The Power Of Zero Show

The Piecemeal Internal Roth Conversion (PIRC) may be indispensable to your retirement plan. There are two massive risks that could waylay your retirement journey and prevent you from living a happy and stress free retirement. The first is tax rate risk, the risk that tax rates in the future will be dramatically higher, and the second is longevity risk, where you run out of money before you die. Historically, financial planners have been decent at mitigating either one or the other of those risks but rarely good at mitigating both. If you're mitigating tax rate risk, you are executing a series of Roth conversions in a way that stretches out your tax liability over time but quickly enough that you get it done before tax rates go up for good. You should really try to get your financial house in order before 2030 if possible. Dealing with longevity risk is fairly simple and involves accumulating more money in your retirement portfolio but this can be a challenge for most people. The 4% Rule has fallen out of favor in recent times and that means using your stock market portfolio to fund your lifestyle needs has become much more expensive. The other option is to offload that risk to companies that deal in mitigating that risk but they typically come with a few downsides. A fixed index annuity is another option that people have traditionally used to mitigate longevity risk. The problem with the traditional approach that financial advisors use to mitigate longevity risk is they typically do it to the exclusion of mitigating tax rate risk. 99% of advisors implement a fixed index annuity within the tax-deferred bucket and once you begin receiving that income it is impossible to receive that income in any other way. If you draw a guaranteed stream of income via an annuity in your tax-deferred bucket, the whole purpose can be thwarted if tax rates go up. If tax rates double in the future and you are relying on that income, you will have half as much money as you expected and will have to spend down your other stock market assets to compensate. The second issue is that the money will count as provisional income and cause social security taxation, compounding the problem and requiring more money to come from your stock market portfolio. Combined, these problems can lead to running out of money 7 to 10 years faster. Many companies allow you to do a Roth conversion prior to drawing against the annuity but they usually require you to convert the entire dollar amount in the same year. This can result in most of that money being taxed at your highest marginal tax bracket. There are only a few companies that allow you to do a Piecemeal Internal Roth Conversion where you can do those conversions over whatever timeframe your financial plan calls for. By getting the conversion done before tax rates go up for good, you have insulated your guaranteed stream of lifetime income from tax rate risk and when coupled with other streams of tax-free income, this can cover your lifestyle needs in a guaranteed way for the rest of your life. The traditional approach to mitigating longevity risk permanently exposes you to tax rate risk. Insurance companies and advisors have not been historically interested in mitigating both types of risk and you need to find an annuity company that offers a Piecemeal Internal Roth Conversion feature if you want to find the right solution.

David often gets the question of whether a person can be too old to implement an LIRP and like most questions the answer is "it depends". There are a number of great reasons to implement an LIRP, but you have to keep in mind that it's not a silver bullet for your retirement and should be paired with other streams of tax-free income. The first benefit of the LIRP is that the money in your account grows safely and productively, but that also means that you're not going to hit any homeruns inside that account. The LIRP is often used as the bond portion of your portfolio which allows you to take more risk elsewhere. Money in an LIRP also grows tax-free and can distribute the money tax-free via a variety of loan options. The next big advantage of the LIRP is the death benefit, which usually has to be the primary motivation for acquiring an insurance plan. You have to have a need for life insurance and a death benefit. A lot of people are using the LIRP as an alternative to long term care insurance. Many people think that as they get older the money coming out of their LIRP will prevent their cash value from accumulating, but that's just a misconception about the guidelines around the LIRP. As you get older the amount of death benefit the IRS requires you to have goes down. There does come a point in time where the ratios of the LIRP no longer work in your favor. We need to look at the expenses over the life of the program because as life goes on the average cost of an LIRP goes down, this means that you need time to make that happen. If you get too old by the time you implement the program you don't have enough runway. You don't have enough time to allow the expenses to reduce. Many of the benefits are still present but you won't be able to use the LIRP as a distribution tool over the age of 65. The LIRP can be a great way to pass on money to the next generation, to cover a long term care event, and still have a death benefit, but you probably don't want to use an LIRP after age 65 if your primary motivation is accumulating money tax-free and then distributing money tax-free. For paying for a long term care event an LIRP will always be a good option, it's just that one of the main benefits of the LIRP no longer applies once you implement it after age 65. The plan still has a lot of good attributes, and it will mainly depend on what you want to get out of it.

In past episodes of the podcast David described the impact of a blue wave in the upcoming November election and what may happen to your finances if Joe Biden becomes the next president. The first major change would likely be the loss of the stepped up basis which could result in a large increase in the taxes on money you inherit in the future. No matter who gets elected in November tax rates will have to go up. There is a rumour that a fifth part of the Covid-19 relief bill will be coming in the next few months and the US will likely be at least an additional $4 trillion in debt by the end of the year. Biden currently has a probability of 55% of becoming the next president in November according to the odds in Vegas. A lot can change by the fall but that's where the odds sit at the moment. Unlike Elizabeth Warren, Joe Biden is not pushing for a wealth tax. The biggest takeaway is that Biden is not talking about raising taxes on anyone making less than $400,000 but he is talking about raising taxes on the wealthiest Americans prior to 2026. This would require a change in the existing law, but the Republicans are trending towards losing the Senate which means it is a possibility. This would probably mean the 37% tax bracket would go up to 39.6%, but all the other tax brackets would remain the same. This would also mean that come 2026, you would not experience a reversion to pre-2018 tax rates and could actually make the tax cuts made at the end of 2017 permanent. We can't keep tax rates this low for very long without some very unpleasant consequences for Social Security and Medicaid and this may be a way to do some political maneuvering in the meantime. If the expiration date of the current tax cuts becomes null and void due to a change in the law, that could mean you won't have the same urgency to condense your conversions in the remaining six years. Corporate tax cuts will go up from 21% to 28%, which will have an impact on GDP. Biden is also looking at capping the value of itemized deductions at 28% which would be a stealth way of eliminating deductions for the top earners. Biden is not levying any direct taxes on the middle class, but they will have to shoulder the burden of the other tax increases as those increased costs are passed on to consumers. The increase in taxation amounts to about $3.4 trillion over the next decade, but that money is not earmarked to pay down debt or create efficiencies in the federal government. It's all designated towards increased spending above and beyond what we are already paying for. David Walker tells us we need to either reduce spending, increase revenue, or some combination of the two. Biden is increasing revenue but also increasing spending, so he will not be doing anything to solve the structural issues in the US entitlement programs. By 2026, the amount of interest on the debt will be taking up a considerable amount of the federal budget and crowding out all the other spending. Every article says we have to pay down the debt. If we are not addressing the debt with all this increased spending we are hamstringing ourselves as a country and we will be forced to make some very tough decisions by the end of this decade. It's not about whether the additional programs are good or bad, it's about the implications of this tax policy for the future viability for the country. Taxes will have to increase even further to get us out of this terrible position. If the 2017 tax cuts become permanent, that means you have a wonderful opportunity to pay lower taxes in converting your taxable money to tax-free. It is possible that taxes will be reverted to 2017 levels but that doesn't seem to be the case. Biden will also probably raise the threshold on wages that are subject to Social Security tax and MediCare tax, but anytime you take money out of the economy and put it into federal programs, that money is not being used as efficiently. If Joe Biden does get elected there will be changes on a number of fronts where the average American will not see an increase in their personal taxes, but will feel the impact of the increase of corporate taxes in higher prices.

Time-segmented investing is a critical concept in the Power of Zero paradigm. The traditional approach says that you can have an investment portfolio balanced in such a way as to protect against systemic risk, but this approach has a serious risk associated with it. A couple of down years in the stock market during a time when you are withdrawing funds from your portfolio can lead to you running out of money up to 15 years faster than you expected. The 4% rule is how people typically protected themselves against that risk but changing times have made that rule pretty antiquated. Now it's as low as the 3% or 2.5% rule. This also means that in order to live comfortably, many people will need considerably more money in their retirement funds if they want to avoid sequence-of-return risk. During the first ten years of retirement, traditional asset allocation is not the best way to go about funding your lifestyle needs. You need to have six different portfolios that are calculated to produce a certain amount of money at certain times. Each portfolio should be calculated so that it provides the money you need at specific points of your retirement. This allows you to take an amount of risk commensurate with the time horizon when you will need that money. If you know how much money you will need in certain years, you can calculate the exact right amount of money you need for each time segment to generate those results. Anything earmarked for years 11 or later will be placed in a high growth portfolio with a higher amount of risk, because you can afford to take the extra risk. Given the low risk investments for the first ten years and the higher risk investments after year 11, you end up with a standard deviation similar to a traditional portfolio but you have completely eliminated sequence-of-return risk. There are also ways to eliminate longevity risk and guarantee a stream of income for your lifestyle needs in retirement. A piecemeal internal Roth conversion inside an annuity is the key, but it does come with some conditions. If you know from day 1 of retirement that you are going to have your lifestyle needs covered by time-segmented investment for the first seven years, you now have the luxury of taking more risk in the stock market. Sequence of return risk is only dangerous when your lifestyle needs are not guaranteed for the first ten years.

David Walker has been saying that tax rates are going to have to double since 2008. We didn't do that. So that means the national debt will continue to accumulate until we reach $53 trillion, at which all the money flowing into the Treasury will only be enough to pay the interest on the debt. Many people other than David Walker are starting to speak about the future of tax rates as the national debt continues to skyrocket. Ray Dalio has said that the US will have little choice but to raise taxes in the coming years to offset its mounting liabilities and debt. In many ways we are looking at a currency problem, not just a debt problem. Leon Cooperman believes that no matter who wins in the coming November election, taxes are on the way up, and the coming tax revamp is going to change capitalism forever. The only variable is how high and how fast tax rates will go up. Leon spoke favourably in the past about the tax cuts implemented by President Trump and why the wealth tax proposed by Nancy Pelosi is pretty much impossible to implement, let alone being unconstitutional. Ed Slott believes that there is a good chance that tax rates will go up before 2026. Should Joe Biden get elected, the tax sale may very well come to an end earlier than expected. Larry Kotlikoff, one of the most famous accountants in the world, is recommending that people implement the Power of Zero principles for their clients. The cost of converting a portion of your stock market portfolio will be lower today than at any other point in your lifetime. There are a few good reasons not to buy municipal bonds in general, but Larry offers another reason. Larry Swedroe echoes much of what Larry Kotlikoff has said. Whatever party is in power, we are likely to see a significant increase in taxes before 2026. More and more experts are seeing the writing on the wall and saying that we will have to endure higher taxes in the near future. Even the most skeptical of experts are coming around and are realizing what's happening. You must take on a sense of urgency when it comes to your taxable buckets. If you still have money above and beyond the optimal amount in your taxable bucket, you are exposing yourself to some serious risks. You're much better off paying taxes now than later.

The Before and After Comparison is an indispensable part of the financial planning process and you can get help with yours over at davidmcknight.com. The comparison is made up of three different projections within some sophisticated financial planning software of side-by-side-by-side life scenarios. The comparison reveals the impact of using the Power of Zero paradigm on your retirement funds. The first projection shows what happens if you continue doing what you are doing right now under the unlikely assumption that taxes don't rise in the future, and shows how long your money will last. This works as a baseline for the next two comparisons. David Walker has said that tax rates will have to double in the future to keep the US solvent, that's why the second comparison focuses on what happens to your retirement picture under those conditions. There are a few important things to keep in mind when tax rates double. The first is that it takes much more money to meet your lifestyle needs, but also when tax rates go up that means your Social Security also gets taxed at a higher rate. This leads to spending down your assets that much faster. The average person will run out of money 12 to 15 years faster when tax rates double. The third comparison shows what happens to your finances if you implement all the Power of Zero strategies and how multiple streams of tax-free income will affect your retirement. The point of the comparison is to put a price tag on inaction. You don't have to love Roth IRA's, or LIRP's, or Roth Conversions, you just have to like what they do for you and like them a little more than the IRS because, in the end, someone is going to get your money. The comparisons also measure tax rate risk and show you how long your money will last under multiple different scenarios. The Before and After Comparison can be very valuable by showing how much better off you could be when you implement the Power of Zero strategies, but not everything can be quantified. It's hard to quantify how important it is to you to protect yourself from a long term care event or sequence of return risk, but those do have to be factored in. The bottom line is the Before and After Comparison will show you the cost of inaction so you won't be haunted by the reality of letting the opportunity go by. There are huge opportunity costs when you don't implement these strategies. If you give a dollar to the IRS that you didn't really need to give them, not only do you lose that dollar, you lose what that dollar could have earned for you had you been able to keep it and invest it over the balance of your lifetime. If this is so important, why didn't my current advisor bring this up to me? There are two reasons why, and it's hard to know which one is worse. The Before and After Comparison also comes with a roadmap that shows you what you need to do each year to realize the advantage of the Power of Zero paradigm. Taking the roadmap to your current advisor may not be the best idea. Do you really want to be your advisor's guinea pig as they experiment and learn these strategies? There are a number of different thresholds that need to be navigated to maximize the Power of Zero paradigm so working with an experienced advisor is highly recommended. Advisors that want to be able to create and implement these strategies for their clients can learn more at powerofzero.com.

