The Power Of Zero Show

There are a number of ways to get money out of an IRA before you are 59 and a half years old. One is a Roth Conversion, but the problem with that is you have to pay tax and potentially a penalty. The only other way is something called a 72(t). The 72(t) basically means separate equal periodic payments. What this means is that you can take money out of your IRA before your 59 and a half years old as long as you do it in separate equal yearly distributions that last for at least five years, or until you are 59 and a half, whichever is longer. With the 72(t) you can take out about 5%, but that number ebbs and flows with interest rates. The IRS gives you three different income options when it comes to the 72(t). The first two options are fairly similar, amortization and annuitization. The third option is the required minimum distribution method. The RMD method is different because it's recalculated every year, and is designed to get bigger each year. With the first two methods, you are locking in to a level payment. If you don't keep the payment for a minimum of five years, you are going to pay a penalty. The only way to waive the penalty is to die or become disabled, but you do have a chance to change the method once if you see an issue in the future. The number one reason to do a 72(t) is to fund an LIRP and there is no other money anywhere with which to do so. Number two is you can't do a Roth Conversion because you have no money in your taxable bucket. Number three is to stymie the growth of an IRA prior to the 59 and a half year mark. Only one of ten will be a candidate for the 72(t), but for those who can take advantage of it, it can be a powerful tool to get money flowing to your tax-free bucket. Beyond funding an LIRP, you can spend the money however you want. David recommends putting the money into a tax free account. The point is to start growing dollars in the tax free bucket. Letting the tax deferred bucket grow in an uncontrolled way complicates your tax picture down the road, especially in a rising tax rate environment. You can be too young to use a 72(t) since you are committing to a lengthy time and your situation may change. There are also older ages where the 72(t) doesn't make sense. The closer to 59 and a half years old you are, you may as well wait instead of getting locked in and risking a penalty. The 72(t) should only really be used when there are no other options to fund the Roth Conversion or the LIRP, and the ages between 50 and 57 is the sweet spot for it. It's a great concept that allows you to start getting money into the tax free bucket, but it should only really be used in prescribed scenarios.

There are three critical mistakes that most people make when preparing for retirement that really should be resolved beforehand. The first mistake is to assume that you will be in a lower tax bracket in your retirement years. This has been pushed by more than a few financial gurus online that tell people to get a deduction during their working years by putting money in 401(k)'s and IRA's. This is likely a miscalculation on the part of many people getting ready for retirement. The country is $22 trillion in debt with $1 trillion deficits every year, plus 10,000 Baby Boomers retiring every day. In 2026, Medicare goes broke. In 2032, Social Security goes broke. The question is, how do we account for the massive gaps in these programs? To suggest that we will be in lower tax brackets ten years from now is to be completely ignorant of the math involved. Some experts have even claimed that we will just print and inflate our way out of the problem. The trouble is these programs are pegged to inflation. We can't borrow or print our way out, we aren't going to reduce expenses, so the only likely solution at this point is raising taxes. The first mistake is listening to the wisdom of yesterday without considering that times have changed, but if we look at the fiscal landscape of the country, it's hard to arrive at any other conclusion. The second huge mistake is having IRA and 401(k) balances that are so big in retirement that required minimum distributions cause your Social Security to be taxed. Most people don't realize the impact of Social Security taxation. If you have more than $44,000 in provisional income as a married couple, then up to 85% of your Social Security can become taxable at your highest marginal tax rate. Most people start taking more money out of the retirement accounts to make up for the shortfall which can have serious long term impacts. People who have their Social Security taxed will, on average, run out of money 5 to 7 years faster than people who don't get taxed. The way you avoid this is by shifting your money to tax free accounts and pay the tax now before you retire. The third mistake is not taking advantage of Roth IRA's and Roth 401(k)'s while you still can. Every year that goes by that you fail to take advantage of these accounts is an opportunity you will never get back. There are opportunity costs associated with not contributing money to these kinds of accounts. If you have a lot of money sitting in your taxable bucket, there are only so many ways to get the money out of there, like paying taxes on Roth conversions or a life insurance retirement plan. Roth IRA's have great liquidity, so every year that goes by that you don't fund these accounts is a mistake. The cost of admission to a tax-free account is paying a tax, and taxes are currently in a period where they are historically low. You can't go back in time and recuperate the lost years where you didn't contribute to your tax-free accounts. More people should have a balance between their buckets, also known as income tax diversification. By being aware of the three mistakes, you will be less likely of needing to make massive expensive shifts to be tax free later in life.

