and sustainable level over the next 10 to 20 years. Prior to Covid-19, the Social Security and Medicare trustees estimated that the trust funds were supposed to go to 0 by 2035 and 2026, respectfully, but because of the economic effects of Covid-19, the years are now 2031 and 2023, respectfully. This means that revenue will still be coming in but any bills would have to be paid out of those funds. In the case of hospital insurance, payments will have to be cut 10-15% immediately and across the board, with cuts of 20-25% to Social Security benefits. All the more reason we need to recognize reality and start making the tough choices now. What are the implications of having debt balloon out of control? We have passed the all-time record for Debt-to-GDP which was previously set after World War 2. Unlike then though where we rapidly decreased Debt-to-GDP dramatically after the war, we are now adding Debt-to-GDP and plan to add more. Currently, our interest expense is not increasing because we are not experiencing regular market conditions. The Federal Reserve is buying significant portions of US debt and artificially holding down interest rates, which isn't sustainable. The other problems stem from the proponents of Modern Monetary Theory, a theory that runs contrary to history and long established economic history. Politicians are already fiscally irresponsible, the last thing you want to do is give them an excuse to be even more fiscally irresponsible. History has shown that when debt as a percentage of the economy reaches unsustainable levels, it has an adverse effect on economic growth and this has a knock on effect on personal opportunity. Over 70% of the national budget is already on autopilot, the remaining 30% covers all the governmental responsibilities envisioned by the founding fathers. Modern Monetary Theory is dangerous and fundamentally flawed. The Biden administration will probably not adopt the theory, but even if that's true we still need to make tough choices on spending and revenue. The problem can not be solved solely by controlling spending and economic growth, revenue will have to go up because of the reality of compounding and math. A wealth tax will enter the conversati

David has written a number of books on the Power of Zero paradigm for retirement and still does about 90 speaking engagements each year. He also runs a program with around 250 advisors that help him espouse the Power of Zero worldview. The basic premise of the Power of Zero is that due to the fiscal irresponsibility of the US, tax rates will have to rise dramatically over the next few years just to keep the country solvent. Combine that situation with a skyrocketing national debt and unfunded liabilities and there are massive implications for a generation that has the majority of their retirement money in the tax-deferred bucket. If you can situate your retirement assets such that in retirement you are in the zero percent tax bracket then you have effectively insulated yourself from the impact of higher taxes. If you're in the zero percent tax bracket and tax rates double, two times zero is still zero. Conventional wisdom says that you will be in a lower tax bracket in retirement than during your working years, and that made sense in the 70's but it doesn't hold true for the current situation. What he found was that a lot of the deductions you enjoy when you're working disappear once you retire and many people end up in a higher tax bracket instead. We know that the current tax rates expire on Jan 1, 2026 and they will return to what they were in 2017, but the real danger is what will happen to tax rates in 2028, 2030, and beyond. We are moving into a future where the debt we are taking on will be unsustainable and we will either default on the debt or raise taxes. It will be challenging but there are ways for people to insulate themselves from these dire repercussions. Most people believe that tax rates will be higher in the future, but they still have the majority of their retirement portfolio in the tax-deferred bucket. This means there is a disconnect between what people believe and how they act because of the inertia of traditional wisdom. Like the average person, the federal government has trouble delaying gratification. We do a lot of things as a country that help us scratch our itch in the short term but that has a lot of adverse repercussions over time. This is a problem that pervades every single part of government and society, but there are things we can do to forestall these eventualities. There isn't an official zero percent tax bracket, but it is possible to not pay tax in retirement by positioning your money in the right amounts in the right accounts. David's second favorite tax bracket is the 24% tax bracket because it doesn't "cost" as much. If you're in the 22% tax bracket, increasing your taxes by 2% will give you an additional $150,000 in shifting capacity to get more of your money into the tax-free bucket before tax rates go up for good. There is a right amount of money to shift each year that doesn't push you up into a higher tax bracket but allows you to complete all the shifting before 2026. The Roth conversion is the workhorse that allows you to shift your money to the tax-free bucket. The Power of Zero strategy is not hard to implement. Roth conversions are relatively easy to do, in terms of not having to liquidate assets. You just have to be willing and able to pay the taxes from some other source. When you figure out your taxable income, you figure out what your highest marginal tax bracket is. David breaks down the basic process of a Roth conversion and why you should pay your tax at the time of the transfer. Your taxable bucket is your least efficient bucket. You know you have a taxable investment if you receive a 1099 form from your financial institution. This isn't good because when you amortize those efficiencies over a lifetime, it can cost you hundreds of thousands of dollars. Shift money from your tax-deferred bucket to your tax-free bucket by using money from your least efficient bucket. In the act of paying taxes on our Roth conversion out of our taxable bucket, we are reducing our least efficient bucket and maximizing our most efficient bucket. Study the tax brackets and the fiscal condition of the country. Let's not invest our money in a reflexive sort of way, let's be more cognizant of the fiscal condition of the country and make investment decisions accordingly.

There are a lot of stigmas around retirement planning and David's new book addresses two of the most difficult problems facing retirees right now, longevity risk and tax rate risk, and how to deal with them at the same time. Tax rate risk has always been a big problem for retirees, but it's not their biggest concern. Most people worry more about running out of money before they run out of life. David has observed that financial advisors are stuck believing they can solve one risk or the other. 99.5% of advisors fall into this trap where they mitigate longevity risk within the tax-deferred bucket, and that unleashes a chain of unintended consequences that can bankrupt a stock market portfolio ten to twelve years faster than you thought possible. Daniel recommends to every financial professional he meets that they read the Power of Zero collection of books. You're not relevant to the retirement space if you don't have some part of your company's philosophy centered in the Power of Zero message. David isn't making big claims about a specific timeframe. His message is universal and experts have been saying we'll need to deal with all this debt at some point in the future. It's not a political issue, we all need to prepare for this. An object at rest stays at rest. People are averted to paying taxes to the IRS sooner than they need to, even if they believe that tax rates will be higher in the future. More people are coming over to the Power of Zero way of thinking. There is an incredible divide between the people who think that tax rates will never go up and those who think that the Power of Zero paradigm is the gospel of retirement planning. The biggest skeptics don't believe that tax rates will rise in the future and the very thought threatens their way of living. David McKnight's top three advisors to pay attention to include Ed Slott, Tom Hegna, and Van Miller. Each of them has something extremely valuable to add to the conversation. Many experts decry annuities unnecessarily and consumers need to be careful about overgeneralizing. Financial gurus on television and the internet have to paint with a very broad brush so that it applies to a large swath of people. Unfortunately, the people that need more customized strategies get sucked in by the one-size-fits-all idea. Would David ever consider hosting a moderated financial planning debate with the traditional gurus on one side and the Power of Zero paradigm on the one side? Just like in politics, there is an establishment in finance. David's first book was the #2 bestselling business book in the world, but despite that, it didn't make it onto any bestseller lists. David and Daniel are up against the invisible hand of the establishment to get the word out. What can we expect from the Joe Biden administration? Much of the answer depends on the Georgia runoffs and whether the Democrats gain control of the Senate. If that's the case, Joe Biden will push through a number of changes that will affect millions of Americans no matter what tax bracket they are in. If you're making more than $400,000 each year you better duck and cover. What should you do if you haven't done anything yet? Start with educating yourself on where you think the fiscal condition of the country will be in the next decade or so. There are a number of experts predicting a perfect financial storm in 2030. If you believe tax rates will be lower in the future, keep putting money into your 401(k)s and IRAs, but if you think tax rates will be higher in the future then start moving money into your tax-free bucket. Be preemptive about your future retirement.