Every once in a while the idea of fixing all our fiscal problems by taxing the top 1% of the population is proposed, but it's time to do the math and see if it's true. The Committee for a Responsible Federal Budget put out a report a few years ago, prior to the latest spending due to Covid-19, where they analyzed what it would take to actually balance the budget. The first scenario looks at balancing the budget by not adding any more to the existing debt. The challenge with this scenario is that the interest on the existing debt will crowd out other expenses in the federal budget over time as interest rates rise in the future. In order to balance the budget of the federal government by increasing taxes on only the top marginal tax bracket, they would have to increase it to 102%. Everything earned over $400,000 would be taxed at 100% and then some. When they looked at how high tax rates would have to go if they included anyone that made more than $250,000 a year, the tax rates would have to be 90%. If they went down to $150,000 a year the tax rates would be around 80%. When the committee looked at increasing everyone's taxes to balance the budget over 10 years, taxes would have to go up to 49% across the board. If you think that you stay in the 24% tax bracket and not be affected by the current fiscal situation the math isn't looking good. What if the government didn't want to balance the budget but just maintain the current deficit? The top tax rate would have to go up to 60%, or if applied across the population no matter how much they earned, everyone would have to pay a 42% tax rate. Our fiscal condition is more dire now due to Covid-19 so these numbers aren't drastic enough. The moral of the story is that our current financial crisis is irreversible and can't be solved by just taxing the rich, the only solution is to broaden the tax base. When you confiscate 100% of what people make you encounter the Laffer Curve. At whatever the cut off point is those people will just stop working and you will ultimately kill the economy. You also need to keep in mind that when a politician talks about taxing the rich today, they are talking about using that money to fund another program, not to deal with the debt crisis. Taxing our way out of the problem isn't going to work very well, even if we taxed everyone in the country and spread the burden out, let alone just by taxing the rich. You are not immune to tax increases just because you're not in the top 1% in terms of wealth. Mentioned in this Episode: Can We Fix the Debt Solely by Taxing the Top 1 Percent? https://www.crfb.org/blogs/can-we-fix-debt-solely-taxing-top-1-percent

David moved his family to Puerto Rico about three years ago and within six weeks of arriving they experienced something that completely changed their lives. It's been three years since Hurricane Maria hit Puerto Rico, but there are still residents with significant damage to their house. When deciding to move his family to Puerto Rico, the idea of a hurricane wasn't even a concern since the last major hurricane to hit the island had happened in 1928. Unfortunately for David and his family, Hurricane Maria turned out to be a category 5 direct hit. While the damage to the house was significant, the damage and destruction of the surrounding rainforest was tragic. With resources running low once the storm had passed, the McKnight family was forced to evacuate. David had to drive around for an hour in order to find a place with a strong enough cell phone signal so he could call and reserve plane tickets for him and his family. David's family was able to board and evacuate safely but his own reservation was canceled and he had to scramble to reserve another flight. All lines of communication were down for several days but against all odds David's friend Brian was able to secure a ticket. Puerto Rico struggled for months after the storm to restore electricity and lines of communication while rebuilding the damaged infrastructure, with many areas still suffering the effects of the hurricane three years later. Prepare for the storms of life no matter what form they take, preferably before the storm is about to hit. Not every experience has a financial lesson, but Hurricane Maria taught David something very valuable, namely cataclysmic events happen when you are least expecting them. Take some time now to prepare for the contingencies that life can throw your way because there is always something unexpected in your future.. The story ends well with David and his family moving back into their house in Wisconsin that hadn't sold yet. His kids were able to complete their school year in their old neighbourhood and they were able to move back to Puerto Rico over the summer once the situation had mostly returned to normal. If you like warm weather, good people, and big tax benefits, Puerto Rico is a place you should consider moving to.

Not everybody is going to get an inheritance but there are some very important strategies you can implement to minimize your taxes if you are going to receive one. The ultimate goal of the IRS, no matter how you inherit money, is to get all of the inheritance money into your taxable bucket within the next 10 years, preferably immediately, because that is how they make the most money. We know that if you inherit money from a taxable bucket you get a stepped-up basis for those investments. Since these investments end up in your taxable bucket, you're going to pay ordinary income tax on that. When you inherit money from a tax-deferred bucket it goes into your tax-deferred bucket, however the IRS will force you to realize that money within a ten-year timeframe. If you inherit a tax-free investment like a Roth IRA you will continue to experience the tax-free growth over the next ten years, but at that point it will all go into your taxable bucket. The goal of the IRS is to always move your money into the taxable bucket whenever possible. Your job upon inheriting money is to put together a plan that moves the money over into the tax-free bucket as quickly as you can. When you have money in your taxable bucket, there are a number of different things you can do to get that money into the tax-free bucket. The first step is to make sure you and your spouse are fully funding your Roth IRA's, as well as your Roth 401(k)'s. The easiest way to get money into your Roth 401(k) is to increase the amount of money coming out of your paycheck to fund your account, and then compensate for that reduced pay amount with the money from the inheritance. Remember there is an ideal amount of money to keep in your taxable bucket and a great way to spend that money is by paying the tax on Roth conversions. The final way to move an inheritance into the tax-free bucket is the LIRP. There are a number of advantages that come with the LIRP and the only thing really limiting you is the size of your death benefit. The ideal way to have money flow to you is through the tax-free bucket. If it comes to you in your taxable bucket at the peak of your earning years when taxes are higher than they are today you could end up losing up to 50% of those inherited IRA's. If it's not too awkward, you should be having this discussion with your parents to figure out a plan that allows them to convert their dollars to tax-free. Keep in mind that when one parent dies, the surviving parent's tax bracket doubles and they will be forced to receive their Required Minimum Distributions and pay taxes at double the tax rate. It makes a lot of sense for everyone involved to preemptively shift those dollars to the tax-free bucket. If you're building your Power of Zero retirement strategy right now and know you are going to be inheriting a large sum of money in the next 10 years, there are a number of things you can do with an LIRP to make it big enough to accommodate those dollars. Get your buckets in place to accommodate any future dollars you may be inheriting.

A Coronavirus-Related Distribution (CRD) is any distribution by a person diagnosed with Covid-19, this can also include a spouse or dependent. Alternatively, if you've been adversely affected by the Coronavirus in some way, for example being furloughed, you may qualify as well. The CRD allows you to withdraw up to $100,000 from your qualified plan and if you're younger than 59½, the 10% penalty is waived. Another benefit is you are allowed to pay the money back over the course of the next three years. The IRS treats this as a rollover instead of a contribution so you're not constrained by the traditional contribution limits. This is where the Roth Conversion loophole comes in. You have the opportunity to recharacterize the money and contribute it into a Roth IRA, and because of the extra benefits that come with the CRD, it's possible to avoid the 10% penalty you would normally face. This provision allows for someone younger than 59½ to take the money out, retain a portion of it for taxes, and put the rest into their Roth IRA. David runs through a hypothetical example of what this means for the average taxpayer under 59½. The question is whether this strategy is morally permissible for someone affected by the Coronavirus. The spirit of the rule suggests that the answer is yes but only if you are actually adversely affected. This is a loophole, and what do we know about loopholes? When they get abused, eventually the IRS catches on. The IRS reserves the right to change the rules, and if they think people are abusing the CRD, they may come after the people they believe took advantage of it. This doesn't diminish the importance of taking advantage of Roth Conversions. This is the greatest opportunity in the history of our country to do Power of Zero-type planning. There are two sales going on right now, taxes are historically low at the same time as the stock market is down. The CRD Roth Conversion loophole is available for those that want to take advantage of it, but if you haven't actually been affected by the Coronavirus it could cause you problems with the IRS in the future. Check out The Hallmarks of a True Power of Zero Advisor podcast episode to learn how a true Power of Zero advisor can help you set up multiple streams of tax-free income.

The US is very likely to default on its debt at some in the future, but we're just not sure exactly when. What we do know is that the sooner it happens to smaller the impact will be, but that doesn't seem like it's going to be the case. The reality of our financial situation as of May of 2020 is the US is on course for a $3.7 trillion deficit this year. According to Jerome Powell, we are going to need another stimulus package and could be looking at a deficit of over $5 trillion, a number which normally takes five years to reach. All of the predictions made in the past have all been accelerated because of the increased deficit spending this year. For governments, it's more attractive to raise taxes than it is to default on their debt because of the devastating consequences of doing so. Essentially, if Congress declines to raise the debt ceiling the US Treasury Department can no longer issue bonds and the federal government wouldn't be able to fund all its obligations. We have to understand the implications of default. The current debt to GDP ratio of the US is 110%, but it's actually much higher than that if you include unfunded obligations like Social Security, Medicare, and Medicaid. Timothy Geitner once discussed the implications of what would happen if Congress did not raise the debt ceiling and how it would impact everyone. Defaulting on the debt is not the same as a government shutdown. It's far worse. The second way the US could default on its debt would be by not paying the interest on the debt, in which case the value of the US Treasuries would drop like a rock and come with its own set of major problems. In the case of a debt default interest rates will also rise dramatically because creditor countries will justifiably see the US as more risky. Other countries would no longer be willing to finance our debt spending unless we pay a lot more. Even the threat of debt default is bad, when the credit rating of a country is downgraded interest rates go up and the effects can be felt throughout the economy. A debt default would also affect the stock market as investments in the US would become riskier as people and countries no longer see the US as the safe haven it used to be. This would precipitate a global depression. The first opportunity for debt default comes in 2035 but it could come sooner. The surest way to prevent a debt default is to prevent budget spending that leads to additional debt and raise more revenue. The trouble is reducing spending isn't going to be easy. As we accumulate more debt and march into the future, the likelihood of taxes going up becomes all the more inescapable. The cost of servicing the debt will eventually become such a huge part of the budget that the government will have to look for revenue raising activities to pay its bills, i.e. taxes. For people saving for retirement they have to position themselves with the right amount of dollars in the right buckets. You should have six months of expenses in your taxable bucket, a balance low enough in your tax-deferred bucket that your RMD's are equal to or less than your standard deduction, and everything else systematically shifted over to your tax-free bucket.

The federal government has waived the Required Minimum Distributions for 2020. There are 20% of Americans who don't spend their RMD's which means that 80% of the population relies on those RMD's to pay for daily expenses. This change affects anyone who had an RMD due in 2020 from their 401(k), IRA, and other retirement accounts. The IRS takes the value of your account in December of the year prior. In this case the stock market of December 2019 was considerably higher than it is now. Over the past few months the Dow Jones has declined by over $4000. In a normal year you would be forced to take the RMD on the value of the account as determined at the end of the previous year. The problem now is that this means the IRS is essentially forcing you to sell low. Even if you don't need the money at this point in time, you will no longer be able to benefit from the tax-deferred nature of your IRA and will now have to start paying 1099's on any growth you experience. The last time this was done was in 2009 after the collateralized mortgage debt crisis. Sidenote: We went from $24 trillion to $25 trillion in debt in a little over a month. In one year we may be up another $4-$5 trillion in debt. We are accumulating debt at breakneck speed which means the low tax rates we are enjoying right now are all the more a good deal. When you take an RMD, you have to put it into your taxable bucket. You do not have the luxury of converting it to a Roth IRA, but this year you now have the ability to put it into your tax-free bucket instead of with a Roth conversion. This won't make a huge difference in your finances overall but every little bit helps as we move into a period in history where tax rates are going to be dramatically higher than they are today. Keep in mind that Roth conversions can no longer be undone, so you must be confident that the tax rate you are paying right now is lower than it will be in the future. The only downside is that for people that need the funds to sustain their lifestyle will not be able to take advantage of this situation. We have six years to take advantage of historically low tax rates and this is a nice opportunity for the 20% of America that doesn't need those RMD's and can take advantage of a Roth conversion. Another advantage is that because the stock market is currently down you are going to be paying taxes on a lower amount. Let's pay that lower amount and get the rest into the tax-free bucket to let it recover and compound. There is an opportunity for those that don't require their RMD, but they have to take advantage of it by taking action now.

Can you be in the 0% tax bracket and still be a good citizen?' is a common question that David gets fairly frequently. David relates an exchange he had with a listener on Facebook where they stated that paying less taxes is inherently selfish and paying taxes is how we take care of people as a society. Most people have the thought of "what happens to society if everyone is in the 0% tax bracket?" The trouble is they are coming at the question from the wrong angle. Everyone who earns an income will be paying income tax. The only way to not pay taxes is to not be working and basically be in poverty, the income you earn is below your standard deduction, or you're retired and have done all the heavy lifting of positioning your money to tax-free. Are we in danger of having 78 million Baby Boomers being in the 0% tax bracket? Not really, at this point, there is still $23 trillion in the cumulative IRA's and 401(k)'s in the country and only about $800 billion in the Roth IRA's and Roth 401(k)'s, which is about a 25:1 ratio. Even when people do hear the message of the Power of Zero paradigm they don't always act on it. Even though people believe that tax rates are going to be higher in the future, they are not doing anything about it. There is an incongruency between what they believe and what they do. That means we are marching into a future where tax rates are going to be higher than they are today and advisors have a lot of heavy lifting to do to get the message out. "Over and over again the courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike, and all do right for nobody owes any public duty to pay more than the law demands." -Judge Learned Hand The tax code actually encourages us to pay as little taxes as possible. David uses the analogy of a toll road and the question of using a different route. The question comes down to when you are paying the taxes, not if you are paying taxes. You can either pay taxes now at historically low rates or you can postpone the payment of those taxes until the future when taxes are likely to be much higher. People can feel perfectly guilt-free for taking advantage of tax rates while they are low. There is simply nothing wrong with appreciating the fiscal landscape of our country and that a revenue-hungry federal government is going to have to pay for their bills one way or another. It is perfectly moral to keep as much money that you have earned and saved within your own pockets as you can. You are completely within your rights to pay your taxes today while they are historically low instead of waiting until the tax sale is over in 2026. Mentioned in this episode:https://www.amazon.com/Tax-Free-Income-Life-Step-Step/dp/0593327756/ref=s_nodl

Families that aren't quite rich enough to be affected by the Estate Tax, but have built wealth over time, have another benefit available to them called the step-up-basis loophole. Essentially, what happens with the step-up-basis loophole is when you pass on an investment to your beneficiaries, the present value at the time of your death becomes the new basis for that investment. This will wipe out the capital gains on that investment and can be a great deal which compares favourably to inheriting a Roth 401(k). Anything over $23.16 million in your estate will be subject to a punitive estate tax of 40% when you die. But if you have an estate that is worth less than $23.16 million in your taxable bucket, that money can go tax-free to the next generation. What happens to loopholes as time wears on? They become the target of a revenue-starved federal government. There are four reasons why, while this may sound like it compares favorably with a Roth IRA, it is not the best idea. If you receive dividends from one of your investments, even if you reinvest them back into the stock, you are going to have to pay tax on them which can stymie the growth of your stock portfolio. Because you have to pay tax on those dividends, you are exposed to tax rate risk along the way. Should taxes raise dramatically over time, so will the taxes on those dividends. You also have to remember those dividends count as provisional income which could affect your social security. The step-up-basis loophole is also going to come under fire as the country slides into insolvency and the government's national debt starts to skyrocket. Joe Biden is currently proposing that the step-up-basis loophole be closed, which would mean that you would inherit the original basis of the investment. This would also mean that you would have to pay long-term capital gains on the difference. If you have an annual income greater than a million dollars, you would be required to pay the difference between the basis and the current value at your highest marginal tax bracket, which means you will be paying very close to the 40% estate tax that you wouldn't otherwise be subject to. Big taxes are coming down the road and letting your stocks grow in your taxable bucket will be a bad idea. Lawmakers have their sights on the step-up-basis loophole in the near future. Some people believe the current tax law is even better than the Roth IRA because you won't have the same requirement of spending the money down over the next ten years. If you are building your financial plan around this loophole being around for the next 10 to 15 years from now, you're going to be disappointed. We have to start looking at the four to six different streams of tax-free income for retirement. Life insurance has been around forever and like the loophole we are discussing, it allows you to pass money onto the next generation tax-free but won't be in danger of being eliminated. Make sure that you are maxing out your Roth 401(k)'s, Roth IRA's, taking advantage of Roth Conversions, and funding your LIRPs. These are all things that are going to be immune from the tax changes coming down the pipe. We are going to be looking at higher tax rates in the future, Republican or Democrat, it doesn't matter. It's just a question of time before the loophole is closed so we have to start planning with the expectation that it won't be around when we die.