Harlon Accola is the National Reverse Mortgage Director for Fairway Independent Mortgage Corporation, and reverse mortgages are all he's done for the last sixteen years. More recently he's been training other professionals in how reverse mortgages mesh with overall financial planning. It is true that if you do a reverse mortgage you will lose equity, but it's not about losing equity, it's about spending equity. A reverse mortgage is simply a way to get your money back out in a tax free way that you can use to fund your retirement. You lose equity but you will gain cash. You won't have to pull that money out of somewhere else, which will allow your investments to continue growing. Everything is expensive if we don't understand the value. Reverse mortgages are more expensive than most other mortgages, but that's because of the protection you get from the mortgage insurance. Everything costs something, no matter where you take out the money you will pay to access it. The question is "does the value justify the cost?" A reverse mortgage can actually be better for inheritors than other options. If someone gets a reverse mortgage at 62 instead of waiting, they will have more cash flow during their lifetime, they will pay less taxes, they will have a higher net worth, and a bigger legacy to pass on to their children. What decreases the inheritance to children is long life and spending down assets, not reverse mortgages. By putting that money into a more effective investment, your children will end up better off. The alternative to living off your home equity during retirement is spending down all your other assets. By using your equity, it gives your investments more time to grow at higher interest rates. There are a number of new rules that have been put in place to make sure that people don't end up on the street after taking out a reverse mortgage. The only way to lose your house with a reverse mortgage is if you don't pay the taxes or stop living in it. Most fears around reverse mortgages are unfounded. Banks don't want your house. If you die early, your heirs get whatever equity is left. The bank doesn't become the owner of the home. If the reverse mortgage goes upside down by the time you die, your heirs won't owe any extra money. If it doesn't go upside, your heirs get the difference. Reverse mortgages are truly tax free, because borrowed money is not taxable. Because you are not selling your house you will not pay tax. Reverse mortgages can not cause a taxation issue, it can only be a tax deduction. A reverse mortgage is a source of money that isn't taxable so it makes Roth conversions much easier to calculate and more useful. The majority of Harlon's clients are mainly affluent and use reverse mortgages to optimize their retirement investments and decrease their taxes. Many investment advisors say that you can't use a reverse mortgage to fund an investment product, but that's not what's happening here. It's about using cash flow properly to replace money that is otherwise going to come out of higher cost and taxable accounts. There is $7.1 trillion sitting in people's houses. If by working with advisors, we can create liquidity. We can change the way retirement is done in this country. Everyone is skeptical about reverse mortgages at first, but you should run the numbers to see if your skepticism is valid.

Today, we continue last week's discussion of 15 Things You Should Know about the Roth IRA, with Part 2. You can not take a required minimum distribution from an IRA and turn it into a conversion, you have to deposit it somewhere else. The ideal scenario is to preemptively convert all your IRA's to Roth IRA's before you would want to. Roth conversions have to be done before December 31 but that makes it a real challenge to know what your modified adjusted gross income will be for the year by that time of the year. With traditional Roth IRA's, you have the ability to make up your mind in terms of contributions until April 15th of the following year. You can't recharacterize your Roth IRA anymore. You now have to work with the hand the market deals you in any given year. Roth IRA's don't have any required minimum distributions during your lifetime and if you die that still applies, but if you die and the account goes to a non-spouse beneficiary they do have to take distributions. This may change when the SECURE Retirement Act gets signed into law at some point in 2019. Roth IRA's have a 5 year rule. Whatever money you contribute to your Roth IRA, you can take out and return as long as you put it back in within 60 days. The 5-year rule says that you cannot touch the growth on your account until 5 years have passed or you are 59½ years old. Roth conversions also have a 5 year rule. If you convert $100,000, you can't touch that money for a minimum of 5 years without suffering a penalty. Technically this rule is also a way to take money out your account penalty free if you are younger than 59½ years old as long as you wait 5 years. The rule no longer applies once you are over the age of 59½ years old.