The Power of Zero occasionally gets a negative review. Today's episode is going to deconstruct and rebut a recent one-star review and go through the different perspectives. The first claim is the book is based on a misleading assertion regarding taxes in retirement. They are basically subscribing to the idea of tax diversification and the idea that we don't really know what taxes will be in the future, and in that case we should hedge our bets against all possibilities. This would be a fine approach if we didn't have any data to base a decision on. That's not the case. The current fiscal trajectory can not sustain the current level of taxation and number of prominent experts in the financial world agree. Absent a dramatic cut in spending, tax rates will have to go up and we will go bankrupt as a country. Tax rates will have to go up or eventually the interest on the debt will consume the entire federal budget. Most people believe that tax rates will go up in the future, but they also have most of their money positioned in the tax-deferred bucket. This means there's a massive disconnect between what people think of the future of tax rates and what people are doing about it. If you believe that tax rates will be higher in the future, tax diversification is not the right solution. There is a mathematically perfect amount of money to have in your tax-deferred bucket and it's rarely a fifty-fifty split. The second claim had to do with the LIRP and Roth IRAs. An LIRP costs an average of 1.5% of your bucket per year over the life of the program, which is undoubtedly more expensive than an index fund. You have to remember that the LIRP and an index fund are not designed to do the same thing. If low fees were the only thing we were after we would simply put everything into a savings account. The LIRP is providing a death benefit that doubles as long term care in exchange for that 1.5%. The other thing to keep in mind is that an index fund doesn't provide long term care or a death benefit. Dave Ramsey is guilty of this comparison by not taking all the variables into the calculation. The LIRP is not a replacement for the Roth IRA, it's meant as a complementary strategy. It's not a one or the other choice which is how the review frames it. There is a cost that comes with low fees as well. Vanguard did a study that found people with a financial advisor had a 3% greater return over time because the advisor is there to make sure you are following through with your investment objectives. There are insurance companies that guarantee their 0% loans. David breaks down the way this works and why the review is incorrect on how the loan process works. When the Power of Zero was written the Roth 401(k)s were not that available, but since then David has spoken and advocated for those plans. The choice is not either/or, having a Roth IRA and Roth 401(k) is a good way to create more than one stream of income. The reviewer also doubts that taxes will rise across the board in the near future. If we confiscated all the wealth of the 2500 billionaires in the US it would be enough money to fund the government for 7 months. We can't just tax the rich to solve the US debt problems. We have to broaden the tax base and this means taxes will go up for every American or the country will eventually become bankrupt. Mentioning the tax brackets of the 1960's is not to say that those are the tax rates of the future. It's to take people out of the belief that tax rates are low today and will always be low in the future. Tax rates ebb and flow over time. They are artificially low right now but that should not give us any false sense of security. We will likely soon see the types of tax rates we see in Scandinavia or Canada where the effective tax rate is 50%. There is no cap on interest on the national debt. Defaulting on the debt results in a global depression which is something we definitely want to avoid. A sovereign debt crisis could be the result of not reigning in spending.

Last week David did part 1 of the review of David Walker's new book and talked about the reasons why the US will probably no longer be a world superpower by 2040. In this episode we're going to cover the proposed solutions. 40% of Americans don't pay any tax at all with 20% of Americans receiving a refundable tax credit. This has been used in lieu of raising the minimum wage. The federal government forgoes $1.4 trillion in taxes per year in allowable deductions. One solution would be to shore those deductions up. Tax cuts don't pay for themselves unless they are accompanied by a dramatic spending cut. We can't grow our way out of the problem with tax cuts. All exemptions, deductions, and exclusions would have to be eliminated. David Walker also proposes making income tax more inclusive and progressive so that everyone above the poverty level would pay taxes and more people would be invested in the system. It's not enough to tax the rich. He also discussed a wealth tax of 2%-3% per year. This comes with a number of details that would need to be hammered out and should be considered alongside eliminating the estate tax. Broadening the tax base is just the beginning. David Walker had a number of recommendations for spending and the federal budget. The first is if a member of congress doesn't submit their budget on time, they don't get paid. In all but 4 of the last 60 years, Congress has failed to pass their appropriation bills by the end of the fiscal year. This usually results in all these bills being combined into a massive omnibus bill with a number of other pieces of legislation being added in. If the federal government can't take their budget seriously and get it filed on time, how are they supposed to gain control of their spending? Whatever changes that will happen will happen under budget reconciliation which doesn't require a supermajority. The state of California was having similar problems with their appropriation bills and passed a provision like the one proposed. They have not had a problem since. The second big pillar is recapturing control over the federal budget. In 1912 the government had control over 97% of their spending, now 71% of the budget is non-discretionary. We are writing a blank check for 71% of the annual budget and have no control over it. That's primarily Social Security, MediCare, and Medicaid. The only program that David Walker was reluctant to cut was Social Security since it's one of the most popular federal programs. We can not put a cap on the interest on the national debt, given enough time the interest will overtake 100% of the federal budget. We need to change our approach to debt limits. Most industrialized nations have a cap on the debt in relationship to GDP which is something the US should adopt. The debt on its own is not a problem, it's the debt relative to GDP that's the problem. Given the scale of the debt, having a 90% cap is more realistic but will still be very difficult to meet. Any proposed tax cuts or spending increases would have to be offset so that our debt to GDP situation doesn't worsen. The time has come for a fiscal responsibility constitutional amendment to keep the debt-to-GDP ratio at a certain level. This is currently the way the states operate and could be applied federally. These recommendations could help and David Walker has been talking about the federal debt for a long time trying to raise awareness at the grassroots, which is where the will to change has to come from. The catastrophe of the first half of the book is going to come to pass. The reality of David Walker's vision becomes more real and inescapable with each year that passes.