Should you be contributing to your Roth 401(k)? The short answer is yes because anything with the word Roth in front of it is truly tax-free. What does it mean to be truly tax-free? Roth 401(k)'s pass both litmus tests for what makes something tax-free. If you're younger than 50, you can put in $19,500 each year, and if you're over the age of 50, you can catch up a bit with an additional $6,500. You can also still get the match when contributing to your Roth 401(k). Your company will put those dollars into your tax-deferred bucket. It's okay to have some money in your tax-deferred bucket because the IRS is going to force you to take money out of that bucket at age 72, but you will be able receive up to a certain amount of money tax-free because of your standard deduction. In many cases, this can mean that you can put pre-tax dollars into your tax-deferred bucket and get a deduction on the front end. It will grow tax-deferred, and you'll be able to take it out tax-free. It's ideal to have multiple streams of tax-free income and Roth 401(k)'s fit into the typical strategy that David recommends to his clients. There is a big difference between Roth 401(k)'s and Roth IRA's. With a Roth 401(k), the IRS will force you to take the required minimum distributions at age 72 for the same reason they force your beneficiaries to withdraw money from an inherited Roth IRA. They want that money going back into circulation so it can be taxed again. The strategy around this is to roll Roth IRA dollars into a Roth 401(k) account, but you have to be aware of the different rules around the Roth 401(k) first. Roth IRA's have a five-year holding period, similar to Roth 401(k)'s, but they function differently. If you don't currently have a Roth IRA, open up one now and start your five-year clock. Keep in mind that any money rolled from a Roth 401(k) into a Roth IRA will still have to contend with the ten-year window your beneficiaries will have to spend down the account when they inherit the money. If you only have enough money to fund your Roth 401(k) up to $26,000 per year but that doesn't leave anything left over for the LIRP, what should you do? You need both, so a good strategy is to put enough into your Roth 401(k) to get the maximum match and the rest into your LIRP. Don't put yourself into a position where it's either/or. Instead, put yourself into a position where you can get the best of both buckets. You should be doing a Roth 401(k), so reach out to your human resources department to add one. Not only will you benefit, but your fellow employees will as well.

Under what circumstances should a single person want to own an LIRP? There are a number of scenarios where it can make sense, but it definitely depends on the individual's situation. We have to remember the primary motivation for having life insurance is having death benefit, but there are a few close second reasons. Using the death benefit in advance of your death to pay for long-term care is one such reason. With sufficient long-term care insurance, you are able to call the shots and have the long-term care performed in your home, which studies have shown also leads to longer life expectancies. Without long-term care as a single person, you will end up spending down all your other assets in order to pay for it until you basically run out of money and end up qualifying for Medicaid, which is not something you really want to qualify for. Medicaid facilities are typically of the government's choosing and there is often a wide disparity in the quality of care you will receive when compared to a facility paid for by your LIRP. Should you find yourself unable to do two of six activities of daily living, the LIRP will allow you to take 25% of your death benefit in advance of your death for the purpose of paying for long term care. More and more people over the age of 50 are getting LIRPs mainly because they want to be able to call their own shots when it comes to long-term care instead of being forced into a Medicaid-funded facility. The second big reason has to do with your IRA. If you want to control how your beneficiaries spend your IRA money, you can't really do it due to the new retirement laws introduced earlier this year. The third reason is you want your money to grow safely and productively. Some LIRPs have a growth account that is linked to the upward growth of a stock market index. If the index were to go out in any given year, your account is credited a zero. Historically, this will net you 5% to 6% after fees. This allows you to use the LIRP as a functional replacement for the bond portion of your portfolio. If you have too much money in your taxable bucket, it may not seem like a big deal until you crunch the numbers on all the inefficiencies and find it can cost you hundreds of thousands of dollars. Many of these benefits of the LIRP are very useful to a single person, but the most important is being able to access your death benefit in order to fund long-term care. Visit the Medicaid-funded facility in your area and see what you think about it and then consider how an LIRP can allow you to ride out a long-term care event in your own home. A lack of income limitations are another important factor in the LIRP that essentially allows a single person with an income greater than what they can put into an IRA access to an unlimited bucket of tax-free dollars. The tax freight train is accelerating due to the Covid-19 stimulus package so be prepared.

David often gets questions from people asking why they would want to liquify their investment portfolio to fund their annuity, especially now with the markets being down due to the coronavirus. There is an inverse relationship between stocks and bonds, when stocks are down bonds are up. Annuities and the LIRP share a lot of similarities and effectively replace the bond portion of a portfolio. Annuities can be superior to bonds for seniors, giving them high, guaranteed payments for the rest of their lives that allows them to be more aggressive with the rest of their portfolio. Basically, an annuity that guarantees a stream of income for your lifetime functions like the bond portion of your portfolio. If the stock portion of your portfolio is down, that means that the bond portion is up. If you want to guarantee a portion of your income, it may make sense to simply replace the bond portion of your portfolio with an annuity. Once you start drawing income from the annuity it continues to function as the bond portion of your portfolio and in many cases because of the growth mechanism internal to the annuity gives it the opportunity to keep up with inflation over time as well. If you just qualified for a LIRP, you may have the same question in your mind. Why do it now while the stock market is down due to the coronavirus? The key to remember is that you won't be cementing your losses in the stock portion of your portfolio, you fund it through the bond portion which happens to be doing great right now. When the stock market recovers, the stock portion of your portfolio will grow along with it. Now is an excellent time to start repositioning money to tax-free. Every year is a window of opportunity to take advantage of historically low taxes. You can also take advantage of the cost of a Roth conversion based on the depressed value of your assets. If you're concerned about the losses in your portfolio, you have to remember that the LIRP and annuities are designed to replace the bond portion of your portfolio, not the whole thing. They actually reduce the overall risk in your stock market portfolio while giving you higher rates of return. Don't wait for the stock market to recover, just think of an annuity as a more effective and efficient bond and if you're over the age of 50, the LIRP is also a heartburn-free way of mitigating long term care risk. Retirement economists are unifying their voices and saying that your stock market portfolio will last longer if you guarantee a portion of your retirement income.

Investors need to understand the latest coronavirus stimulus bill that was just passed. Investors can now take out up to $100,000 from their 401(k) or IRA prior to age 59 and a half without any penalty. The bill has also increased the loan size you can take out from your 401(k) to $100,000. Another big piece of news investors should be aware of is that required minimum distributions are going to be waived for 2020. The question is how will the IRS fill the hole in the federal government's revenue for the year. This coronavirus bill is twice as large as the previous economic stimulus bill in the wake of the 2008 mortgage crisis. This is the single largest stimulus bill in the history of the world. A quick breakdown of where the $2.2 trillion will be spent over the next few months. Stimulus checks will be sent out. Individuals who make up to $75,000 per year will receive a $1200 check from the government. Couples who make up to $150,000 per year will receive a $2400 check. For individuals who make more than those thresholds, they will gradually reduce the amount of money being sent out. Additionally, parents will receive an additional $500 per child. People that have their automatic bank deposit info on file with the IRS will receive their money in the next two to three weeks, those that don't will be mailed a check but who knows when that will occur. There is already a push for another stimulus bill beyond the first, specifically with pressure from Nancy Pelosi, that aims to increase the benefits for food stamps, increase the amount of money going to regular Americans, and introduces some environmental restrictions on airlines. There is a lot more spending and money printing/borrowing coming down the line, including a plan for the US Treasury to mint two $1 trillion coins and deposit them in the Federal Reserve. This is essentially an exercise in playing around with Monopoly money. There are universal financial laws at play here, and when you violate them there is always a chicken that comes home to roost. Money is valuable because it is scarce and creating more makes it less valuable and precipitates inflation or hyperinflation. According to the New York Times, the stimulus is going to be financed by borrowing money. When asked how the government is going to pay for this additional spending, they claim that they will actually be reducing taxes on top of the spending. There is always an unintended consequence of printing or borrowing money. This increase in spending will accelerate everything that we've been talking about on the podcast and that includes massive inflation. Countries will likely stop loaning the US money unless we raise interest rates in the near future. Low-interest rates mean the loan is riskier for those countries so they are less likely to make them. Increasing interest rates will only make servicing the existing debt that much harder and will likely lead to a financial crisis much sooner than would have otherwise happened. 2030 will be a year of massive consequences for the US, and this stimulus bill may even bump that up to 2029 or 2028. We are essentially running a deficit of $3 trillion this year and that will have major consequences for the economy going forward. This is only emphasizing how important the Power of Zero paradigm is for your retirement.

The coronavirus downturn in the market is actually the perfect time to do a Roth Conversion because of the double sale that's going on. The first sale involves the next six years where we get to enjoy the lowest tax rates we are likely to see in our lifetimes. The second sale is due to the 35% drop in the stock market, your assets are now at much lower values and that means the tax on a potential Roth Conversion is also 35% lower. If you were to hypothetically convert a $1 million IRA this year your tax bill would be approximately $299,112 or a 29% effective tax rate. If you take in the decline in the stock market of 35% your tax bill is a little more than half. If the stock market goes through a massive recovery over the next few years having done this Roth Conversion, all of that recovery occurs in your tax-free bucket. If the market is down 25%, your portfolio has to recover 33% to get back to where you started. If the market drops 50%, you need a 100% recovery to get back to even. Where would you prefer to have that recovery occur, in your tax-deferred bucket or your tax-free? You have the opportunity to take advantage of a double tax sale right now. Your assets are 35% lower than they were about a month ago and that means the cost of getting into the tax-free bucket is on sale right now as well. There are a couple of caveats to be aware of. If you decide to undertake a Roth Conversion right now and don't have the tax withheld by your custodian, you don't want to delay paying the tax because you will end up paying penalties and fees. No matter your age, the very best place to pay for the taxes of a Roth Conversion is out of your taxable bucket. If you have more than six months worth of expenses in your taxable bucket you have some inherent tax inefficiencies in your portfolio that can cost you hundreds of thousands of dollars over your lifetime. Let's use our least efficient bucket to help move money into our most efficient bucket. When you contribute to a Roth IRA you have to use cash. That can be problematic because there can be lots of movement in the market when you liquify parts of your portfolio. You can't predict what is going to happen with the market which is why the Roth conversion is so useful. The Roth Conversion allows you to do a like-kind transfer where you can transfer shares you own from one account to a Roth IRA. This insulates you from the rise and fall of prices while you cash out from the market. If you want to get into the zero percent tax bracket, you have a huge opportunity right now. The market will likely recover at some point in the future, and that means there are a number of great deals to be had right now. Ideally, your assets will be able to recover in the tax-free bucket and there is a big opportunity to do so in this market downturn.

A common question that David gets fairly frequently is whether or not the LIRP can be a substitute for the bond portion of a portfolio. A lot of people are funding their LIRP's out of stock market portfolios that are growing at an average rate of 8%. If that's the case and they take money out of that portfolio to get a 4% return in their LIRP, doesn't that neutralize the tax benefit that justifies doing the LIRP in the first place? It can make sense for the LIRP to function as the bond portion of your portfolio, so long as you are actually funding your LIRP out of the bond portion of your portfolio! Due to the recent precipitous drop in the stock market this question is popping up more often, but the stock market may be down but the bond market is not down nearly as much. Back in 2008, both the stock and the bond market went down at the same time. In that situation taking some money to fund a LIRP makes sense. You have to recognize that if you are funding your LIRP out of your retirement portfolio, it makes sense to liquidate the bonds when the markets are down to fund your LIRP. This could also hold true with a fixed index annuity. If you're transitioning money from the bond portion of your portfolio to your LIRP, you should take a little more risk in the stock market in the meantime because a LIRP is typically less risky than the average bond portion of your portfolio. If you are barely retired, most of the money you are planning on spending in retirement has even been earned yet. If you want your money to last as long as you do, you need to continue to grow that money over the course of your retirement. If you take money out of your stock market portfolio during the first ten years of retirement you are exposing yourself to the sequence of return risk and if it's done during some down years it could send your portfolio into a death spiral from which it will never recover. Having two to three years' worth of lifestyle expenses in your LIRP is how you want to cover expenses during the two or three down years you are likely to experience in the first ten years of retirement. If you're just retiring now, you're going to have to fund it over the next five or six years and let it sit. You don't want to touch the money until the eleventh year, there are some fees and expenses involved in the first ten years and it doesn't make sense to tap into yet. If you don't have a funded LIRP that can cover the first ten years of retirement, your best bet is to have your lifestyle needs allocated to a time segmented portfolio. The reality is that the LIRP can certainly replace the bond portion of your portfolio. Annuities are great because they can function as the best kind of bond, with higher rates of return and less risk, and can also allow you to take more risk in the rest of your stock market portfolio. As you are transitioning your money to your LIRP from the stock market portfolio and as long as you are increasing the risk in the stock market allocation, you are likely going to get a higher rate of return with less risk overall. You have to grow your money in retirement, this is not the time to go into hibernation mode.