A true tax-free investment will meet two basic tests. They will first be free from every type of tax which means free from federal tax, state tax, and capital gains tax. The second thing is that the investment can't count as provisional income. Roth IRA's meet all those criteria as long as you are at least 59 and a half. Anything with the word Roth in front of it should be embraced as a truly tax-free investment, including Roth IRA's, Roth Conversions, and Roth 401(k)'s. You can't make a significant amount of money and invest in a Roth IRA. As a married couple, if your combined earned income is between $193,000 and $203,000, your ability to contribute to a Roth IRA gets phased out. If you make too much money there are other ways to contribute money to tax-free accounts, like a back-door Roth or the LIRP. Anyone of any age can contribute to a Roth IRA as long as they have earned income. The only exception to that is alimony. We should all know what the Roth contribution limits are. As of 2019, for a single individual, the limit is currently $6000 per year. The Roth 401(k) has different contribution thresholds. Someone younger than 50 can contribute up to $19,000 per year. Someone older than 50 can contribute up to $25,000 per year. You can do both a traditional Roth IRA and a Roth 401(k) in the same year. Roth 401(k)'s do not have income limitations as opposed to the traditional Roth IRA. For couples that make more than $203,000, that is an important option. Roth conversions do not have income limitations. Even Bill Gates could convert the money he makes each year to a Roth conversion. If you are at a high marginal tax rate you have to assess if it makes sense and is worthwhile to do so. Roth conversions do not count towards your modified adjusted gross income threshold of $203,000 as a married couple. Roth conversions will not prevent you from doing any sort of traditional Roth contributions. Tune in next week for Part 2 of 15 Things You Should Know about the Roth IRA.

Micheal Coleman texted a glowing testimonial to David about his latest book, "The Volatility Shield." We often talk about why your taxes could double in an effort to keep the country solvent because of the vast unfunded obligations like Social Security, Medicare, and Medicaid. However, there is another scenario where your tax rates can double that has nothing to do with those factors. David relates the story of a limousine driver that he met that was quite proud of his financial planning. He had a pension and a 401(k) with a million dollars in it, and felt like he had everything set up just right. The first question to ask is, "what tax bracket are you in?" It's important to figure out where you are in the tax cylinder, because you want to know the cost of implementing any sort of asset shifting recommendations. The driver was in the 15% tax bracket at the time, but David pointed out that if he or his spouse died that would be more like the 25% tax bracket. In terms of advice, if all the driver did was shift the maximum allowable amount within the 15% tax bracket into a Roth IRA, he would be able to protect $35,000 per year as long as both spouses were alive. If there is a possibility that you or your spouse will pass away in the next 20 years, your tax rate is going to double no matter what. The Power of Zero principles can help protect you from more than just the risks associated with the country becoming insolvent. When you file as a single taxpayer, you hit each subsequent tax bracket twice as soon. If you are living on the same amount of money as you were when you were married, you could find yourself with a marginal tax rate that has doubled. Systemically repositioning money from tax deferred to tax free allows you to avoid this scenario, and pay tax rates that are still historically low. It not only allows you to take out your money down the road tax free, if it goes to your heirs they also get to receive it tax free, at a time where tax rates will likely be much higher and they can least afford to pay them. Shifting money to tax free doesn't just benefit you, it can also benefit the people that will spend your money after your death. You don't want to scrimp and save your whole life only to give up to 50% of your money to the IRS. If you're in the slow-go years or the no-go years you're likely in a low tax bracket. So, it makes sense to figure out what your current tax bracket is right now, and compare that to what your children would pay if they were to inherit your tax deferred assets. If you're in the 22% tax bracket it makes sense to look at what the 24% tax bracket can do for you in terms of your ability to shift money to tax free. Even if tax rates don't double to keep the country solvent, they can still double for you. If that happens, it will be too late to do the Roth Conversion because the conversion will be done at the doubled tax rate. We are at historically low tax rates, especially for married people, so take advantage of them while you still can.