David's new book did quite well during the launch week, quickly becoming the 3rd most sold business book in the world. David Walker is well known for his expertise regarding the fiscal condition of the United States and is perhaps the person who most understands the potential impacts. Based on David Walker's current projections for the US in the next 20 years things are not looking good. There is a real question about whether or not the US will still be a world superpower at that point. What does it mean to be a superpower? Being a superpower comes with four pillars: we are widely respected from an economic perspective, a diplomatic perspective, military power, and cultural influence. Currently, the US produces 50% of the global GDP but that number will be 18% by 2040 as China and India eclipse the United States' productive ability. Workers to retirees will be reduced to a 2:1 ratio by 2040, which speaks to the insolvency of our entitlement programs. David Walker predicts higher unemployment and economic disparity between the classes. Because capitalism has been under attack for so long the US will have become a welfare state and the private sector will become diminished in a creep toward socialism. The growth of the economy will have stalled out between 1% and 1.25%, which is not great for American prosperity. This is a big problem for keeping down unemployment and creating prosperity for America. The debt to GDP ratio will be 170% by 2040, notwithstanding huge tax increases, major reductions in tax spending, and constrained investments. This isn't reflecting the real debt to GDP ratio when you include unfunded liabilities. Due to higher debt levels and interest rates, there will be more protests against calls to raise taxes just to pay interest on the debt. If the US defaults on its debt it will precipitate a global depression. Even the Modern Monetary Theory enthusiasts will be concerned. David Walker is not a follower of MMT and believes that the US will experience hyperinflation, the likes of which hasn't been seen since the 1970s, followed by stagflation. The global consensus by 2040 will be that China is considered the most powerful country on Earth, as judged by the four pillars mentioned earlier. The threat of military conflict will increase but the US will be weaker from a conventional military capabilities perspective because most of the money will be going to pay interest on the debt. Our own fiscal responsibility will become our greatest weakness. Most countries in the world use the US dollar to transact but that will change as the dollar becomes unstable. The federal government of the US economy will comprise 28% of the economy, and when combined with state and local spending the number will balloon to 40%. This will lead to a misallocation of resources and less private investment. 50% of graduates from public education will lack basic language, math, and technology skills. Politicians will be calling for higher taxes and more wealth redistribution. This will result in poverty rates in seniors to skyrocket due to changes that will have to be made to Social Security and Medicare. Many wealthier individuals will leave the US, primarily leaving for Canada. For the first time in history, the quality of life of future generations of Americans may not be better than in the past. We don't face an immediate crisis, which is part of the problem. We are headed to a very bad place unless we can make some serious changes to shore up the fiscal conditions of our country.

The historical paradigm says to put your money into a 401(k) or IRA, get a tax deduction and let that money grow tax-deferred so that when you take that money out you're in a lower tax bracket. Experts and economists are starting to look at the fiscal condition of the US and the picture isn't good. The US is $23 trillion in debt with unfunded obligations of upwards of $239 trillion. We are marching into a future where the very solvency of the US government is being called into question. We are going to have multi-trillion dollar deficits over the next decade and the debt is only going up. What are the chances that taxes are going to be lower in the future given that reality? The paradigm has been flipped so the focus is now wringing every bit of efficiency out of your retirement accounts. Taxes are on sale right now. Experts have been saying for years that we need to raise revenue and lower spending, but the federal government has been doing the opposite. The 2017 tax cuts that were introduced have an expiration date in 2026, which means we only have six years to take advantage of these historically low tax rates. When you're retired, every day is Saturday. The average retiree shouldn't expect to spend less in retirement and studies have backed this finding up. To get to the zero percent tax bracket, the first step is accepting that taxes are going to be higher in the future than they are now. Many notable experts agree that tax rates will have to be dramatically higher than they are today, just to keep the country out of bankruptcy. The second step is to realize that there is an optimal amount of money to have in your three buckets in a rising tax rate environment. In your taxable bucket you should have no more than six months of expenses. In your tax-deferred bucket you want your balances to be low enough that required minimum distributions are offset by your standard deduction and don't cause social security taxation. Everything else should be systematically shifted to the tax-free bucket. If you don't have a pension or any other residual income in retirement, you probably shouldn't have more than $350,000 in your tax-deferred bucket. Everything else should be safely ensconced in your tax-free bucket by 2026. Most people don't recognize the fact that your social security can be taxed and many financial professionals don't even know what provisional income is. If you have too much provisional income, up to 85% of your social security can become taxable to you at your highest marginal tax bracket. When that happens you will run out of money five to seven years earlier than you would have otherwise. Plan for RMD's before they happen to you. Right now, the IRS is not requiring you to pay taxes on your money until age 72, but the question is "does that really make sense?" For most people it makes more sense to preemptively pay taxes on your terms, so that you're not paying taxes on the IRS's terms at age 72. Leaving a large amount of money in your IRA or 401(k) that you want to leave to your children is also a poor choice. They will be forced to pay taxes on that money over the course of ten years and it won't be unusual for people who inherit these accounts to pay upwards of 50%. Unfortunately the paradigm that most CPA's work in is to keep you as a client which means keeping you happy by saving you money this year instead of in the future. The Power of Zero paradigm is about changing this perspective. The best way to learn about the Power of Zero paradigm is by reading David's book or just listening to David Walker. If your advisor hasn't told you about this, it's for one of two reasons. Either he or she doesn't know about it, or he or she knows about it but they are not telling you about it. There isn't any one tool you can use to get to the zero percent tax bracket. It usually requires four to six streams of tax-free income. Generally, anything with the word Roth in front of it is a good idea. One thing that many people overlook is paying for long-term care. People aren't opposed to having long-term care insurance, they're just opposed to paying for it, which is why David recommends the LIRP as a great option. The general conclusion of the experts seems to be that tax rates will have to double by 2030. Governments are not currently doing anything about the debt and tend to wait until the last hour to act. The government likes to kick the can down the road. The problem with this approach is that the fix on the backend will be all the more draconian and severe than if they simply put a permanent fix in place today. There are a few people that doubt the prognostications of tax rates being higher in the future than they are today but we are starting to run out of critics. Since social security, Medicare, and Medicaid are tied to inflation it's impossible to print our way out of our problems. The more the debt grows, the less opposition there is to the Power of Zero paradigm. The math doesn't lie. Tax rates ha

The Securing a Strong Retirement Act is a bipartisan bill currently working its way through the house and has major implications for everyone in the country. We are finally getting some relief from RMD's. With life expectancy increasing they are looking at pushing out Required Minimum Distributions until the age of 75. This primarily benefits people of substantial means since the average person with money in their retirement accounts are withdrawing it above and beyond the minimum and well before age 75. Another interesting provision has to do with student loan debt. The new bill stipulates that people putting money towards paying down their student debt could have an equal amount of money put into their 401(k). It also says that if you have balances in your 401(k) or IRA you would be completely exempted from taking a Required Minimum Distribution. Seniors will also be able to count certain donations towards their RMD. Under the current law, there is a catch-up provision on the books. They are proposing that if you're over the age of 60 you will be able to catch up even more. If you believe tax rates are going to be dramatically higher in the future than they are today this is an opportunity to put additional funds into a Roth IRA. There are massive expansions of the buckets into which we can contribute after-tax dollars and allow them to grow tax-free. The average person changes industries seven times over the course of their lifetime and another provision would help people get reconnected with 401(k) accounts that were forgotten or left behind. The biggest takeaway from this new bill is that you will be able to make more contributions to Roth 401(k)s and Roth IRA's. The goal is not to get a deduction at historically low taxes, we want to pay the taxes at historically low levels so that when taxes are dramatically higher down the road we can take that money out tax-free. If you're just out of college, this bill will be an opportunity for you to get a jump start on your retirement savings while you're paying down your student loan debt at the same time.