The two single greatest threats to your retirement are tax rate risk and longevity risk. The Power of Zero paradigm is the unified approach to mitigating both of these risks. As of March 9, 2020, the stock market is down 19% from its peak in February which has erased a lot of the returns from 2019. The infections of the Coronavirus are doubling approximately every six days. Around mid-May that doubling interval should start to taper off. People over the age of 70 are at the most risk from serious complications. Everyone else practicing safe social distances and taking precautions will help. There is a lot of panic in the media at the moment. The main concern of the federal government is that the number of infections will overwhelm the nation's healthcare system. We are not going to avoid 90 million people getting infected, but the longer we can draw out the window of time we can give the US healthcare system the time to deal with the situation. One of the biggest drags of your retirement, it's not taxes or fees, it's emotion. Investors left to their own devices make horrible decisions when it comes to stock market investing. Emotion-driven investments could knock about 3% of your expected portfolio returns. The worst thing you can do is say "I know when the bottom of the market is, and I know when to get out and when to get back in." You can't predict the market, if you got out before the crash in 2008, you weren't prescient, you were lucky. Don't panic. This situation highlights the importance of being able to guarantee your retirement income adjusted for inflation, so you don't have to panic when the stock market goes up and down. The money in your stock market portfolio should be earmarked to cover your discretionary lifestyle expenses. The LIRP can be a great compliment to your stock market portfolio to cover lifestyle expenses. When you have your lifestyle guaranteed by a combination of social security, a pension, and a guaranteed lifetime income, you have the luxury of not having to worry about the stock market as much. If you are funding your lifestyle needs right now you are probably freaking out at the moment. A guaranteed lifetime income also allows you to take more risk in retirement. If you are retiring now, the vast majority of your money that you are planning on spending has not been earned yet. You have to be able to take some risk in the stock market in order to earn returns that will allow you to properly fund your retirement. The people relying on the 3% or 4% rule and the returns of the stock market to be able to pay for their lifestyle don't have the luxury of enjoying their retirement. They have to be in hibernation mode in retirement and tend to be more stressed and die earlier. For all intents and purposes, the guaranteed lifetime income becomes the bond portion of your portfolio. It allows you to invest the rest of your money in a more aggressive stock allocation which means your money lasts longer. Do your part to stretch out the window of coronavirus infections so the healthcare system has more opportunity to deal with the situation. Don't panic about the market. Studies have shown that panic will erode your returns. With a guaranteed lifetime income, you don't have to worry about where your next paycheck is coming from.

It's easy to forget how bad the fiscal situation of the United States actually is unless we are being constantly bombarded by experts telling us the truth of the matter. A recent article details a coming report from the Comptroller General. Come March 12, the Government Accountability Office is going to put out an assessment of the fiscal health of the federal government and unsustainability is the key takeaway. The Comptroller General put out a similar report in 2019 and not only has nothing changed since then, but the situation has gotten much worse. The debt is now over $23 trillion and it doesn't seem like the government is heeding its own warnings. Officials can't continue indefinitely spending more than the government receives in taxes without incurring staggering long term costs to borrow from China and other lenders. Due to the coronavirus, the Federal Reserve has just reduced interest rates .5%. Their speculation is that interest rates will stay low for the foreseeable future. The trouble is the expected interest rate for future debt will likely be higher than historic averages as the US becomes riskier to lend money to as time goes on and the debt to GDP ratio continues to increase. The imbalance between spending and revenue that is built into current law will lead to the continued growth of the deficit. The situation where the debt grows faster than the GDP of the US means the current federal fiscal path is unsustainable. Historically, debt compared to GDP has averaged 46%. We are now at 109%, which is worse than it was in the wake of World War 2. But that doesn't count the off the books transfers like Medicare, Medicaid, and Social Security as part of the debt that every other country in the world includes in their accounting. The true debt to GDP ratio is close to 1000%. We are going to pay the interest on our debt, which is money that is taken off the table from other programs. Interest payments are non-discretionary spending. If the US defaults on its debt it will have major economic impacts on every country on the planet. The growing interest payments are going to crowd out all the other expenses in the budget, but we have to pay it so ultimately we are painting ourselves into a corner. As the debt continues to grow and other countries start to believe that the US will not be able to pay that money back, the interest rates on the loans will only get higher and higher over time. For the second year in a row, the highlighted word in the Comptroller General's report is unsustainable. More skeptics are coming over to the Power of Zero way of thinking every day. We are at a period of historically low tax rates. Every year between now and 2026 is a window of opportunity to take advantage of that fact. Every year beyond 2026 is potentially a year will you be forced to pay the highest tax rates you will see in your lifetime. Never in the history of the US has there been a more appropriate time to adopt the Power of Zero paradigm. Mentioned in this episode:https://www.theepochtimes.com/comptroller-general-will-again-tell-congress-governments-financial-situation-is-unsustainable-but-will-anything-change_3257865.html

If you're between the ages of 50 and 65, there is a good chance that you have at least one parent or in-law that is going through a long-term care event. This may lead you to wonder how you are going to deal with your own long-term care events in the future. The government may be picking up the tab, but people in Medicaid-funded long-term care facilities tend not to live as long as at other facilities. A lot of people in that age range have a false sense of security around how they are going to finance their long-term care events, assuming they will be able to pay for everything out of their IRA or 401(k). The average stay in an assisted living facility is just over two years, but research shows that people receive some form of long-term care in their home for an average of three to six months. Sixty percent of those people in the assisted living facility will go on to spend up to an additional two years in a nursing home. When you add up the averages, you can expect to be in some sort of long-term care situation for four to five years, which is much longer than most people think is the case. Long-term care costs are not uniform across the country, but you can expect to spend around $100,000 after taxes per year of long-term care. There are other expenses that people don't think about known as shock expenses. These can include things like unexpected health care costs. All told, you can expect a total cost of somewhere around $400,000 a year. In order to net just $100,000 in distributions you need to figure out your effective tax rate, but you also have to keep in mind that since tax rates are going to be dramatically higher in the future those numbers are going to increase as well. People who will need long-term care in the future may have to deal with an effective tax rate of 40%, which means you would need $166,000 before taxes to cover your long-term care expenses. And that's assuming the costs of long-term care don't rise in the next twenty years, which is highly unlikely. Are you going to have over $1 million in your IRA's and 401(k)'s at the age of 85? Most people tend to spend the majority of their retirement money in the early years when they are still mobile. In a rising tax rate environment, it is not a smart move to pay for your long-term care out of your tax-deferred bucket. This is why the L.I.R.P. is something we recommend to cover your long-term care expenses. With an L.I.R.P., you can spend your death benefit in advance of your death in order to cover long-term care expenses. Instead of waiting and hoping you have enough money when you need it, why not proactively pay taxes on that money and position them in tax-free vehicles like the L.I.R.P.? That way, you can have guaranteed access to the cash when you need it. We have to remember that tax rates in the future are going to be much higher than they are today and long-term care costs are likely to be much higher as well. If we can pay taxes preemptively, we are going to be in a much better position to pay for these long-term care costs. If you are between the ages of 50 and 65, you are likely in a position to do something about your long-term care needs without the heartburn that a generation of Baby Boomers are likely to feel. Medicaid doesn't step in until you have spent all your money as a married couple down to $128,000 and is the least efficient way to pay for long-term care. You can literally burn through a lifetime's worth of savings in just a couple of years because you didn't plan ahead of time and are forced to pay for long-term care expenses out of your tax-deferred bucket.

99.5% of all annuities are not in the right bucket. There are many reasons to use an annuity: they can be safe and productive, they safeguard against market risk while participating in the upward movement, and many people use them for a guaranteed stream of income. The alternative to annuities for creating a stream of income is the stock market but that approach comes with a set of rules including the previously discussed 4% Rule. When you factor in present conditions, the 4% Rule no longer holds true and it's now more like the 3% Rule. In order to live your target lifestyle with the stock market strategy, you would typically have five options: you can save more, spend less, work longer, die sooner, or take more risk in the stock market. Most of those options don't appeal to people, but there is an alternative with annuities. One of the more common ways of solving this problem is using a single premium immediate annuity. The appealing part of this option is that you don't need nearly as much money upfront to live your target lifestyle. The downside is that if you die early, that money is gone. Some people will use a fixed-index annuity, where the growth of the annuity is fixed to the growth of an index in the stock market. The trouble is that nearly every single annuity is in the tax-deferred bucket. Let's say you decide to draw an income from your annuity. It's going to feel like it's coming from a pension and that means it will be exposed to tax rate risk. If tax rates go up, the portion you get to keep goes down. The reason people are getting a guaranteed lifetime stream of income is they want a guarantee that it will cover their lifestyle expenses when coupled with their social security. If tax rates go up, and we expect them to, that stream of income will not cover your lifestyle expenses and that means you will have to spend down your other assets much faster than you expected Those spare dollars are meant to cover aspirational expenses or shock expenses and spending down this pool of resources will cause you problems down the road. Like a pension, if you draw from an annuity in your tax deferred bucket, it will count as provisional income and counts against the threshold that determines if your social security gets taxed. When your social security gets taxed, you run out of money 5 to 7 years faster. If most annuities are in the tax-deferred bucket, this will force people to pay tax on their social security in a rising tax rate environment. They are going to keep less of their income than they thought they would, and it's going to force them to spend down their non-annuity assets that much faster. There is a way to get the annuity in the tax-free bucket. When most people retire with 401(k)'s or IRA's and they roll them into an annuity, they typically get stuck. This is why it's crucial to use an annuity that allows you to use the Roth conversion option at your leisure. There are four companies that allow you to take advantage of an internal Roth conversion feature that allows you to shift your annuity over to the tax-free bucket. Having an annuity in the tax-free bucket is much closer to the idea of a guaranteed stream of income and it allows you to take much more risk in the stock market. You won't be as constrained and can allow the market to go up and down without being exposed to the same level of tax rate risk or sequence of return risk. There are a number of benefits to having your annuity in your tax-free bucket as opposed to being stuck in the tax-deferred bucket. If you're contemplating getting an annuity, ask your advisor if you're getting one that will have to stay in the tax-deferred bucket. Specifically ask if the annuity allows for internal piecemeal Roth conversions.

Historically, people who had large IRA's, and who didn't want their beneficiaries to squander their inheritance all in one year, could use a trust to make sure the funds were released over the course of their lifetime. However, due to the recently passed Secure Act, that beneficiary will be forced to spend down that money over ten years or less. The good news is that there is a way to control the flow of money in a similar fashion despite the legislation. Since it makes sense to pay taxes now while taxes are still currently historically low, Roth conversions are one way you can do that, but Roth IRA's won't solve the inheritance problem. This is where life insurance comes in. We know that life insurance can be owned by a trust, and this trust can be required by law to distribute those dollars per the language of the trust. The bottom line is life insurance gives us some flexibility in terms of passing money on to the next generation and being able to control how that money gets distributed. Instead of preemptively doing Roth conversions with a large IRA, you would instead pay taxes preemptively at historically low tax rates, and then contribute that money to a life insurance policy that is owned by a trust. Your beneficiaries will not get that money in any other way than the way the trust prescribes it. Life insurance trusts are much more flexible and simple, and you don't have to navigate a bunch of difficult tax laws. As great as this strategy is, it doesn't solve the problem of keeping the money growing tax free over the life of the beneficiary in the way it would with the previous form of the stretch IRA. The IRS is getting wise and is now requiring beneficiaries of Roth IRAs to spend that money down over the course of ten years. If a beneficiary inherits a huge IRA or Roth IRA, they will need a tax-free receptacle within which they can continue to grow that money tax-free over their lifetime. One of the things that we know about life insurance is that there is no limit on how much money that you can put into the policy. Ideally, the beneficiary is forced to receive these distributions from a IRA or Roth IRA, or from a trust that owns a life insurance policy, and once received that money is placed into another life insurance policy since life insurance is an excellent vehicle for assets to continue to grow in a tax-free way. We know that you can touch that money in the life insurance policy before age 59 and a half without a penalty. When you take the money out the correct way, it can be tax-free and there are no contribution limits. We also know that life insurance has been historically granted a grandfather clause. Life insurance seems to be immune to tax rate risk. If congress decides that someday in the future they want to change the rules around life insurance, existing policies will be exempt and continue operating under the old rules. Life insurance is the single greatest tax benefit within the IRS tax code. It gives you more flexibility, it allows you to pass money on to the next generation with more simplicity, and allows you to rule from beyond the grave. The fact that beneficiaries can use life insurance to continue to grow and compound their inheritance in a tax-free way is often lost in the conversation. We need to start thinking about using life insurance as a more efficient way to bypass the constraints of the Secure Act while also using life insurance as a way to grow and compound that wealth for the next generation. There may be two life insurance policies that need to be purchased, one owned by a trust that allows you to distribute that money at your discretion, and a second policy owned by the beneficiary for use as a receptacle for that money. The common denominator here is that we probably need to be using life insurance more in retirement planning, more in estate planning, and more in the lives of the beneficiaries of those estate plans. Life insurance is so flexible and offers so many benefits, that's why it's such a great tool in the Power of Zero strategy.