In 2012, there were two Acts that came out in Puerto Rico that gave people massive tax incentives to move their business there. Act 20 says that if you own a qualified business and move it to Puerto Rico they will waive your federal tax, your state tax, and they will charge you a flat 4% tax. You have to become a Puerto Rican citizen in order to take advantage of the Act. Act 22 is even better, this Act says that Puerto Rico will also waive all your capital gains tax. This is why hedge fund managers and real estate tycoons tend to live in Puerto Rico. There used to be a lot of stipulations around the Acts but they have since relaxed them a bit to mainly living in Puerto Rico for at least 183 days out of the year. You can also live in Europe for the majority of the year and still maintain your tax status in Puerto Rico, it only matters if you live in the mainland US. There are some downsides to Puerto Rico you should keep in mind. When hurricanes come there is usually little opportunity to leave so you just have to batten down the hatches and wait out the storm. You also have to deal with the fact that it's a tropical island that tends to move relatively slowly. When people ask when I'm coming back to the mainland, I tell them "I'm coming back when I'm sick of not paying taxes!" You do have to give up a lot of the amenities of the US. Seeing a doctor can occasionally be a challenge so it's not for everyone. The lesson I learned from living in Puerto Rico is that when you pay taxes in the United States you do get infrastructure improvements in exchange. You have to temper your expectations around services in Puerto Rico and understand what the nature of living on the island is all about. Harry Dent is a demographic investor that has made several accurate predictions and is one of many people that have decided to live and work in Puerto Rico. Act 20 and 22 were established to convince successful businesses to come down to Puerto Rico and stimulate the economy. In many ways, the economic circumstances have gotten so bad in Puerto Rico that many people are fleeing the island to go to the mainland at the same time that Americans are fleeing to Puerto Rico. You have to be willing to turn your life upside a bit but Puerto Rico is a possible tax paradise for the right person.

The math demonstrates that our elected officials have made promises that they can't possibly afford to deliver on in the form of Social Security, Medicare, and Medicaid. To avoid getting voted out of office, they are likely to raise taxes dramatically in the future and the people who will suffer the most are the ones who have the majority of their retirement savings in 401(k)s and IRAs. The taxable bucket is the least efficient bucket to keep your money in, given that in reality, the optimal amount to keep in this bucket is around six months of living expenses. Anything else should be shifted to a tax-free account. $22 trillion of Americans' retirement money resides in tax deferred accounts. Because of how easy it is to invest this way, this is where we save most of our money. Financial experts told us 20 years ago to do it and due to force of habit we still do. We are also addicted to the tax deduction on the front end which the government is more than happy to give us. We must remember that the true purpose of our retirement account is not to give us a deduction, it's to maximize cash during a period of our lives where we can least afford to pay the tax. Some people believe they should get every dollar into the tax free bucket but that's not necessarily the case. If you shift all of your money from tax deferred to tax free, your standard deduction is wasted so we want to leave some money in the tax deferred bucket to take advantage of that. For most typical American retirees, the amount is somewhere around $300,000. New legislation may force us to change the way we take money out of an inherited IRA. If this occurs, depending on the state you live in, it could cost you up to half of the IRA because you will have to withdraw the money on the IRS's terms. This is another reason to accumulate dollars tax-free because doing so can really insulate you from this type of legislation. For an investment to be considered tax-free it has to be free from federal, state, and capital gains tax. It also has to not count as provisional income. Roth IRA's, 401(k)'s, and conversions all count as tax-free. There is also a strategy known as the Life Insurance Retirement Plan (LIRP) that mimics a lot of the features of the Roth IRA, is available to everyone, and does a lot of things that other tax-free accounts do not. There has been a lot of negative feedback about programs like the LIRP, some of it justified, but a lot has changed in the last 15 years. Not everyone has been kept apprised of these changes, and it's now a very dynamic tool that can be very productive while also protecting you from long-term care events and stock market fluctuations. The first step, if you want to implement the Power of Zero paradigm, is to find a qualified expert to help you. Not all financial experts are created equal, ask some questions and find the right person to help you. We now know the year and the day when tax rates will go up: Jan 1, 2026. When they go up, they will go up quite a bit. We have a seven year window of opportunity to take advantage of historically low tax rates. You should try to spread the tax liability out over the next seven years so that you don't bump up into a higher tax bracket but still get all the heavy lifting done.. If you let a single year go by without taking advantage of these historically low tax rates, your window narrows and you will probably rise into a higher tax bracket to get it all done. Strike while the iron is hot and take advantage of the next seven years because once they're gone, we are not likely to see taxes this low again in our lifetimes. When you do something by design, it means being proactive. If you're proactive today you can extend the life of your investments and you'll find you have more money to spend in retirement.

