The Power Of Zero Show

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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.