The 4% Rule originated with a man named William Bengen in 1994. He looked back and noticed that people were withdrawing from their portfolios at a very haphazard rate. Prior to 2005, a common way people used to determine how much they could withdraw was to look at the average return of the market at the time. When asked, 40% of retirees said that they could withdraw 10% annually from their portfolio starting from day one of their retirement without ever running out of money. William Bengen started running Monte Carlo simulations on the past 70 years and used a hundred thousand combinations of variables including length of retirement, rate of withdrawal, and stock mix. He found that the current rates of distribution of 7% at the time were completely unsustainable, and that the only way to give yourself a high probability of having your money last through life expectancy was to take out 4%, hence the 4% Rule. If you have a million dollars starting day one of retirement and wanted to keep up with inflation over time, the most you could take out was $40,000. Over a 30 year retirement, you would have a 90% likelihood of your money lasting your whole lifetime. This became the way that most people combatted longevity risk. As long as you only took 4% of your retirement portfolio adjusted for inflation, that gave you a very high probability of your money lasting through a 30 year time period. When William formulated his 4% Rule, he was using a 40/60 split between stocks and bonds, but bonds are no longer performing the way they did in the 90's. Many economists and retirement experts have revised the rule downwards primarily as a function of bond returns. Combating longevity risk is an expensive proposition, even if you use the 4% Rule. If you require $100,000 to live in retirement, once you factor in inflation you will need roughly $2.5 million by the time you retire. If you're not on track to hit that amount in your portfolio, you have five heartburn inducing alternatives: save more, spend less, work longer, die sooner, or take more risk in the stock market. It gets even worse with the new 3% Rule. With the 3% Rule, what was before a very expensive, cash intensive, high asset proposition is now even more expensive. You need even more money if you plan on using the stock market and the 3% Rule, even if you manage to acquire enough money it's not guaranteed. The second issue with the 4% Rule is you have to be able to stick to it even in erratic markets, which is the opposite of what most people do. In order for the Rule to work for you you have to keep your money invested in good and bad markets. Do you have the discipline to keep your money invested even when the market is going down? There is also the illusion of liquidity. When you have millions of dollars in your retirement portfolio, it looks like you have plenty of money that's easily accessible. The trouble is that every single dollar is already earmarked under the Rule and as soon as you take out any additional funds your odds of outlasting your retirement money sink rapidly. If your plan is to live by the 3% Rule, all your retirement money is already allocated and you won't have any room for unexpected expenses. If you want to be able to cover shock expenses or aspirational goals, you will need an additional fund set aside by the time you retire. We have to be clear about the shortcomings of the 4% Rule, and now the 3% Rule as well. They work in a vacuum, but we don't live in a vacuum. We live in the real world and unexpected things happen.

David gets the same question nearly every single week. Someone invariably asks about how if they do a Roth conversion, won't they have less money working for them in the tax-free bucket and need more time to catch up compared to had they just left the money in the tax-deferred bucket? If the government came up to you and offered to loan you some money and wouldn't tell you what the interest rate will be, would you cash the check? Putting money into your 401(k) is very similar, by doing so you are letting the government tell you what the rate will be once you want to take out that money. According to the publicly stated debt, we are $23 trillion in debt but according to fiscal gap accounting we are $239 trillion in debt. Listen to episode 63 of the Power of Zero podcast to find out how dire the situation actually is. The question is why are Americans still okay with that deal? David breaks down the math and compares two scenarios. One person has $1 million in an IRA and another does a Roth IRA and has $700,000 in their tax-free bucket. The question is which person has more money? The thing that people forget is that when you have money in an IRA you have a business partner, and until you distribute money from that bucket, you don't know how much you actually have. Assuming a level tax rate environment, both people have the same amount. But there are other considerations, the person taking money from their tax-deferred bucket is going to take distributions that will count as provisional income, which will cause their social security to be taxed. The person taking money from their tax-free bucket doesn't have to worry about that. If tax rates go up by 1%, the person with the Roth IRA will definitely have more money. A Roth IRA gives you certainty and creates an environment where you reasonably expect to know the amount of money you will withdraw into retirement. You won't have to roll the dice and hope that tax rates stay low as our country slips into insolvency. The January 28th edition of the Wall Street Journal goes through all the Democratic candidates and their tax plans. The nature of political power is to swing back and forth, and since that's the case we are very likely to see marginal tax rates go up in the future simply because of that. You do not necessarily have more money working for by not doing a Roth conversion, because that money is not just yours. You are in a partnership with the IRS and every year they get to vote on what percentage of your profits they get to keep. It all comes down to what tax rates will be in the future when you are taking money out of your investments, compared to where they are today. If you believe that tax rates are going to be higher in the future than they are today, then it makes sense to do a Roth conversion.

David prefers to be a clear-eyed realist and face things head on, mincing words about the fiscal situation of the United States would be a disservice to everyone. One of the big things that people have asked about after the previous episode is whether shifting all their money to tax-free will do anything for them. If the situation is so bad, what's to stop the government from taking these programs away? There are two traditional approaches to retirement and taxation, namely, the government is going to tax you either on the seed or the harvest. That is to say, either preretirement or postretirement. In order for the government to tax your Roth IRA, they would have to completely abandon the very paradigm they have forced you to submit to, which would likely lead to chaos in the streets. When you add up the cumulative Roth IRA's and 401(k)'s of Americans, it adds up to about $800 billion. When it's compared to the cumulative amount in traditional IRA's and 401(k)'s, approximately $23 trillion, it doesn't make much sense for the government to violate a principle they've established because the total wouldn't have much of an impact on their fiscal situation. It would be much easier for the IRS to do what they've done in the past, namely to raise taxes on the pot of money that is owned by the people they are in a business partnership with. It's legal, they've done it before, and as money grows in shorter and shorter supply they become more likely to do it again. If you have a Roth IRA, they will likely prevent you from contributing to it at some point in the future, but the risk of taxing these accounts would probably be too great to justify the action. L.I.R.P.'s will probably go away at some point in the future. As the US approaches the point of no return, the federal government will be looking at all options to increase revenue and they've already looked at removing the L.I.R.P. in the past. George W. Bush sought to level the tax playing field in the early 2000's which reveals a key principle; specifically, whenever they change the rules whoever has the bucket gets grandfathered in. If history serves as a model, if you already have an L.I.R.P., you will get to keep it and continue contributing. This creates even more urgency for people who don't yet have an L.I.R.P. to get one and get it secured soon. The greatest tax benefit in the US tax code is the tax benefit for life insurance. If the country is going broke, as we are, they will not allow these benefits to exist in perpetuity. If the past is a prologue, we can look to history and be confident that we can continue with these programs and keep contributing to them for the rest of our lives. Don't worry too much but do face the situation head on. There are places in our country that you can safeguard your money against the inevitable and dramatic rise of tax rates in the future.

The new year brings important changes to the IRS tax code along with various thresholds that we have to know about when it comes to Power of Zero planning. We have to be keenly aware of these thresholds because they can end up being landmines if we're not doing things correctly. The new income threshold for the Roth IRA is $124,000 to $139,000 for a single person and $196,000 to $206,000 for a married couple. The good thing about the Roth IRA is you have until April 15th of the following year to figure out how much you are going to contribute. The Roth conversion is a little more difficult. You have to make the decision before you have all the information prior to Dec 31 and you can't change it once it's been done. 401(k)'s have changed quite a bit as well, with increased limits on contributions for both people younger and older than age 50. This applies to Roth 401(k)'s as well which is good because you should take advantage of anything with the word Roth in it. We're marching into a financial apocalypse so it's very important to take advantage of as many of these diversified tax-free streams of income as possible. The standard deduction has also increased, but in 2026 we will be reverting back to the tax code of 2017, so the net result is likely to be pretty much the same. Required minimum distributions have been pushed back by two years. This won't really impact people who need the money as they would withdraw it either way. This can be advantageous for people who don't need the money because they won't be forced to realize the income in their IRA's. However, they may be hit with higher tax rates as taxes increase in the future. The stretch IRA has been abolished. This means that your non-spouse beneficiaries will have to spend down your IRA's and 401(k)'s in the ten years following your death. This is another reason to move your money to tax-free so that your inheritors won't have to pay some of the highest tax rates at the apex of their earning years. You can now contribute to your IRA after age 70 and a half which you couldn't before. Gift and estate tax exemption is now at $11.8 million per individual but there is a chance that these changes may not last if a different administration takes the Senate, Congress, and White House. These changes are largely good for people looking to implement the Power of Zero strategy but there are some questions for the IRS that can be very revealing. The fact that they haven't adjusted the contribution limits of the Roth IRA to keep up with inflation should tell you that Roth IRA's are good things. The ideal approach to tax-free retirement is to take advantage of all the tax-free streams of income that are available to you because they all have benefits and merits that are unique to each bucket. They are all pieces of the Power of Zero puzzle.

For a grim depiction, check out this article The Mathematical Certainty of U.S. Government Default by Ptolemy3 about the future of the US government's debt situation. The US government reached the tipping point at least fifteen years ago where the only way out will be default. People who calculate debt for the US federal always do it incorrectly. The proper way to do it is to figure out the net present value of everything that we've promised over the years minus what we can actually afford to deliver. The US government currently only projects these numbers out for 75 years, if they went out beyond that timeline the situation get much worse. The fiscal gap is growing. The expenses are going up dramatically and will continue to do so for years while the cash flow remains relatively static based on current tax rates. The author begins by looking at US government positive cash flow. Any prediction that economic growth will rise dramatically over time is based on religious belief. There is no data that suggests that economic growth will increase more than 2% in our lifetimes short of an AI revolution. Some people are suggesting that we've hit a maturity on economic growth and are actually approaching a decline. The basic standard programs are not likely to change; once a government program gets established it's incredibly hard to get rid of it. Looking at the current assets and liabilities and estimating what the future cash flows will be over the next 75 years paints a pretty dark picture. When broken down, the net present value of the future obligations for social insurance programs alone is $49 trillion. Core operations of the government are actually running in a surplus, but the situation gets really ugly when you get to the interest payments on the debt. The current payment is around $300 billion but interest rates are projected to increase to an average of 5.1% over time. This means we would have to have $110 trillion dollars in the bank account today earning Treasury rates to be able to deliver on just the debt. The Terminal Value, the number we would need to have in the 75th year to be able to bankroll the expenses of the federal government in perpetuity, is an astonishing $1.6 quadrillion. When you add all the numbers up the net present value of all our future obligations is around $239 trillion. To put that into perspective, our fiscal gap represents almost 70% of all the money in the world. We are deficit spending, basically using debt to pay our bills. As the debt increases, there will be a point where it starts to snowball and we won't be able to afford the interest on the debt no matter how much we cut back on other programs, and we've already passed the point of no return on that number. When interest rates go up, the costs of servicing the debt will triple. If the government defaults on the debt it would likely plunge the world into a depression. The author considers what would happen if we continued on the current path. By 2038, the US government will be running an annual deficit of $3.3 trillion which will last for decades in the future. We would most likely default at this point since waiting until 2058 or later would only make the future default more devastating. Gokhale and Smetters published a paper titled "Is the United States Bankrupt?" It describes the solution to the problem that would involve an immediate and permanent doubling of personal and corporate income taxes, and/or an immediate and permanent two-thirds cut of all social security and Medicare benefits. The author comes to very similar conclusions. When using the government's numbers from their own financial reports, he ran into problems trying to reconcile their math. It looks like the government is deliberately trying to hide large numbers from the calculations including government employee benefits and Medicaid. Even using the government's own numbers, their fiscal probability is not sustainable and there is a 100% probability that this ends in default. Everytime the debt comes due, the whole system breaks. The outcome is always hyperinflation or default, which are fairly similar in their effects. This ends badly, either revenues need to be increased or costs need to be decreased. We have made promises that we can't afford to keep, even if tax rates went up to 100% it would not solve the problem and would obviously be disastrous for the economy. This is the largest Ponzi scheme in human history. As the bubble pops during our lifetime it's going to get very ugly. Like all Ponzi schemes, the longer they are able to hold their disastrous financial situation together due to their trust in them, the greater the eventual damage will be when the bubble pops. The Power of Zero paradigm is based on the belief that tax rates will go up in the future and that spending will have to go down. We want to take steps to protect ourselves from this reality by systematically repositioning your tax-deferred dollars to tax-free. Mentioned in this

The SECURE Act was passed a couple of weeks ago and we now know what it's implications are. The big thing that everyone is talking about is that it eliminates the lifetime stretch provision for non-spouse beneficiaries of IRA's, 201(k)'s, and Roth IRA's. Now, if you're leaving your IRA to a non-spouse beneficiary like a child, they will have to realize it as income over the following ten years. If your child will inherit your IRA, they will probably do so when they are at the apex of their earning years. The question is if this happens 20 years from now, will tax rates be higher or lower than they are today? That money will be piled on top of all their other income and they will be taxed at their marginal income. This is a backdoor tax increase. This is a money grab by the IRS unless you do something about it. This even applies to Roth IRA's. If that money gets distributed over the next ten years, it will probably end up in a taxable account that the IRS will start earning money on. If you have an IRA, you need to ask yourself if you will have significant amounts of money in those accounts at the end of your life and might they go to a non-spouse beneficiary. This underscores the importance of doing Roth conversions during your lifetime. If you have a large IRA and plan on leaving it to the next generation, you need to consider what taxes will look like in the future. There has been a new estimate that the SECURE Act will generate $15.7 billion in tax revenue over the next decade. The implications for retirees will be largely positive, but the heart of the law is about forcing people to pay higher taxes in the short term. When these beneficiaries inherit these accounts, they will be forced to realize the income whether they need it or not. Once they pay the taxes, they will have to put the money somewhere and the question will be where do they put it. Traditional tax-free options like a Roth IRA are too prohibitive so it will likely end up in the taxable bucket, where the IRA will benefit once again. This is where the L.I.R.P. comes into play. It's an optional place to put the money that comes with a number of additional benefits. This makes an even more compelling case for people who were still on the fence. They now also have to consider if they want their beneficiaries paying up to half the inheritance in taxes. This is an opportunity to start doing some tax planning, we still have six years to stretch out our tax liabilities if we act now. The other big change coming with the SECURE Act is the required minimum distribution age going from 70½ to 72. 80% of Americans with RMD's are taking more than they need to anyways so this won't impact them too much. The last change allows people to do backdoor Roth conversions after the age of 70½. The big question that people now have to ask themselves is "do you think you will have money left over in your IRA when you die?" Because if you will, do you really want to have scrimped and saved for your entire life only to have your beneficiaries pay half the amount in taxes? We need to be taking advantage of the next six years. Don't wait to only pay taxes at much higher rates because at that point, the sale will be over.