David has been in the industry since 1997, serving people and trying to insulate them from the coming tax storm. David's wife and seven kids live with him in Puerto Rico, and he's written several books to get the word out to the American people. David Walker was the former Comptroller General of the federal government, and in 2010 he created a movie called I.O.U.S.A. In that movie, he talked about how we are marching into a future where we are likely to go bankrupt as a country. David Walker is one of the key people that has inspired David to talk about these issues, along with Larry Kotlikoff. 10 years later, it seems like no one is talking about the issues anymore. Not a lot of people are aware that tax rates will be higher in the future than they are today. Even with the people that do believe the message, they haven't done much about it. David does about 70 or 80 presentations a year, and the people he talks to seem to recognize that we are in tough fiscal straights. Once they get educated, people recognize that math doesn't lie, and if they want to be prepared for retirement they have to dramatically change the way they do things. Politicians are very reluctant to control spending, because their number one job is to get elected. The biggest voting block in the US is the Baby Boomers, and the easiest way to not get elected is to talk about cutting Medicare, Medicaid, and Social Security. In the Power of Zero movie, Tom McClintock talks about the concept of a sovereign debt crisis. That's where other nations will no longer loan you money, and since Medicare and Medicaid is pegged to inflation, that scenario basically leaves us with dramatic and draconian increases in tax rates as the only viable option. The states are not immune to unfunded liabilities. 75 million Baby Boomers are making a bet, whether they know it or not, that tax rates will be lower in the future than they are today by leaving their money in 401(k)'s and IRA's. David Walker famously talked about why tax rates will basically have to double in the next ten years because we can't grow our way out of the problem, or print our way out, and people will not lend us the money. Tax rates will have to double in the next ten years if we don't start cutting these programs in a dramatic way. For every year we don't cut Social Security by a third, the harder the fix becomes on the back end. There are millions of different types of investments, but they all fit into one of three types of buckets. The taxable bucket typically contains things like money markets, CD's, and brokerage accounts. The taxable bucket is the least efficient way to save your money. Every dollar you give to the IRS is a dollar that you don't get to invest and grow for your future, which is why David recommends that you only keep your emergency funds in the first bucket. The majority of the Baby Boomer's savings are in the tax deferred bucket. David likes to describe this bucket as going into a business partnership with the IRS, where they get to vote on what percentage of your profits they get to keep. This can make planning for retirement really difficult because you can't really know how much money you actually own. The last bucket is the tax free bucket. If you believe that taxes will be higher in the future than they are today, it makes sense to pay the tax today and then take it out tax free later on. At that point, you have divorced yourself from the IRS and own that money. If you're in the zero percent tax bracket, it insulates you from higher taxes. Even if tax rates double, two times zero is still zero. The taxable bucket can be very useful since it's very liquid and easily accessed. The optimal amount to hold in your taxable bucket is around 6 months of basic living expenses. Any investments in this bucket should be low risk and non-volatile. Living a richer life by design means being more intentional and proactive when it comes to retirement planning. We have been lulled into the traditional paradigms, and people have to remember that the purpose of your retirement account isn't about getting a tax deduction. It's about maximizing your cash flow during a period of your life when you can least afford taxes. The Power of Zero worldview really embodies the by design perspective.

There are two pieces of legislation that are working their way through the House and the Senate. The goal of which is to incentivize and encourage people to save more often and save earlier, but there's more to them than that. The Setting Every Community Up For Retirement Enhancement Act (SECURE) is the legislation moving through the House. The Senate has their own version of a similar act. Both pieces have a lot of things in common, namely they both want to create retirement plans that have annuity options within them. They also want to require retirement plans to tell the contributor at least once a year what their lump sum would equate to as an annuity payment. It's about income, not assets. Imagine knowing how much per month you would be getting out of your retirement account once you retire at the age of 65 at the top of each statement you get. There is talk in the House measure to push the required minimum distribution from 70.5 all the way up to 75. For most people this won't affect them, it will affect people who are not dependent on their RMD's right away. This could eventually force them into a higher tax bracket. RMD's are designed to force you to liquidate your IRA vehicles before you die. If they are pushing back the age limit, they may also force you to take more money out and subsequently increase the amount of taxes you're going to have to pay. If you consider the current rules around inheriting an IRA right now, the RMD's would reflect your expected life span. This means you probably wouldn't be forced to take much each year if you're relatively young. In the proposed legislation, you could instead be forced to liquidate the inherited IRA in only 10 years and be forced to pay taxes at your highest marginal tax bracket. This could be considered to be a huge tax grab by the IRS. On one hand, they appear to be making it easier to save more money, but what happens on the backend? Some of the proposed provisions will help, but there are a couple of things in the legislation that will cause some major issues from a tax planning perspective. Some version of the bill will likely be signed into law. All this really does is underscore the need for tax planning, and shifting money from tax deferred to tax free. Keep in mind that if the money goes to a spouse, they won't have to spend the money over a ten year period, but as a widower their tax bracket just gets cut in half. That means it's much easier to hit the higher levels of marginal taxes. This legislation is all the more reason to proactively pay taxes on these accounts at historically low tax rates. At the very least it could significantly help out your heirs, as they will probably be at a point in their lives where they are paying very high taxes and could probably use some help.