At the time of recording this podcast the results haven't been certified but it looks like Joe Biden will be the next US president. There are a couple of different outcomes that you need to pay attention to. The first involves him not controlling the Senate. In order to win the Senate Democrats would have to win two seats in a runoff election on Jan 5 but pundits are saying that result is unlikely. If Republicans control the Senate there will be a lot of obstruction for Joe Biden's agenda. Everything that Joe Biden campaigned on is going to be effectively neutralized and he will probably have to postpone any changes until the midterms two years from now. This means you can expect two years of relative status quo, but if the Democrats do win those Senate seats in the midterm elections or want to press his program, he will likely try to make the most of the opportunity and push through his agenda more aggressively. If you make more than $400,000 per year, you are essentially a marked man or woman. For example, if you live in California you will have to pay a 13.3% State tax, a 39.6% Federal tax, an additional 14% additional Social Security tax for every dollar over the $400,000, and finally a 3.8% for an Obamacare surcharge. This scenario results in 1970s style tax rates where you would be paying 70.7% in taxes. You will also have fewer ways to mitigate that tax and be unable to deduct 401(k) contributions on the margin as well. Joe Biden has proposed considerable changes to the way 401(k) deductions are done so we are going to start to see deductions phasing out for people in the higher income levels. Joe Biden wants to be able to tax you at high marginal tax rates and doesn't want to give you a lot of recourse in terms of mitigating that tax. If you have significant income, your long term capital gains could become short term gains. If Joe Biden wins the Senate he will have two years to put this into law but in the process will likely upset a lot of people and potentially lose the Senate after the midterms, however this means that for the first two years you better duck and cover if you make $400,000 a year or more. If you make less than $400,000 a year, a Joe Biden presidency is relatively good news for you. Joe Biden plans on letting the tax cuts expire for the people that make $400,000 or more but for those who make less, he plans on making the tax cuts permanent. This could make contribution to your 401(k) a bit more complicated and for those above the $400,000 threshold they will probably want to consider some other options. In terms of the Power of Zero paradigm, it is largely good news if you believe that Joe Biden will make the tax cuts permanent for those who make less than $400,000 per year. We can't afford to keep tax rates this low and have actually gone beyond the point of no return. We would have to tax 103% for every dollar made over $400,000 just to prevent the deficit from growing. This doesn't include actually paying off the debt. Unless you believe in Modern Monetary Theory there doesn't seem to be any other way to solve our problems other than ultimately raising taxes on the middle class. Joe Biden is kicking the can down the road and it's going to compound our problems over time, but if you're looking to take advantage of this opportunity before we come face to face with reality, this is a great opportunity to shift money to the tax-free bucket. If Joe Biden wins over the Senate there's going to be a lot of shock and awe in the first two years of his administration as they push through a number of pieces of legislation that will disproportionately impact people who make more than $400,000 a year. If he doesn't win the Senate he will bide his time until the midterms to gain the seats he needs to implement this agenda.

Today's episode covers the last secret to mitigating the two most concerning risks of people planning to retire. People are afraid of running out of money before they run out of life. Traditionally the way you can mitigate that risk is by accumulating a lot of money and restricting your distributions to 3% which gives you a statistical likelihood of not running out of money. The alternative is by guaranteeing your income by way of an annuity. Economists say that the ideal way to guarantee an income stream for life involves giving an insurance company a large lump sum in exchange for a steady stream of income for life. There are a number of shortfalls with that approach including a lack of liquidity and what David refers to as the "Mack Truck Factor". Single premium immediate annuities do not adjust for inflation which means as inflation goes up your spending power goes down. Insurance companies have recognized a number of benefits of having an annuity as well as attempted to address the shortfalls. The solution they've come up with is a fixed indexed annuity. A fixed index annuity gives you liquidity on your dollars and the growth of the money in the account is linked to the upward movement of the market. They also come with death benefit features which do quite a bit to mitigate the issues with traditional annuities. The big mistake that most people make is they implement these annuities in the tax-deferred bucket, exposing themselves to the risk of a rising tax-rate environment. Insurance companies provide options to convert that fixed indexed annuity to a Roth IRA but that comes with its own set of problems. In an attempt to avoid doubling your taxes over time you may end up doubling them in the short term. There is another option known as a piecemeal internal Roth conversion that allows you to convert your annuity over whatever timeframe your financial plan calls for. The piecemeal internal Roth conversion eliminates the two greatest risks to your retirement, tax-rate risk, and longevity risk. When you remove those risks off the table, you also take care of the sequence of return, withdrawal rate risk, and inflation risk. Historically, financial advisors will say you can only mitigate one of those two risks. Either you have liquidity and don't have to worry about longevity or you cover longevity and have no liquidity. The plan outlined in Tax-Free Income for Life allows you to effectively remove longevity risk, along with all of the risks that get magnified as a result of longevity risk, and tax-rate risk all in the same financial plan. If you're looking for an advisor to help you navigate all the pitfalls that stand between you and the zero percent tax bracket, as well as mitigate both longevity risk and tax-rate risk you can go to davidmcknight.com to get connected with an Elite Advisor. The Power of Zero and Tax-Free Income for Life are companion volumes essential to your financial plan.

In the previous episode, David explained the surprising benefits of having a guaranteed income stream in retirement via an annuity, including living longer. If there are so many benefits of owning a guaranteed lifetime income annuity, why aren't more Americans taking advantage of these programs? There are three major barriers that are preventing people from ever entering into the transaction. The first issue that Americans have has to do with liquidity. In order to pull off the annuity deal, you have to give a large lump sum to an insurance company and you can't undo the transaction. There is a psychological benefit to being able to access your money at a moment's notice so the act of giving up liquidity is a major barrier for many people. The second problem is the lack of inflation hedge. The typical single premium immediate annuity does not index for inflation and people are afraid the income provided may not be enough to cover their expenses in the future. Some people approach the problem by increasing the lump sum at the beginning but that leads back to the first complaint of lack of liquidity. The third problem is the "Mack Truck Factor". If you go for a large annuity under the assumption that you will live for a long time but get flattened by a Mack truck a couple of years later, that asset will disappear from your balance sheet. However unlikely the proposition, the potential of making the worst investment ever and losing their kids' inheritance is a scary scenario for many people. Insurance companies are not blind to these three problems. They've created a fixed indexed annuity to try to address these issues and mitigate some of the risks involved. To address liquidity, they allow you to withdraw 10% of that annuity per year. This isn't full liquidity but basically functions the same way when you think about the 3% Rule. To address inflation, the annuity is placed into a growth account that is linked to the upward movement of a stock market index. You're not going to hit a homerun in this account but since the goal is to guarantee a stream of income until you die, this fits the bill. The last issue is addressed by a death benefit. If you die up to two years after purchasing an annuity, whatever you don't spend goes to the next generation including any growth on that money. As great as all that sounds, the last issue is that 99% of fixed indexed annuities get implemented in the tax deferred bucket. There are two major problems with that approach. When you have that annuity in your tax-deferred bucket, it can never be undone, which means you are exposing yourself to tax rate risk. If tax rates rise dramatically in the future you will have a hole in your income and will have to find a way to compensate. The second issue is that taking money out of your tax-deferred bucket, even if it's from an annuity, counts as provisional income and can lead to the risk of social security taxation. The combination of these two things, tax rate risk and social security taxation, could force you to spend down your stock market portfolio 12 to 15 years faster than you otherwise would have.