One of the most common questions that David gets is regarding what happens to the Medicare Part B premium if someone engages in a Power of Zero tax strategy. Are there unexpected consequences of shifting money from tax-deferred to tax-free? When you do a Roth conversion, it doesn't count towards the income thresholds that determine whether you can do a traditional Roth IRA, but it does have an impact on your Part B Medicare premium as well as your prescription drug premium. IRMAA stands for income-related monthly adjustment amount and it's basically a higher premium charged by Medicare Part B and D to individuals that reach certain thresholds. Medicare Part B helps pay for certain services like outpatient care and for the average American they pay 75% of the Part B premium. If you are taking advantage of the 22% and 24% tax brackets you are going to move through two different thresholds when it comes to IRMAA and could be looking at an additional $2000 in costs per year when doing Roth conversions. At the top of the 24% tax bracket, it could be a little over $3000. The thing to keep in mind is you're only paying this extra premium in the years that your income goes up due to the Roth conversions, it doesn't mean your premiums will stay that way forever. The question then becomes "is the increase in premium worth it?" The simple way to find out is to do the math. If tax rates are going to double in the future, will those taxes be more or less than the two to three thousand dollars in increased premiums you're going to pay now? You can also just compare the cost to the tax rate increases coming in 2026. You'll probably find that your tax rate will still be more than the increase in your premiums. When you get money shifted at historically low tax rates to avoid a doubling of tax rates over time, but you have to pay a little bit extra, you're still much better off. Pay the higher drug premium now and avoid the tax freight train that is bearing down on your retirement.

Once you get past December 31 of 2019 you will only have six years left to reposition dollars from tax-deferred to tax-free before tax rates go up for good. Every year that goes by your timeline gets shorter. The question that David gets all the time is what is going to happen once 2026 hits and will the Power of Zero paradigm still exist? The Power of Zero was written in 2013 and plenty of people between 2014 and 2017 were taking advantage of the Power of Zero strategy before they even knew there was going to be a tax sale. Even back then those tax rates were still considered good deals. Just because the tax sale ends in 2025, that doesn't mean things are changing that much. Tax rates will still be low historically and especially so given where tax rates are likely to go in the next decade or so. The main thrust of the Power of Zero message is that in a rising tax rate environment there is an ideal amount of money to have in your taxable and tax-deferred buckets. So long as you are paying taxes that are lower today than they will be in the future the strategy still applies. The difference between the low tax rate and the high tax rate is a benefit that accrues to us and helps us wring more efficiency out of our tax dollars. The question you need to ask yourself is "are we in a rising tax rate environment?" The Power of Zero vision is always in effect in a rising tax rate environment, the only scenario where it doesn't make sense is in an environment where taxes will be lower in the future than they are today. What if you only have two years left? If you're going to shift all your money in two years, you have to be very cognizant of what tax bracket you will bump into. In many situations, it will make more sense to pay slightly higher taxes by stretching out your plan beyond 2026. There are worse things than paying a few extra percentage points in taxes. Even while taxes are on sale, you don't want to rise into a tax bracket that you wouldn't otherwise have to. If you average the tax rates during the tax sale with those few years you may have to pay beyond 2026, you are still probably coming out ahead than if you had shifted all your money prior to 2018. It's not the end of the world when we get to 2026. The Power of Zero paradigm will still be in full force. Simply put, in a rising tax rate environment you are always going to be better off paying taxes at the lower rate. Don't panic if you only have 5 years to get all your shifting done. What should worry you is waiting until 2027 and beyond to start the process. All tax rates have to do in the future is to rise by 1% a year for the Power of Zero math to make sense.

The last weeks of December are critical in terms of taking advantage of your last opportunities to do Roth conversions for the 2019 tax year. Many people think you can go all the way until December 31 but that's not always going to be the case. Some companies require you to submit a Roth conversion much earlier because they can take some time to process. Missing the Roth conversion deadline can have major tax implications. With a traditional IRA you can fund it up until April 15 of the following year, but that's not the case with Roth conversions. They have to be done by December 31 of the current year which can cause some people problems because of the tax uncertainties involved. The IRS no longer allows you to do Roth recharacterizations in the event you end up in a higher tax bracket than expected. You just have to give it your best estimate. You should be doing a Roth conversion in 2019 because if you don't, you no longer have seven years to stretch out your tax liability. If you waited until you had only a single year to do your Roth conversions and convert a million dollars, most of that money will be taxed at 37% plus whatever your state tax happens to be, and it will happen all in one year. This means you could give away up to 45% away. The whole idea of this planning is to reduce taxes as much as possible and avoid a doubling of tax rates over time. Even if you take two years to complete your Roth conversions, you're still likely going to be in the 37% tax bracket. The further you stretch out your Roth conversion, the lower the effective tax rate on that conversion. If you feel like tax rates are going to be higher in the future than they are today then every year counts. There are worse things in the world than simply paying the taxes at what the rates will be in 2026. What you should worry about is what is going to happen beyond that when we get to a crisis point in our country financially. There is a proposal going through the House of Representatives right now that could result in an additional 7% increase in taxes for most Americans. The tax rates in 2026 may still be good deals of historic proportions because at the rate we are taxing Americans right now, there is just not enough money to pay for everything that's been promised. Every percentage point increase in taxes after you retire means less money for you to spend. Remember, it's not how much you have, it's how much you actually get to spend after tax. It's crunch time. If you're going to do a Roth conversion this year, now is the time to act. Take advantage of the seven years you have and keep more of your money. Go to davidmcknight.com and find out what your Magic Number is. Keep in mind that you want to have some money in your tax-deferred bucket to take advantage of your standard deduction. The 22% tax brackets for most Americans is golden. These tax brackets are not going to be around forever. If you wait even only a little bit you may miss your chance this year.

David gets a number of emails from listeners saying that he's been wrong for years and the central thesis of the Power of Zero paradigm is incorrect. The question is, do the tax cuts of 2016 delegitimize what he and others have been saying? In reality, the problem has only compounded since the tax cuts came into effect. You have to consider whether the US government is prone to making bad financial decisions and has just kicked the can further down the road. David Walker says that anytime you have tax cuts, they should be accompanied by a commensurate decrease in spending. The Republican Congressional Budget Office says that the tax cuts will cost $1.5 trillion over the next ten years. Notice what's happened to the deficit. Since the tax cuts have been put in place, the deficit has only gone up. When we get to the point where we have trillion dollar deficits, that's the canary in the coal mine for a sovereign debt crisis. If anything, we have just covered up the problem and deferred it into the future, but in the process have made the reality of future tax hikes all the more inevitable. What happens if we don't increase revenue or cut spending? We will get to a crisis point where we will have to have immediate and dramatic increases in taxes just to pay for social services. The federal government has a history of waiting until the very last minute to address these problems. Just because the government behaves irresponsibly, that doesn't mean the math to which David Walker and other economists refer doesn't add up. Every year that goes by where the government fails to reduce spending, spending reduces its effectiveness. We will get to a point where the interest on our debt consumes such a large part of the budget that we won't be able to pay out Social Security and Medicare benefits without raising taxes. We are financing our spending with debt, and eventually the interest on that debt will become so prohibitive that it will crowd all the other expenses out of the budget. Has the central thesis been disproven? Of course not! If anything, the tax cuts have made the Power of Zero paradigm more important. Every day that goes by where the federal government fails to reduce spending means the reality of higher taxes down the road becomes all the more imminent.

When someone is talking about a risk multiplier, they are essentially talking about longevity risk. The longer you live, the more likely it is for you to experience a subset of risks that could completely derail your retirement plan. There first major risk is the long term care risk. In many ways, you are better off dying than needing long term care, because a long term care event can completely decimate your savings and put your spouse into a very difficult spot. Historically, long term care policies are how people have mitigated this risk, but these policies have a number of disadvantages. They tend to get more expensive over time, often to prohibitive levels, and it can be very difficult to qualify. People also find the chance of paying for a long term care policy but never using it pretty irritating. Insurance companies started exploring the idea of giving people their death benefit in advance of their death in the event of a long term care event. This puts people in the scenario where if they die peacefully in their sleep their beneficiaries will get the death benefit completely tax free. This is why the L.I.R.P. is the recommended way of dealing with the risk of a long term care event. The second major risk is withdrawal rate risk. This risk basically says that there is an ideal amount of money to take out of your stock portfolio each year to avoid running out of money. The previous rule of thumb used to be withdrawing 5%, but that was found to be generally too risky. The current recommendation is somewhere closer to 4%. The sequence of return risk is closely related to withdrawal rate risk. If you are withdrawing money during a down market in the first ten years of retirement, you could send your portfolio into a death spiral where it never recovers. Combined with withdrawal rate risk, sequence of return risk can really mess with your retirement plan. The Wall Street Journal is saying the 4% rule is now actually the 3% rule if you want to mitigate your risk. To shield yourself from sequence of return risk and withdrawal rate risk, to fully mitigate them you need to have a massive amount of money saved by the time you get to retirement. There is another way to mitigate this risk without accumulating a giant amount of money and that is through a guaranteed form of income through an annuity. If you have a pension from your work or are a fan of social security, you are also a fan of annuities because they operate on the very same premise. If you're going to live a 40-year retirement instead of a 5-year retirement, then you are much more likely to run into these risks. Take a portion of your stock portfolio and give it to a company that pools your risk with other people's risk in exchange for a guaranteed stream of income until you die. In the case of a down year, you can avoid taking money out of your portfolio and rely on the annuity instead. The answer to the three basic risks in retirement are having an L.I.R.P. and an annuity. Mathematically speaking, your money lasts longer, you're able to spend more money in retirement, you're able to effectively mitigate longevity risk by having some guarantees in your portfolio. Longevity risk is the risk multiplier, it will make the other subsets of risks even more likely to derail your retirement. If you want to eliminate stress from your retirement and have peace of mind, then pooling risk and offloading it to insurance companies is the way to do it.

David is generally very reluctant to recommend something that would cause someone to bump from a 12% tax bracket into a 22% tax bracket. We're trying to avoid the tax apocalypse that's coming down the road, and that means thinking about the future. There are some circumstances where it makes sense though. A scenario to compare is between two 65 year olds with similar amounts of money in their three buckets. The first thing to do is figure out what their taxable income is by crunching the numbers on the income from their pensions and other sources, as well as their standard deductions. In this scenario, both people are in the 12% tax bracket, which is great for them. The 12% tax bracket will be looked back upon as the deal of the century. But we have to acknowledge the remaining $700,000 in their tax-deferred bucket and they only have $24,000 left before they hit the top of the 12% tax bracket. We could shift some of their money from tax-deferred to tax-free each year to keep them in the 12% tax bracket, but would that really solve anything? How big will their IRAs be once they turn 70 and a half, when they are forced to take the money out? There may be a scenario where it makes sense to go into the 22% tax bracket. We have to project into the future and see how big their required minimum distributions will be in a few years. At that point in time, the 22% tax bracket will be reverting back to the 25% tax bracket, and we may very well see that the 22% was actually a good deal. We also have to recognize that there is a scenario where someone can be bumped into the 22% tax bracket overnight. If you're over 65 and your spouse dies, you will find yourself in the single filer tax bracket and your thresholds are reduced considerably. It's a penalty to be single in many ways since your tax bracket gets cut in half. The third scenario to consider is the effect of the upcoming SECURE Act. Starting next year, it could force a non-spouse beneficiary to spend down an inherited IRA or 401(k) over the course of ten years. This could mean that your beneficiaries could inherit your money at the apex of their earning years, at a period of time when taxes are going to be higher than they are today, and when they can least afford to pay the higher taxes. If you are afraid of the 22% tax bracket right now, your children could be paying tax on your money at the 32% or 35% tax bracket, or the future equivalent. Whereas you could have paid the 22% tax now and allowed them to receive the money in the future tax-free. Consider the three circumstances where it may make sense for you to bump yourself into the 22% tax bracket. If you find yourself as a widow prematurely, you could find yourself spending a fair amount of time in the single filer tax cylinder. If the SECURE Act gets legislated into law, your children will inherit your money and end up paying a much greater amount of taxes.

Rule #1: Everyone's situation is different, and there is no cookie cutter approach. You can't pick up the Power of Zero book and have the exact recipe for success. It will need to be tailored to your personal situation. Rule #2: It is unlikely that you will be in a lower tax bracket in retirement. The closer you are to 2029, the less likely you are to be in a lower tax bracket. We know when the tax cuts will end and when tax rates will go up. When you look at the ten-year horizon, it's really tough to make the case that tax rates won't be higher. This turns conventional wisdom on its ear. We are marching into an uncertain future, and that doesn't bode well for people that have the majority of their money in the tax-deferred bucket. Rule #3: There is an ideal balance to have in your first two buckets in a rising tax rate environment. Your taxable bucket should contain around six months worth of expenses and your tax deferred bucket balance should be low enough that RMD's are equal to or less than your standard deduction, as well as not cause social security taxation. Rule #4: Anything above and beyond the ideal balance in those first two buckets should be systematically repositioned to tax-free. Preferably you don't do it all at once but you do it quick enough to get all the heavy lifting done by 2026. Rule #5: Anything with the word Roth on it is your best friend. These vehicles give you the ability to shift nearly unlimited money from tax deferred to tax-free. Rule #6: Social security taxation is a big deal and you should do everything you can to get your social security tax-free. If your social security is taxed, you will have to spend down all your other assets even faster. In many cases, your money will run out five to seven years faster if your social security is taxed. Rule #7: The best way to deal with long-term care in retirement is not through a traditional long-term care policy. An L.I.R.P. is a much better option. If you die peacefully in your sleep never having used the long-term care, at least someone is still getting a death benefit at the end. L.I.R.P.'s are great way to take the sting out of mitigating the long-term care risk. Rule #8: You will need more than one stream of tax-free income in retirement. You never know when the IRS is going to legislate one of your tax-free streams of income out of existence. You need multiple streams of tax-free income working together. Rule #9: You really want to get all your heavy lifting done before 2026. You have seven years before the tax cuts end and every year you wait to take advantage of these low tax rates, is another year you will have to pay more than you need to. Rule #10: Know your magic number. Your magic number is how much you should be shifting each year from tax deferred to tax-free so that by 2026 everything is perfectly allocated. You only have so many retirement dollars, so you need to spend them in the most tax efficient way possible. Rule #11: Never, ever annuitize your retirement in the tax deferred bucket. Annuities in your tax deferred bucket will count as provisional income and cause you all sorts of problems. When you annuitize your investment, there is no going back. Rule #12: It is much better to have a guiding hand when you're navigating the path to the zero percent tax bracket. The thresholds are always changing and there are a number of ways to get it wrong. Connect with a certified Power of Zero specialist who can help you avoid the pitfalls.