The simple answer to the question of whether or not you can have too much money to get to the 0% tax bracket is no. The thing someone would be afraid of in that regard is paying so much tax in the process that it wouldn't make sense to try to get there. It really comes down to whether the next seven years will be a good deal in terms of how much taxes you can pay now versus pay later. Much of the answer relies on Required Minimum Distributions. RMDs are designed to force you to pay taxes on all the dollars in your tax deferred account before you die. There is about $22 trillion in the cumulative retirement accounts in the US and the IRS wants to have some tax predictability. If you have $5 million in your tax deferred bucket for example, you're going to be forced to take out roughly $175,000 each year, and before you know it, you could be in the highest marginal tax bracket. The whole point of the Power of Zero world view is that tax rates are going to be dramatically higher in the future than they are today. The equivalent of the 37% tax bracket after 2026 could be 50%. You have to look at everything in context. Another thing to keep in mind is that not all couples die at the same time. There could be a number of years where you end up basically paying double the taxes after your spouse dies. There is currently legislation in the House and the Senate that could eliminate the ability of your children to stretch out your IRA money out over their lifetimes. Currently, if you are a non-spouse beneficiary you can stretch out the RMDs over your lifetime, which can allow you to avoid bumping up into a higher tax bracket. The legislation would force you to pay taxes over a ten-year period. What would happen to your beneficiaries if they were forced to receive hundreds of thousands of dollars each year? They would likely pay tax at the highest tax bracket, and if you're planning on dying after 2025, that will be at least 39.6%. The US government is hurting for tax revenue and they are willing to force your children to pay taxes on their inheritance that they would otherwise be able to stretch out over their lifetime. There is a good chance that they will only be able to keep half of it. Ask yourself, does it make sense to have large amounts of money in your IRAs, having your spouse be forced to potentially pay taxes at double the rate, or for your children to pay taxes on that money over a ten-year period? If you have lots of money in your taxable bucket, that may be a different story. If you can shift your taxable money over to tax free, that money can grow more productively, particularly in life insurance. As we slip further into insolvency as a country, the US is going to put all options on the table in order to garner more revenue. If you have a lot of money, the IRS is going to get their money one way or another. The question is, if you're not going to pay that tax then who is going to pay?