This is the first of three podcasts leading up to the release of David's latest book, Tax-Free Income For Life. According to a number of surveys, the number one risk that retirees are most concerned about is outliving their money. One of the ways to mitigate longevity risk is by having an annuity. There are a number of benefits that come with guaranteed lifetime income annuities, the first of which is retirement predictability. The first benefit of a guaranteed lifetime income annuity is closing the income gap between the amount required above and beyond what is provided for by your social security and government pension. An annuity has the ability to completely mitigate longevity risk. The second benefit is that people who have an annuity that can guarantee their income generally have considerably less anxiety and a higher level of happiness than those that don't. An annuity won't bring anxiety-free retirement but it will certainly be much less than those who have to rely on the stock market to achieve their retirement goals. The third benefit may surprise you. With a guaranteed lifetime income annuity, you will likely live longer. Studies show, after adjusting for all other variables, people with annuities tend to live longer than their counterparts who don't have them. The fourth benefit allows you to skirt around the 3% rule. While the 3% rule should generally work to ensure you never run out of money it tends to be a very expensive proposition. An annuity allows you to mitigate that risk with much less money. This can also free up more money to invest in the stock market. The final benefit is that because of the ability to guarantee your income with less money than you would require otherwise, you can take a greater risk in your stock market portfolio and be more aggressive. If the stock market goes down you are not going to be forced to take money out in a down year since you will have your living expenses guaranteed by your annuity. You will have the luxury of waiting for the stock market to recover in that scenario. Most of the money that you are planning on spending on your discretionary expenses in retirement has not been earned yet when you retire. You must have the ability to stretch your stock market portfolio over a possible 30 year time frame which requires you to take more risk in your investments. When you guarantee your lifetime income, you have a permission slip to take more risk in the stock market. A guaranteed lifetime income annuity also neutralizes two risks that have sent many retiree's portfolios into a death spiral. Namely sequence of return risk and withdrawal rate risk. This can prevent you from running out of money up to 12 to 15 years earlier than you expect. You don't have to worry about taking unduly high distributions from your stock market portfolio if your income is provided by a different means like a guaranteed lifetime income annuity.

Joe Biden is coming for your 401(k) and it's actually worse than David portrayed it in previous episodes of the podcast. Under Joe Biden's tax proposal he is going to equalize the tax benefits of retirement plans. David breaks down exactly what this means for people in different tax brackets and what the implications of this plan are. In order for Joe Biden's plan to be tax neutral the rate at which you receive a tax credit is 26%. This essentially means that anyone in a tax bracket under 26% is getting a great deal and anyone in a bracket above the 26% tax bracket is getting a terrible deal. Let's say you're in a 39.6% tax bracket and wanted to contribute $20,000 to your traditional 401(k). With the 26% benchmark you would receive a $5200 tax credit and have to pay $2720 in income tax on that contribution. But wait, there's more. At some point you are going to have to take those dollars out because they haven't taxed yet. Not only did you pay 13.6% to put the money in, if you're still in the 39.6% tax bracket when you take the money out you end up paying 53.2% and that still doesn't count the state tax implications. The math taking place on the tax return happens on a separate line which means the contribution carries down to the state level. Unless state legislatures act, your retirement plan contribution may be fully taxable at the state level when contributed. Since the retirement account is still pre-tax, which means the balance of your retirement account might be fully taxed at the state level upon distribution. The solution is fairly simple. If you find yourself above the 26% tax bracket, the solution is to simply stop contributing to your 401(k) and only contribute to your tax-free bucket. Pay your tax rate today if it's above 26% and avoid all the extra taxation. You are not going to be able to keep very much of your savings if you're above the 26% threshold and you contribute money to your 401(k). This proposal has the ability to radically redefine the retirement landscape. If Joe Biden wins the election, this proposal could become a reality. Mentioned in this Episode: The Biden Tax Plan: Proposed Changes And Year-End Planning Opportunities

Today's podcast is based on a recent article penned by Maya MacGuineas titled The Debt is Huge Because Trump Kept His Promises. Maya also appeared in David's documentary The Tax Train is Coming. Much of what Maya says is that we shouldn't be surprised by what happened during Trump's first term since it has been exactly what he campaigned on. The debt that has accumulated has been a result of President Trump's campaign promises of steep tax cuts and increased spending on both defense and veterans, and crucially, he promised to not make any changes to Social Security and MediCare. We are now paying the price for it. The numbers proposed were so huge that they seemed exaggerated and improbable, in other words, the amount of debt that Trump was looking to accumulate over the course of his first term was astronomical. The Nonpartisan Committee for a Responsible Federal Budget estimated that Trump's agenda would increase deficits over the next ten years by $4.6 trillion. The numbers at the end of Trump's first term are even worse due to the extra spending for the Covid-19 lockdown. In Trump's first three years he approved $3.9 trillion in borrowing just to pay for the tax cuts he introduced. Any good economist will agree that tax cuts are okay if they are paired with a commensurate decrease in spending, the problem is we didn't do that. While all the other economies in the world are paying down their debts, the US is piling debt upon debt. The deficit has never been so high when coupled with an economy that was going as well as it was prior to 2019. When you add up the additional borrowing that the US made to deal with Covid-19 the impact is immense, and the borrowing is just beginning. The $2 trillion borrowed initially was only the first half of the bridge. Had we been more fiscally responsible prior to Covid-19 we would not be in the same bind. We would be in a better position to handle something like Covid-19 had we not accumulated so much debt prior to it. There are a few things that Trump did not follow through on. The business tax cuts have not paid for themselves. Trickle-down economics is the idea that decreased taxes and increased capital going to corporations leads to an increase in the economy, but that would only happen with a concurrent decrease in spending, which did not happen in this situation. Discretionary spending is a relatively small portion of the budget, roughly 23% of the economy, and while Trump proposed reducing discretionary spending it actually increased by over $700 billion. Part of the problem is that Trump ran on not touching Social Security or Medicare and every year that goes by where we do not reform Social Security or Medicare in some way has an economic cost. Every year that goes by where we fail to address these two programs means the fix on the backend is going to become even larger and even more draconian. According to the CBO Social Security is projected to be insolvent by 2031 when the youngest of today's retirees turn 73. Ignoring these programs is not the same as protecting them. It dooms beneficiaries to large abrupt benefit cuts across the board or large tax increases on the population as a whole. The debt is headed towards a new record, in just a couple of years, it is projected to grow faster than the economy indefinitely. All major trust funds are heading towards insolvency because we have done nothing to fix them. All of the Covid-19 spending would have been more palatable as we come into the crisis with our fiscal house in order. Whoever is in the White House in January is going to have to put a long-term plan in place to reduce the debt once the economy is strong enough and save Social Security and Medicare. The scary part is that we are starting to hear more about Modern Monetary Theory and the idea that we can just print our way out of our issues without creating immense amounts of inflation. Take advantage of tax rates while they are historically low because they are not going to stay at these levels for long. Mentioned in this Episode: The debt is huge because Trump kept his promises - https://www.washingtonpost.com/opinions/2020/10/05/debt-is-huge-because-trump-kept-his-promises/