When David is working with a client, his recommendation is to reach the zero percent tax bracket is by having 5 to 7 streams of tax-free income. These can include Roth IRA's, Roth 401(k)'s, and L.I.R.P.'s. David often asks advisors what they think is his favorite. Rarely, will anyone guess the truth is RMD's (Required Minimum Distributions). The holy grail of financial planning is any investment that gives you a tax deduction on the front, grows tax-deferred, and you can take it out tax-free. A Health Savings Account and an IRA or 401(k) that allows you to get a deduction on the front end, grow the money tax-deferred, and then allows you to take a portion of the money out tax-free are two of the few vehicles that tick all the boxes. You want a balance in your 401(k) that's low enough that it's equal to or lower than your standard deduction and doesn't cause social security taxation. You can use the calculators on davidmcknight.com to figure out your number. You can also learn your magic number, the amount of money you need to shift each year to achieve your ideal balance. Your IRA and 401(k) only becomes the holy grail of financial planning if they have the ideal balance. That's when it becomes tax-deductible on the front end, grow tax-deferred, and the money can be taken out tax-free. If you have a high deductible health care plan, an HSA is a good idea because when you put money in, you get a deduction, and when you take money for a qualified health care purpose, you get it tax-free. If your RMD's are equal to or lower than your standard deduction and don't cause your social security to be taxed, they become the true holy grail of financial planning. If somebody says to you that you should convert everything you have to a Roth IRA, you have to think about what is going to happen your standard deduction in retirement. If everything is in the tax-free bucket your standard deduction will essentially be left idle. There is an opportunity cost of moving too much of your money from tax-deferred to tax-free. If someone recommends a financial plan that only features the L.I.R.P., you need to run the other way. The L.I.R.P. has significant shortfalls and is not the perfect solution, it's only one piece in the puzzle of getting to the zero percent paradigm. The holy grail of financial planning is really about establishing the perfect amount to have your tax-deferred bucket. If your advisor can't tell you what that number is, you're probably not dealing with a Power of Zero advisor. The ideal approach to Power of Zero retirement planning is to call on as many of these streams of tax-free income in retirement as possible. Each account and investment is meant to be a solution to a specific situation and they only complete the picture when put together the correct way. The L.I.R.P. is for addressing the highest risk in retirement, namely a long term care event. In some cases, almost dying can actually be worse than dying by decimating the assets that would normally go to your spouse. Make sure you have lots of different streams of tax-free income, none of which shows up on the IRS's radar but all of which contributes to you being in the zero percent tax bracket. Above all make sure you've got some money left in your tax-deferred bucket so your standard deduction isn't left languishing. Determining the right amount to have in your tax-deferred bucket is critical, in a rising tax rate environment anything above that amount should be shifted over to tax-free.

There are three words that don't get mentioned very much, but they should scare the dickens out of you. Those words are Public Pension Liabilities. It's a problem that is largely flying below the radar, but if you live in a state with a lot of public pension liabilities, it could end up like Detroit. Public pensions often end up swallowing up the state budget until there is little left over to provide basic services. A pension is a guaranteed stream of income that is paid to you either over your lifetime or the life expectancy of you and your spouse. It used to be very popular in the private sector, but they became phased out as they became too expensive. However, they still persist in the public sector. Public pensions are a great way for politicians to get elected. It's very easy to make a promise to perpetuate lavish benefits when they don't have to deal with the consequences for potentially decades down the road. It will get to the point where certain states will go bankrupt because they can't afford to pay the pensions that have been promised. California, one of the fiscally unstable states in the country, has over 62,000 pensioners that are getting over $100,000 per year. Illinois is on the cusp of bankruptcy because of all the unfunded obligations they have in regards to pensions. These public employees deserve competitive pay, but people are living longer and cities are now in a unique position where they have to fund their current budget. However, they also have to pay one or two generations of retirees. When we ask the states to total up their unfunded obligations they say it adds up to $1.4 trillion, but the Federal Reserve and others put that number as high as $5.3 trillion. You have to realize the precarious position that states are in. They can only raise taxes so high before people start fleeing their state. They can't print money, so their budget is limited to what they bring in. They will eventually have to cut services. Some believe the federal government will intervene, but that's not going to play out the way most people believe. We often focus on the broad national debt, but we often forget what's going on at the local level. If the federal government opts to bail out the states, it will be by raising taxes on everyone. There is a storm looming on the horizon. We have to keep in mind that public pension liabilities are a chicken that will come home to roost sooner or later. It won't be the states that go into austerity to be able to deliver on these pensions. You're going to see the federal government intervene and raise taxes to be able to deliver these pensions from the fiscal abyss into which they have descended over the last couple of years. [ There are solutions that states could look at that could potentially fix the problem. Fix number one would be to wean new employees off of pensions so less of the onus is on the state government. [ Politicians love to bend the truth and promise people a lot of free stuff, so they may not be the ones that push a real solution forward. They have to be much more transparent with the price tag associated with what they are promising. [ We can no longer afford to lavish our public sector employees with very expensive guaranteed pensions. There is a big storm on the horizon, but one of the smaller storms that doesn't get talked about enough is the public pension liabilities that are going to be a major issue for a number of states in the near future.

David becomes very uneasy when advisors recommend that their clients take the money in their IRA and convert all of it into an LIRP. The LIRP has a lot of benefits, but it really should be used in conjunction with other streams of tax-free income. The LIRP is powerful only to the extent that it's used in collaboration with, in most cases, four to six other streams of tax-free income. That's when it really shines. An LIRP conversion is something that you would use with a client when there are no other opportunities for Roth or Roth conversions available. Most annuity companies are okay with you doing a Roth conversion, as long as you do it all in one year. What do you think the tax implications of that might be? There are some companies that allow what is known as a midair conversion, where you take a distribution from the IRA and then you convert it to a Roth IRA on the other end. This isn't very common though and most companies shy away from this. With the LIRP we get as little death benefit as the IRS requires of us and stuff it with as much money as the IRS allows in order to mimic all of the tax free benefits of the Roth conversion. As your annuity balance goes down, you will have to structure the LIRP just the right way, but if you do, your money will be able to grow in a completely tax-free environment. The average expenses over a year over the life of a LIRP are about the same or a little less than a typical IRA or 401(k). Not only are you able to grow your money in a tax-free environment, but you're also able to get a death benefit that doubles as long-term care. The second scenario where an LIRP conversion makes sense is in a situation where you are a non-spouse inheritor of an IRA. If you are a spouse that inherits an IRA, you can do a Roth conversion without any issue, but that's not true for a non-spouse. They will be required to take RMD's on that IRA over their life expectancy. You can't convert an inherited IRA and turn it into a Roth IRA. You can put that money into a traditional IRA, but there are limitations and that's where a LIRP conversion can be very useful. If you believe tax rates are going to be higher in the future and have inherited an IRA, the natural place to put that money may very well be in a LIRP. An LIRP conversion is not an officially recognized term, but the idea is very useful. If a Roth conversion is not available, an LIRP conversion is your next best option. With an annuity with a 10% withdrawal limitation, that is a great place to start shifting money to an LIRP.

There are two people today that are making waves in the national conversation for what they are saying about the national debt. This first is Ken Fisher. Ken says the debt to GDP ratio has been worse in the past and that we really have nothing to worry about. He also says that we borrowed some of that money from ourselves, so it's really just an accounting issue. The trouble is, that's all untrue. We owe the money to Social Security and that money has to come from somewhere. Social Security is underfunded and will need to be paid back, either through higher taxes or spending cuts. Ken Fisher is trying to persuade us the stock market is going to go up in perpetuity, which is basically what he said just prior to the crash of 2007. There is one person on the right side of the aisle who is the opposing voice on the debt issue. Mark Sanford is a GOP candidate running against Trump. Mark doesn't believe we have 8 to 10 years before the coming crash, which is why he's running now. He's injecting the topic into the national debate by running for president, despite the very long odds he will succeed. We don't have the luxury of waiting four years until the next presidential cycle to have this debate. The storm may already have come in 5 years. Tom McClintock has said something similar, namely that the United States will resemble Venezuela in 8 years. The financial storm will be something that we have never seen before. A sovereign debt crisis is looming, which is the straw that could potentially break the camel's back. Our math doesn't add up in Washington. The current financial condition of the country is like a family running up their credit cards to create the illusion of real wealth that gets wiped out when the financial storm hits. While all the other countries in the world are getting their financial houses in order, the US is just piling on their debt. This is not all the current president's fault, but he's not helping the situation either. We are living in a dream world if we believe that the national debt is only $22 trillion. All the other governments in the world follow fiscal GAAP accounting except the US. We would have to have $239 trillion sitting in a bank account today earning treasury rates to be able to deliver on all the promises. Who's right? Ken Fisher or Mark Sanford? One has everything to gain where the other has nothing to gain except maybe averting a disaster. If you find yourself in the position where you or your clients have large amounts of money in tax deferred investments, you have a freight train bearing down on you. Take advantage of the next 7 years to position that money to tax free or you may not be able to keep as much of that money as you thought. The Secure Act will most likely be snuck into a spending bill at the end of the year. It means that if you die with money in your IRA's and it goes to a non-spouse beneficiary like your kids, they will have to spend that money over 10 years. That means they will pay taxes on it at the apex of their earning years when they can least afford to pay the taxes. People will start seeing the writing on the wall and take advantage of Roth conversions, Roth IRA's, and LIRP contributions with Power of Zero advisors across the country.

What are the implications of taking your pension normally versus a lump sum? A lot of companies offer the lump sum as a way to get out from under the financial obligation of paying you or your spouse until you die. As a stream of income, your pension will be coming out of your tax-deferred bucket. You also have to realize that once you opt to take your pension as a stream of income you are stuck with that choice regardless of what tax rates are in the future. It will always come out of your tax-deferred bucket, with all the unintended consequences that go along with that. That doesn't mean you should always take the lump sum option, but it can be a good deal. You just have to crunch the numbers and understand the tax implications of your choice. When you take your pension as a stream of income, it counts as provisional income, so in most cases you can count on it causing your Social Security to be taxed. Anything you take out of your other retirement plans will land right on top of that income and be taxed as well. When 85% of your Social Security gets taxed, which is a situation many people will find themselves in, it forces you to spend down your other assets much faster. You could run out of money 5 to 7 years faster than people who do not have their Social Security taxed. You can spend your other assets down much faster than you planned, in an attempt to compensate for Social Security taxation that's brought about by electing to take your pension as a stream of income. When you're taking a pension stream of income in retirement, it is 100% exposed to tax rate risk because it is coming out of your tax-deferred bucket. That means you are going to have to find a way to compensate, and when tax rates increase in the future it's going to be double hit. A lump sum distribution allows you to roll that money into an IRA. Once it's there, you could do a Roth conversion and place it into the tax-free bucket. If you're really bent on having a stream of income you could use a deferred income annuity, which would create that stream of income in a tax-free environment. Pensions are becoming more scarce, only 40% to 50% of the people we see everyday have one. Most people have 401(k)'s or 403(b)'s. If you do have a pension, you should explore a lump sum distribution before you opt to take that stream of income. You should be aware of your options before you have to make that choice.

Line 10 on your tax return can be a great joy for you in retirement. Before the tax cuts of 2018, you may have known it as Line 43, and it simply means your taxable income. Taxable income is important to someone trying to achieve the Power of Zero paradigm because in a rising tax rate environment there is an ideal amount of money in both your taxable and tax-deferred buckets. Anything above those amounts should be repositioned to tax free. That's approximately six months of living expenses in the taxable bucket, and in the tax-deferred bucket. The ideal balance is low enough that your required minimum distributions are less than or equal to your standard deduction in retirement. When you're shifting money from tax deferred to tax free, you create a taxable event, and to understand how much your going to pay in taxes, you need to know your taxable income. This is where Line 10 on your tax return comes in. Your Line 10 number will inform how much you can shift in a given year before bumping up into the next tax bracket and how much heartburn you will be exposed to. How do you get to your taxable income? Start with your gross income and then subtract your "above the line" deductions like contributions to your traditional tax deferred plans. Once you're at your adjusted gross income, to get to your taxable income you have to decide which one is greater: your standard deduction or your itemized deductions. You need to understand the implications of any shifting you do from tax deferred to tax free and you can't do that without figuring out what your taxable income is. The marginal tax bracket is also the tax rate at which you save taxes when you do something that generates tax savings like taking out a mortgage. Most people we meet are in the 22% tax bracket so they aren't too upset about doing enough shifting to get to the top of that tax bracket, but they should also take advantage of the 24% tax bracket as well. The 24% tax bracket is only 2% higher than the 22% tax bracket, but it allows you to shift another $150,000 each year before hitting the top of that bracket. If you have a $1 million in your IRA right now, you're going to need to shift $125,000 each year over the course of the next seven years to get to the right amounts in your tax deferred and tax free buckets. Ultimately you have to ask yourself are tax rates going to be higher in the future than they are today. If you believe they will go down, then hold off on the Roth conversion. If you believe they are going to be dramatically higher, then line 10 on your tax return will be a good barometer for what the implications of shifting will be. Check out your line 10, figure out what marginal tax bracket that puts you in, and then ask yourself how much room you have to shift before you get to the next level. Remember your pension and social security taxation will fill up your first two tax brackets, and any money that comes out of your IRA's or 401(k)'s and will be taxed at the future equivalent of the 22% tax bracket.

Over the years David has noticed a number of advisors who have professed to be Power of Zero advisors, but there are a number of significant shortfalls in their approach. A true Power of Zero advisor believes that tax rates are going to be higher in the future than they are today and knows how to defend that position. They understand the national debt and the true amount of the unfunded liabilities as well as the implications of those things. In a rising tax rate environment, there is an optimal amount of money to have in your taxable and tax-deferred buckets. Regardless of the direction tax rates go in the future, your taxable bucket should contain about six months of living expenses. The real litmus test for the Power of Zero paradigm is in how much should be in the tax-deferred bucket. For most people that number is around $350,000. You can have too much money in your tax-deferred bucket, and when you do it unleashes a cascade of unintended consequences that could potentially lead to social security taxation. A true Power of Zero advisor believes in the idea of multiple streams of income. If your advisor says all you really need to get to the zero percent tax bracket is a Life Insurance Retirement Plan or something similar, that's a tipoff that they haven't really embraced the paradigm. It's nearly impossible to get to the zero percent tax bracket by relying on just one stream of tax-free income. Each type of tax-free stream of income has a strength and is able to accomplish things that the other types can't. They should be used in conjunction with one another to get to the zero percent tax bracket. The holy grail of financial planning is when you can use your standard deduction to offset your required minimum distribution from your IRA. The LIRP has its own set of advantages. It allows your money to grow safely and productively, has low fees as long as you keep the plan for your lifetime, and you get a death benefit that doubles as long term care insurance. Social security helps mitigate against a number of risks, including longevity risk, sequence of returns risk, inflation and deflation risk, and the longer you live the greater your return on the program. An advisor should be able to talk about all the advantages and disadvantages of all these things. A true Power of Zero advisor recognizes the importance of the date Jan 1, 2026, when tax rates revert to what they were in 2017. You're going to have to pay taxes now or later, so why not pay them when they are at historically low rates? When the tax sale is over January 1st, 2026, it's over for good. According to Tom McClintock, in eight years the US will be in the same boat as Venezuela. A true Power of Zero advisor would never lock up a significant portion of your assets in the tax-deferred bucket in the form of an annuity that didn't have Roth conversion features. Annuities have a lot of benefits in retirement but there are unintended consequences associated with having that income in your tax-deferred bucket and have it be stuck there forever. If you're giving up a portion of your Social Security or other guaranteed lifetime stream of income to taxation, you're going to have to spend down all your other assets that much faster. A true Power of Zero advisors wants to create those streams of tax-free income but they want to do it in the tax-free bucket. Once you start taking a stream of income from your tax-deferred bucket, your ability to get it out of the tax-deferred bucket is gone. Absent any one of these worldviews, you have a hole in your Power of Zero retirement game.

Social Security can indeed be taxed, despite the feeling that you're getting taxed twice. This year, 89% of all federal tax revenue is only going to go towards four things: Social Security, Medicare, Medicaid, and interest on the debt. These are non-discretionary spending items. It would take an act of Congress to choose not to pay for them and doing so would result in a worldwide depression. That means that only 11% is left to fund everything else in the budget and that doesn't include the additional trillion dollars we spend above and beyond the federal tax revenue. We are going to come to a point where we have a sovereign debt crisis and will have to either dramatically reduce spending, increase tax revenue, or some combination of both. Provisional income is the income that the IRS keeps track of to determine if your Social Security will be taxed. Any 1099's coming out of your taxable bucket, including investments that generate income or dividends, count as provisional income. The same is true for any distributions from qualified plans and 401(k)'s in your tax deferred bucket. Most people have no basis in their 401(k). They used pre-tax dollars to fund those accounts and when they take that money out the IRS is going to count 100% of it as provisional income. Any sort of taxable income that accrues to you during retirement will count as provisional income. The kicker is one half of your Social Security counts as provisional income. If, as a single person your provisional income adds up to $25,000, or as a married couple it adds up to more than $32.000, up to 50% of your Social Security can become taxable to you at your highest marginal tax bracket. It's important to remember that your standard deduction has nothing to do with your provisional income. Interest from your municipal bonds counts as provisional income, which is the reason we aren't very keen on them since they don't count as true tax-free investments. There is a longform process you can use to determine your provisional income, but there is also a short cut. Many people think that provisional income is based on a threshold and if they exceed that number, they are taxed at their highest marginal tax bracket, but that's not how it works. It's graduated, so you have to get well above the threshold to feel the full brunt of the tax. Somewhere between $80,000 and $85,000 in provisional income is where your Social Security will be taxed at your highest marginal tax bracket. Many financial advisors think about provisional income incorrectly. We have to recognize that provisional income works in a graduated system and there are ways to keep your provisional income low enough to make your Social Security tax-free. You have to remember that even before you take the first dollar out of your IRA, you are already at the 50% mark, so you have to keep the balance of your IRA low enough that the RMD coming out of it will keep you below the threshold. For most people, the magic number is around $350,000. Why is it such a big deal to keep your Social Security tax-free? The way that most Americans pay taxes on their Social Security is by taking more money out of their IRA's and 401(k)'s, but what happens if tax rates double? When your Social Security gets taxed, you run out of money 5 to 7 years faster than someone that isn't having the Social Security taxed. The act of compensating for Social Security taxation forces you to spend down your other assets that much faster.

When you come from a tax-deferred paradigm, it can really skew how you view the types of accounts that you are accumulating dollars in. The main thrust of the reviewer's critique is that we shouldn't focus on minimizing taxes if that means that investment fees will leap up over the course of retirement. Of course, you shouldn't build your financial plan while only considering taxes. If you look at the financial path the country is on, we can make some educated guesses on the future of tax rates and adjust our financial strategy based on that. The Power of Zero paradigm essentially means that if tax rates are going to be higher in the future than they are today, then there is a mathematically ideal amount of money to have in your taxable and tax-deferred buckets. Anything above that should be systematically transferred to tax-free. Life insurance policies do have higher fees than other potential investments, but only if you don't keep the policy for your entire life. If you do keep it for your whole life, it becomes very inexpensive. To say that you can go out and get useful advice about retirement for less than one tenth of 1% is to say that you are working with an advisor that isn't making any money. The key is that if you're going to work with someone who is going to help you navigate all the pitfalls that stand between you and the zero percent tax bracket, that person is not going to work for free. The average rate of return of the S&P 500 over the last 30 years is about 8%, but the average return enjoyed by most investors is between 1% and 3% because they make decisions emotionally. If you're paying 1/10th of 1% to an advisor, you are getting what you pay for, and you will definitely not get any advice on when to move money from taxable and tax-deferred to tax-free. When you take a loan from your life insurance policy, it's not actually coming out of the policy, it's coming from the insurance company with your policy, being used as collateral. There is a reason why hedge fund managers and banks are the biggest purchasers of life insurance. All life insurance loans are tax-free, but not all of them are cost-free and we're looking for both. Roth accounts are mentioned all throughout the Power of Zero book because they come with a lot of advantages, but one of the things you can't get is the safe and productive growth you can get from the LIRP. The biggest selling point of the LIRP is the death benefit that doubles as long-term care. Baby Boomers are recognizing that one of the single biggest risks they face is long-term care. David has never argued that the LIRP should be used instead of Roth accounts, it should always be used as another stream of tax-free income alongside those accounts. We know that 53% of our country pays all of the taxes, with 80% of that being paid by the top 20%. In order to keep social security, Medicare, and Medicaid, we have to widen the tax base because we just don't have enough people paying enough to keep them going. If the highest marginal tax rate goes up, that has historically been a signal that the other tax rates will likely be going up as well. With the money that has been promised for those programs, there is not enough money available if we just tax the rich so that means the other tax brackets will have to go up in tandem. David Hays found his mother's tax return from the year he was born where they were paying around 30% of their income in taxes, despite not making much money. Even middle class people in the past paid comparatively high taxes, so don't rule it out. There are different viewpoints when it comes to the Power of Zero paradigm but you have to understand the relevant data before dismissing everything.

The IRS has a test called the seven pay premium test. It basically states that it's possible to put too much money into a life insurance policy. If you fail that test than any loans that you take from your life insurance policy get treated differently. Traditionally, if you obey the rules of the IRS you put money into a life insurance policy after tax and if you take the money out the right way you can do it tax free, typically by way of a loan. The alternative is to take the money out of a non-MEC life insurance policy with a policy withdrawal. This happens on a first-in, first-out basis, which essentially means that you can take out the money in your basis tax-free, but anything from the growth portion of your account will be subject to ordinary income taxes. Anything above the basis, you would take out in the form of a loan from the insurance company itself. However, there are some policies that allow you to take out variable or participatory loans against the whole amount. Many people do Modified Endowment Contracts on purpose. In either case, the money will go to the heirs tax-free. The big difference is the order of the withdrawal structure. With an MEC policy, the order is last-in, first-out which means you will pay tax on the growth first before getting to your tax-free basis. If you're younger than 59 and a half, you will also pay a 10% penalty on any loan or withdrawal from a MEC policy. This can have major implications if you end up using the contract the way that most people do, as it can end up being the worst investment you will ever make. The advantage to a MEC policy is that you can get a large lump sum into the policy early on and take advantage of the time value of money. You just have to recognize that you want to have the right amounts of money in the right accounts in a rising tax rate environment. If you want to change your existing life insurance policy you can do a 1035 exchange and roll that money tax free into a new policy, but there are some things to watch out for. Once a MEC, always a MEC. There is another thing you can do with a 1035 exchange where you can take the money in a non-MEC life insurance policy and roll that into an annuity. Once it's an annuity, you will lose any ability to take money out tax-free, but the option is there if you need an escape hatch from your current life insurance policy. The shift only goes one way, you can't take an annuity and roll it into a life insurance policy.

The number one criticism of the Life Insurance Retirement Plan online is that the fees are simply too prohibitive, but the question is really what are they expensive compared to? The best way to compare the fees is to think about where else you could be putting your money, in most cases that's going to be some sort of investment. When it comes to typical investment fees, you're looking at an expense ratio of 1.5%. The baseline number to compare the fees with the LIRP is that 1.5%, which means you have to consider whether the LIRP is more or less expensive than the traditional 401(k) account. The LIRP is a bucket of money that grows tax free, there is no contribution limit or income limitation, you don't pay taxes if you take the money out in the right way, it doesn't affect provisional income and there isn't likely to be any legislative changes down the road. The IRS requires that a certain amount of money flows out of your LIRP in order to pay for certain expenses. The expenses in the LIRP are likely to be much cheaper than what you are paying in your 401(k) or IRA. The fees are a little bit higher in the early years of the LIRP compared to other accounts, but the fees drop off a cliff after the eleventh year. When you average out the fees over the life of the program, it's going to cost you less than the 1.5% baseline. Don't do an LIRP if you don't plan on keeping it for your whole life. There are a lot of benefits to the plan that only make sense if you keep it until you die. If you do plan on keeping it for your whole life, why would you be concerned with the higher fees in the beginning instead of considering the impact over your lifetime. Since the plan isn't a short term investment, it doesn't make sense to only pay attention to the negative return in the first six years. The longer you keep the plan the closer your internal rate of expense gets to 1%. If the internal rate of return reflects a 1% expense over the life of the program, it might as well have been that rate for the entire time. The costs are significant over the first ten years, but if you stick with it for the rest of your life the more dramatically the expenses reduce and the better the internal rate of return becomes. The LIRP may come with expenses but you also get advantages by paying those expenses. If you could get a 6.5% return without taking any more risk than you are accustomed to taking in your savings account, would you? The expense issue with LIRPs is overblown. We have to contextualize the expenses within the broader picture and also consider the benefits it conveys over the course of our lifetime. LIRPs are not a silver bullet, they should complement your other tax-free streams of income. If you put it all together just the right way you get to be in the 0% tax bracket. When you have the right levels of money in the right accounts, that's how you reach the 0% tax bracket, but if some of those levels are off you are not going to make it so make sure you work with a trained professional. The LIRP also operates as a solution for long term care in addition to all the other advantages that it comes with.

You will find articles on the internet that claim that if you are going to do a Roth Conversion you have to do it a number of years before retirement, because you must have the ability to recuperate the dollars you've paid towards tax, but that doesn't stand up to the math. David goes over the example of two brothers, each taking a different approach to investing $100. One goes for the tax deduction on the front-end approach, and one for the tax-free approach. The moral of the story is that most people believe that if they have $100 in an account and it doubles to $200, that $200 is theirs, but they don't actually have $200 because the IRS is going to take their cut one way or another. As your portion of the invested money grows over time, the IRS's portion grows over time as well. In a level or stable tax environment, both the IRA and the Roth IRA are worth the same amount of money. The value of the Roth IRA has nothing to do with having enough time to recover from the taxes you pay on the Roth Conversion. The same math holds sway no matter the approach you take. It comes down to whether you think the taxes you pay on the front end will be greater or less than the tax you will pay on the back end. The only variable that really matters is expected tax rates. If taxes are higher in the future, the Roth IRA is the better choice. If you believe tax rates will be lower in the future, than go for the IRA or 401(k). Always be asking yourself where you think tax rates will be in the future. This is why David focuses on conveying the financial reality of the US. The unfunded liabilities of the country are close to $239 trillion at this point. If you think that tax rates are going to be higher in the future to help keep our country solvent, then the tax free worldview is the way to go. It's okay to keep some money in your tax deferred bucket to offset your standard deduction in retirement, but for most people the sweet spot is somewhere between $250,000 and $350,000. The people who aren't sure if the Roth IRA is worth it or not need to crunch the numbers year by year, and see that there is no catch-up period. The myth around Roth Conversions is not accurate. If after examining all the evidence and you believe that tax rates will be higher in the future, don't believe all the nonsense around Roth Conversions. The math is always on your side if tax rates are going to be higher down the road than they are today.