In every single book David has written he talks about why it's so important to have a trusted and trained advisor in the Power of Zero paradigm. There are dozens of pitfalls standing between you and the zero percent tax bracket which is why it's crucial you have a qualified guide to show you the way. You should work with an advisor that has internalized the Power of Zero principles to help you mitigate both tax-rate risk and longevity risk at the same time. The Elite POZ Advisor Group is a collection of trained professionals that have been vetted by David himself. There are a number of requirements that someone needs to have completed before they can enter the group. Elite Advisors need to have been in the industry for a few years and have demonstrated the ability to answer the client's questions and lead them through the Power of Zero process. Every member of the Elite POZ Advisor Group has also passed a comprehensive written exam. Many advisors have tried and failed to complete this exam because you need to have an in-depth knowledge of the Power of Zero paradigm. Elite Advisors also have to sit through an extensive ten-part training course that covers a number of different case studies and covers all aspects of the Power of Zero retirement strategy. On top of all that Elite Advisors receive ongoing training directly from David to keep them apprised of tax law changes and updates on the approach. When it comes to getting to the Power of Zero tax bracket and tax-free retirement planning, not all advisors are created equal. The Elite Advisors group is the gold standard of the Power of Zero paradigm and if you're working with one of them you can be assured that you are in good hands. Go to elite-poz.davidmcknight.com to find out what the advisors have been through to be part of the elite group. Advisors can go to powerofzero.com to find out how to become part of the Elite POZ Advisor group. There are a number of financial advisors preaching the Power of Zero approach but ultimately they just want to sell you a life insurance policy. That is not what the POZ paradigm is about. It's about having multiple streams of tax-free income and there is no cookie-cutter approach. In the POZ paradigm, most advisors' basic impulses are the exact opposite of what they need to do to lead their clients to the zero percent tax bracket. Head to davidmcknight.com to be connected with an Elite Advisor to help you.

Should Donald Trump win a second term in the Presidency there could be significant changes to the tax code. Donald Trump hasn't laid out a fully realized tax proposal in the same way that Joe Biden has but he has outlined some of the things he would do. One of the things that Donald Trump has already done is unilaterally implemented a payroll tax deferral as an answer to the financial repercussions of Covid-19. It's currently deferred, which means that the money would have to be paid back in 2021, but there are rumors that he would waive that entirely. There have been additional rumors that Donald Trump is thinking about eliminating payroll taxes completely, which would put Social Security and Medicare in difficult positions as they are already underfunded. Unless you subscribe to Modern Monetary Theory (MMT) and the idea of the government's infinity bucket, that's probably a bad idea. The second thing Donald Trump would hope to do is modify the capital gains tax or index them to inflation. The idea being that the cost of doing business would decrease overall and to encourage investment. He has also proposed that the US indexes long term capital gains to inflation as well. David walks through a practical example of what this would mean for the average investor. Should this policy be implemented it would certainly have a positive impact on economic activity and investment in small businesses. The third thing that Donald Trump is considering is a reduction in taxes on the middle class. The current tax brackets are scheduled to expire in 2026 and Donald Trump is looking at a 10% tax cut for middle Americans, although the exact details aren't known at this point. This particular policy could be interesting if implemented, but it would require the Republicans to have control of the House and the Senate to make the tax cut permanent. The fourth thing the President is looking to do is create tax credits for American businesses. He wants people to buy more American products so these tax credits are focused on making American businesses more competitive, particularly in the pharmaceutical and robotics industries. He's also looking to expand the opportunity zones created under the Tax Cut and Jobs act. Keep in mind that none of these changes have been committed to or put down on paper, they've just been some thoughts and ideas discussed so far. David quickly recaps the five tax proposals coming out of the Trump administration. Once we know who our next President is going to be, we'll have a little more clarity about what to expect in terms of taxes for the next four years.

There is a benefit in the tax code that goes largely ignored. The holy grail of financial planning is an investment that gives you a tax deduction on the front end, lets your money grow tax-deferred and allows you to take that money out tax-free. In the Power of Zero paradigm that usually means a combination of Roth conversions and LIRP conversions. For most married couples, the ideal balance of the tax-deferred bucket is between $300,000 and $350,000. In that situation it qualifies as the holy grail of financial planning. There is a second way to accomplish the same tax-free holy grail: through an HSA or health savings account. When you put money into your HSA you get a deduction, the money grows tax free, and when you take it out for qualified medical expenses you don't pay any taxes at all. David breaks down the two scenarios of either having an HSA or not having an HSA in the event of a healthcare issue. With an HSA, healthcare expenses are not taxed. Most people go wrong with their HSA by not using all three tax advantages. They take advantage of the tax deduction on the front end and take the money out tax-free, but they're not taking advantage of the tax-free interest in investment earnings. HSAs are designed to grow the investments inside of them. Instead of using the HSA as a slush fund for smaller, out of pocket medical expenses when you're young, let your precious tax-free dollars experience the ability to grow in a tax-free environment. Use that money when you're older after it's grown and those medical costs are usually higher. Keep all your receipts for medical expenses along the way. There is nothing that says you need to get the reimbursement from your health savings account in the same year that you make the purchase. Let your HSA accumulate tax-free and build steam. It's also important to keep the receipts in case you get audited. You will need to prove that you had a qualified medical expense and that you paid for it. With just a little tweak, you can use all three tax advantages that the HSA confers. Pay for your medical expenses out of pocket now and let that money accumulate tax-free. People don't think of the HSA as the tax-free vehicle that it is, just like a Roth IRA. We are always told that we are either going to be taxed on the seed or the harvest, but with the HSA you are taxed on neither the seed nor the harvest. The problem is people don't let their HSAs grow. If we can all make a little tweak to how we treat our HSAs, we'll have another tax-free bucket to take advantage in the Power of Zero paradigm. There are lots of tax-free streams of income out there and we're not taking advantage of all of them like we should.

A quick recap of the first principles covered in the previous episode. #1 Mitigate longevity risk with an income annuity. #2 Your income annuity only needs to cover your basic lifestyle expenses. #3 Your income annuity needs to have a guaranteed lifetime income feature, inflation protection, liquidity, and a death benefit feature. #4 Cover discretionary expenses with your stock market assets in your LIRP. #5 Always draw your guaranteed lifetime income from your tax-free bucket. #6 Your LIRP must have a chronic illness rider. The seventh principle is to use a time segmented investing approach to grow your assets safely and productively during the time when you are doing your piece meal Roth conversion. If you leave your money in your stock market portfolio you expose yourself to a sequence of return risk. Time segmented investing is about having bonds mature in the year when you know you will need the income and allows you to mitigate the sequence of return risk. Whatever money that isn't going into your LIRP or annuity should be going into an aggressive stock market portfolio. Since you have the luxury of taking money out of your LIRP and guaranteeing your lifetime expenses, you can take much more risk in the stock market. You need to have multiple streams of tax-free income, none of which show up on the IRS's radar, but all of which contribute to you being in the zero percent tax bracket. Preferably between four and six streams of tax-free income, each with unique benefits. Don't take social security until you're ready to draw income from your guaranteed lifetime income annuity. Outside of a short expected lifespan, you should be putting off social security as long as you can, at least until you've paid off your piece meal internal Roth conversion. Identify the ideal balances in your taxable and tax-deferred bucket and shift everything else systematically to tax-free. In a rising tax rate environment, there is an ideal amount of money to have in your taxable and tax-deferred bucket. As of right now, you have six years to reposition your money into the tax-free bucket. Get all your asset shifting done before tax rates go up for good. You have to know what your magic number is and how much money you need to shift to tax-free between now and 2026. Understanding these principles will shield you from longevity risk and tax rate risk. Unless you have the ability to mitigate both risks in the same financial plan, you are going to have a very hard time being fully at peace with your retirement plan. Nobody wants to have to keep constantly looking over their shoulder in retirement.

There are 12 basic principles that make up the Grand Unified Theory when it comes to retirement planning. The first section tackles mitigating longevity risk. We know there are two basic ways to mitigate longevity risk, the first simply being to save up enough money. If you save enough money you can weather all the ups and downs of the stock market. Historically, there has been a 4% Rule that makes the calculation simple. More recently the rule has been revised. The new 3% Rule is more common. If you need $100,000 per year in retirement the 3% Rule says you need $3.33 million to successfully mitigate longevity risk. This is a very expensive way to mitigate longevity risk but it can be done. A better option is an income annuity. The number one principle is to mitigate longevity risk with an income annuity and not by way of the stock market. The second principle is to only use the income annuity to cover certain expenses, essentially your basic lifestyle needs. You just need to cover simple lifestyle needs because other vehicles are better suited to other expenses. The money that doesn't go into the annuity needs to be grown and compounded in another part of your portfolio. The third principle is that your annuity has to have four qualities that you absolutely must have before you commit. It must have a guaranteed lifetime income feature and is designed to last as long as you do. It must have inflation protection because without that inflation could erode your value and leave you looking at a shortfall. Your annuity should also have liquidity in the years prior to electing that guaranteed lifetime income feature. Not all annuities have liquidity which can give people a sense of heartburn in the case where they need that money. That last component is a death benefit feature. Without this, there is the potential for the annuity to be the worst investment you've ever made. With the death benefit feature, in the case that you die earlier than expected at least, your beneficiaries will get the portion that wasn't spent. Once your lifetime expenses are covered by your annuity, you need to look at the rest of your portfolio. There are two types of discretionary needs, emergency expenses, and aspirational expenses, and they will pop up over the course of your retirement and you have to have the ability to grow your money productively to take care of them. You will have two pools of money to draw from to cover those expenses, the first is your stock market portfolio and the second is your LIRP. The rule of thumb is to draw money from your LIRP during down years in the market during the first 11 years, but when the market is up you are simply harvesting the profits from your portfolio. Never withdraw assets from your stock market portfolio following a down year in the market. If you are planning on having an annuity to cover your lifestyle expenses in retirement, you need to draw that money from your tax-free bucket. The idea that annuities are only tax-deferred is a misconception. You should be using piecemeal internal Roth conversions to convert your IRA to a Roth IRA, taking however much time you need to stay in a low tax bracket. This is very important because if you draw that guaranteed lifetime income from your tax-deferred bucket, it will always be taxable. As tax rates go up, the amount you get to keep goes down. It can also lead to social security taxation and running out of money ten to twelve years faster. The last principle is to make sure your LIRP has a chronic illness rider. In retirement, one of the things that can really upset your financial position is a long term care event. A chronic illness rider gives you the ability to spend your death benefit for the purpose of paying for long term care. A quick summary of the first six principles of the Grand Unified Theory on a happy retirement.

Joe Biden has historically said that taxes won't go up for anyone that makes less than $400,000 annually , but that may not be the case. Some people may lose some deductibility in their 401(k) contributions which would result in an effective increase in the tax they are paying. If you are in the highest marginal tax bracket of 37%, when you contribute $1 to your 401(k) you essentially save $0.37 in tax. Joe Biden's perspective is that for people in higher income tax brackets, the tax savings is unduly weighted towards them. The current proposal involves a standard rate at which everyone could deduct money from their 401(k). The exact number is still unknown, but economists are estimating the rate would have to be around 20% to be revenue neutral. This would basically mean that instead of deducting the full $0.37 at the highest marginal tax bracket, you would only deduct $0.20. For people in lower tax brackets, they would get a higher deduction than they otherwise would have. The ramifications of this proposal would mean that people in the higher income tax brackets of 22% or above will skip the deduction. Instead of getting the deduction, higher income earners will likely start paying the taxes on their money today, especially given that we are in a rising tax rate environment. This negates the usual discussion about whether it's superior to save on paying the taxes today and waiting until retirement, since the deduction is not likely to be much higher than the tax rates you will face in the future. The net effect of all this is that it is going to accelerate the flow of money into tax-free accounts. As things are, there isn't much reason to forego a 37% deduction today, but if that deduction changes, it's not going to be very attractive at all. Given this proposal, we are going to see more people foregoing putting money into their 401(k) and looking more towards tax-free options. Despite Joe Biden's pledge to not raise taxes on anyone making less than $400,000, people who make $200,000 or more will find they will be paying more taxes if they no longer have the ability to deduct 401(k) contributions at their highest marginal tax bracket. Anyone who is in the 22% tax bracket or higher will likely stop making 401(k) contributions and start redirecting those contributions to Roth 401(k)'s or other tax-free plans. The silver lining to this is that more people will contribute to tax-free accounts and end up being better prepared for an eventual rise in tax rates. If Biden does get elected in November, many people are going to have to reassess their approach to saving for retirement. Another thing to keep in mind is the rumor that should Joe Biden get elected, he may bow out at the two-year mark. This could potentially lead to 10 years of Kamala Harris in the presidency.

There are five important elements your LIRP must have if you are going to have it for the rest of your life. Similar to getting married, these are things you need to look for before committing to the plan. You don't want to get 10 or 20 years in before you realize there is a ticking time bomb in your LIRP. The first thing your LIRP must have is the ability to get a guaranteed zero percent loan. The best strategy for your LIRP is to work with a company that allows you to take a loan against your plan with a net cost to you of zero percent. This means you have to be diligent in assessing the contract and make sure the guarantee is part of it. Some companies reserve the right to adjust the loan interest rate at their leisure which is exactly what you want to avoid. The caveat is here is that just because someone is saying that they are giving you a zero percent loan, that doesn't mean it's guaranteed. This is one of the most important provisions in your contract. The second thing to look for is interest in arrears, not interest in advance. The problem with interest in advance is the lost opportunity cost over the course of the year. Some companies credit you in a way that makes interest in advance work in your favour, but they are few and far between. The third thing to look for is a strong financial rating. There are several rating companies, and the way they rank financial products can vary, or even contradict each other. The best way to determine the financial footing of a company is to use a Comdex rating instead. A Comdex rating below 90 is a sure sign you should avoid that company, and ideally, you're working with a company with a rating of 95 or higher. The fourth thing your LIRP must have is called an overload protection rider. In order for your death benefit to pay out, your cash value must be at least $1. If your cash value runs out before you die, there are some intense tax repercussions. An overload protection rider is like a failsafe that protects you from that scenario by lowering your death benefit. The last thing your LIRP absolutely must have is a chronic illness rider. This rider allows you to access your death benefit in advance of your death for the purpose of paying for long-term care without paying anything along the way. Compared to a long-term care rider, where you are paying money along the way for the privilege of receiving 25% of your death benefit in advance of your death, the chronic illness rider is superior. If you pay for a long-term care rider throughout your retirement and you die peacefully in your sleep without ever having needed long term care, all of those expenses were a drag on your cash value along the way. You end up having paid for something that you never had to use. A chronic illness rider doesn't have the same opportunity costs. For more info on the 20 things your LIRP must have, check out the book Look Before You LIRP, preferably before you commit to a life insurance policy that doesn't have what you need in it.

It is possible to convert too much money to your Roth IRA and not leave enough money in your IRA to use when you're ready to retire. The first principle you have to realize is that in a rising tax rate environment, it's okay to have some money in your tax-deferred bucket. You have to be very strategic about how you shift your money to tax-free and shouldn't be too reckless when it comes to converting. You can have too much money in your tax-deferred bucket, you can have too little, what we are looking for is just the right amount. You should have a balance in your tax-deferred bucket that's low enough that required minimum distributions are equal to or less than your standard deduction, but also low enough that it doesn't cause social security taxation. Social security taxation could put a $6000 hole in your social security, which will require you to spend down your assets much quicker to compensate. Check out davidmcknight.com and use the Magic Number calculator to figure out the perfect balance you should have in your tax-deferred bucket. The higher your social security, the less money you should have in your tax-deferred bucket. Having too little in your tax-deferred bucket can also be a problem. If you rush into converting all your money to tax-free you may end up paying considerably higher taxes along the way, completely unnecessarily. If by the time you're 72 you don't have any money left in your IRA, your standard deduction is left idle. This means that in the process of executing your Roth conversion, you paid some taxes along the way that you didn't need to pay and have over-converted your Roth IRA. You have to keep in mind the opportunity cost. Any time you pay a dollar to the IRS that you didn't need to pay them, not only do you lose that dollar but you also lose what that dollar could have earned for you had you been able to invest it. As a general rule of thumb, if you have a large pension your ideal balance in the tax-deferred bucket is going to be zero. For everyone else, the typical range is between $250,000 and $400,000 depending on the sources of provisional income you're expecting. All streams of provisional income will affect your ideal balance. The more you have, the smaller the ideal balance in your tax-deferred bucket. If you should have had $400,000 in your IRA but converted it unnecessarily to tax-free you will have probably paid at least 25% of that as taxes. What could you have done with that lost money? While your standard deduction does index for inflation over time, your provisional income threshold does not. If you want to avoid social security taxation, you need to keep your tax-deferred bucket under a static number. The Power of Zero approach typically includes having 4 to 6 different sources of tax-free income, the most common of which are RMDs. Tax-free RMD's are the holy grail of financial planning because when you put money in the front end you get a deduction, it grows tax-deferred, and when you take it out it's tax-free. The RMD should be used as a compliment to other tax-free sources, not the only one you are relying on. It's okay to have some money in your tax-deferred bucket. Sometimes in our zeal to get our hard-earned money over to tax-free, we needlessly pay taxes along the way, and that's the massive mistake we're trying to avoid. If you get your tax-deferred balance down to zero, your standard deduction will sit idle.

A government can't simply print however much money they want to be able to buy whatever it is that they want. The Deficit Myth was recently released and in the book the author argues that because the government issues its own currency, it doesn't have to operate like a traditional household. According to the author, all we need to do is print $239 trillion and the US will be funded for the next 75 years. Stephanie Kelton is a proponent of what's known as modern monetary theory, which is essentially the belief that the government can print its way out of its problems at any time. One argument for this theory is that it's okay to inflate the money supply as long as the economy inflates at the same rate. The trick is in what proponents of the theory are proposing they use the newly printed money for. The Green New Deal has an estimated price tag of $93 trillion, but if that money were printed today would it actually productively grow the economy? The government can't replace the productivity that takes place in a free market economy. The government can't guarantee that a job that it creates is going to benefit the economy in the same way that a private enterprise, when they create a job, can grow the economy. Governments tend not to be able to allocate resources efficiently in the same way a private enterprise can. Elon Musk just sent two astronauts into space in the first commercial space flight, and he did it far more efficiently and quicker than his government counterparts. Some of the biggest criticisms of modern monetary theory come from the left hand side of the aisle. Paul Krugman has warned the US will see hyperinflation if they adopt the theory. Inflation is a type of tax, but it's more insidious than a tax increase because at least with a tax increase your representatives have to vote on it. Inflation is like a hidden tax that devalues your money in the same way as tax increases but without any legislation. If the government printed money to pay off the national debt, we know that inflation would rise and that would decrease the value of US bonds, resulting in a sovereign debt crisis. This eventually leads to a spiral of rising interest rates and crowding all other expenses out of the budget. Printing money ultimately creates more problems than it solves. There are three programs that are primarily driving our national debt; Social Security, MediCare, and Medicaid, and those programs are tied to inflation. The US can't print its way out of its problems, the only option is to raise more revenue via higher taxes. Modern monetary theory is dangerous to the US economy and population and will eventually result in major problems for everyone involved. In the end, we need to become more fiscally sane and fundamentally respect the financial laws of the universe. We know that we shouldn't spend more than we bring in, so we have to be wary of approaches that fly in the face of common sense.

There is a well-known economist named William Bernstein who originally asked the question "When you've won the game, why keep playing?" But should people who are retired avoid the stock market completely? An article on the Motley Fool follows the same line of thought. You do need a plan for withdrawing your money in retirement that is different from your plan for building your nest egg and it needs to be in place before you need to withdraw from your assets. A good rule of thumb is to not have money that you expect you will have to spend in the next five years invested in stocks. If you want to mitigate longevity risk and tax-rate risk, the only way is to have an annuity that gives you a tax-free stream of income for life. If it's inflation adjusted, that's even better. The issue is that most annuities are implemented in the tax-deferred bucket. You must find an annuity that allows you to do a Piecemeal Internal Roth Conversion and convert that annuity over time to a Roth IRA. Accomplishing this during the first five years of retirement is where most people run into problems. Chuck Saletta doesn't completely discount the idea of investing in the stock market during retirement, but believes that for the money you need several years from now, the stock market is one of the few ways to generate the returns you need to accomplish those goals. Ultimately, as you transition to relying on your portfolio to cover your costs of living, you will want to strike that balance between short and long term money. Just because you've won the game, that doesn't mean that you can't do even better over time. In the Power of Zero paradigm, after you have set up the systems to afford your lifestyle expenses in retirement you will still have other discretionary expenses that will arise. These can include healthcare expenses, family requirements, or aspirational expenses and go above and beyond your lifestyle requirements. Any money that is not earmarked to paying for lifestyle expenses, taxes on Roth Conversions, and LIRP contributions during the first five to six years of retirement should be allocated to an aggressive stock market portfolio. This gives you the ability to wait a year and allow the stock market to recover if necessary before drawing money from your portfolio. The bottom line is that you need to keep money invested in the stock market for all the expenses that will be earmarked after the Roth Conversion. You need to grow that money as efficiently as possible over the expected 30 years of your retirement if you want to have any hope of being able to pay for your discretionary expenses. Just because the numbers say you've won the game, that doesn't mean it's time to take all your money out of the stock market. Instead, you should be guaranteeing your lifestyle expenses and anything else above that you can invest and take more risk on. Clients of the Power of Zero paradigm will also be funding their LIRP during the first five to seven years of retirement, which grows safely and productively and can be used to cover discretionary needs after the eleventh year. You should not be taking risk in investments that are going to be used to fund expenses early on in retirement. Work with your advisor to create a timeline that incorporates the right level of risk with investments that mature at the right times during your retirement. Once the Roth Conversion period is up, whatever money is not earmarked for the first five or six years of your retirement should be allocated to your high octane stock market portfolio so you can pay for any additional expenses you will need to cover. Stocks are not toxic once you retire, it is absolutely necessary that you continue to invest in stocks in such a way that your account lasts long enough to cover your discretionary needs during the balance of your retirement.