The Power of Zero paradigm changes a bit when you have a pension. The best case scenario in terms of tax rates that you are going to experience is likely to be while you're working. Let's say we have two 60-year-olds that want to retire in 5 years. They have $500,000 in their IRA's and 401(k)'s, and one of the spouses has a pension of $5,000/month. They are currently in the 22% tax bracket. If you have a $5,000 pension, that is construed as provisional income by the IRS. This means that up to 85% of this couple's social security becomes taxable. When they couple the pension and social security together they are looking at filling up the 10% tax bracket and most of the 12%. Any dollar that the example couple takes out after retirement is going to flow into their taxable cylinder and they will pay taxes at the 22% tax rate or in the future the 25-28% tax bracket. We have a situation where if the couple wants to take money out of their IRA, the best case scenario is that they will be able to keep 78% of their money, and that doesn't count state taxes. Where the opportunity lies when someone has a pension, is we can make the case that since they will be in the 22% tax bracket in retirement, they might as well be converting and maxing out that tax bracket until they are 65. We want to drain those IRA's and 401(k)'s before they reach retirement so the money will come out tax-free. We worry about the things we can control, not the things we can't, and we can't control the fact that their pension and social security will be taxable but they can control the rate at which they get taxed on all their other assets. If they only convert $70,000 per year to maximize the 22% tax bracket, they won't get all the shifting done in the next 5 years. That means they will have to pay higher taxes on the balance. They really need to get the money out before tax rates go up for good in 2026 and converting up to the top of the 22% tax bracket isn't going to cut it. For only 2% more, they can convert an extra $150,000 per year which is a great deal (comparatively). Even if they pay an additional 2%, that will still be lower than the 25% tax bracket that the 22% bracket will be after 2026. If you are already in the 22% tax bracket, and that is most people, and you have a pension that will likely cause your social security to be taxed, you're in a situation where there is no real reason not to max out the 22% tax bracket and probably the 24% as well. Every year that goes by where you fail to take advantage of the current 22% tax bracket is a year where you will be paying at least 25%. The real concern is when the US has a sovereign debt crisis, which is where countries will no longer loan us money and we can no longer print money to escape the issue. Social security and Medicare are pegged to inflation so printing money won't be a solution, the only viable option will be to raise taxes. If taxes raise dramatically over the next decade, we'll look back at the current time as an opportunity of historic proportions. Any sort of residual income will be taxed the same way and could cause up to 85% of your social security to become taxed. The bottom line is to take a look at what your tax bracket is today and what the best case scenario is going to be once your pension and social security fill up the first two tax brackets. You'll see that not a year should go by where you are not taking advantage of these historically low tax rates. Your tax rates are going to double no matter what. When a spouse dies the cost of unlocking dollars from your taxable accounts doubles. If you're thinking that you can just live off of your pension and social security and leave everything in your IRA, there is legislation being considered right now that may limit or greatly affect that plan. If you have an IRA, you should really shift those dollars to tax-free with a Roth Conversion or a LIRP. When we cut taxes, we did just the opposite of what economists said to do. Instead of cutting costs and raising taxes, we cut taxes and raised costs. Mainstream media outlets are starting to acknowledge that we have a debt problem and we'll need to address it eventually. If you have a pension, make sure you assess what your tax bracket is today and recognize that taxes now are lower than they will be in the future. The highest marginal tax rate in 1960 was 89% and the poorest among us were paying 23%. We haven't seen these tax rates in a long time but they are being talked about, experts across the country are making the case that we are at a crisis point. Weigh the evidence and decide if tax rates down the road will be higher. Every year that goes by is a year beyond 2026 where you will be paying the highest tax rates you're going to see in your lifetime.

Let's say we've got two 60 year olds that want to retire at the age of 65. They've got $300,000 in their taxable bucket, $700,000 in their tax deferred bucket between their IRA's and 401(k)'s, and nothing in the tax free bucket. The first step to getting into the Power of Zero paradigm is being convinced that tax rates in the future are going to be dramatically higher than they are today. The second step is that given that tax rates are going to be higher in the future than they are today, realize that there is a perfect amount of money to have in your taxable and tax deferred buckets. Given the starting point, these two people have way too much in their taxable bucket, and they should be systematically shifting that money to tax free over the next seven years. They can do that through the Roth IRA, the LIRP, and they can also pay taxes on the shift from tax deferred to tax free out of the taxable bucket. They know they need the balance in the tax deferred bucket to be low enough so that when the IRS forces them to start taking money out, the RMD's are equal to or less than their standard deduction and that avoids their social security to be taxed. Assuming they don't have a pension or any form of additional income, the ideal amount of money in the tax deferred bucket is around $300,000. It's okay to leave some money in your tax deferred bucket. You want your balance to be low enough that your social security doesn't get taxed, but you also want to be able to take advantage of your standard deduction. In order to shrink it down to the optimal number, the example couple would need to shift about $92,000 each year. Remember you want to stay in a tax bracket each year that doesn't give you heartburn. Lucky for these people, they can shift an additional $150,000 each year for only an extra 2% tax, which they can pay out of their taxable bucket. Keeping the taxable bucket around $50,000 will go a long way towards insulating yourself from tax rate risk. The LIRP is meant to mitigate one of the biggest risks for people over the age of 60, namely a long term care event. Without a plan for long term care, they could potentially burn through their entire portfolio. What they should do is get a death benefit that's impactful. That means a fully funded LIRP which looks like around $35,000 each year. With $35,000 going to the LIRP, $55,000 should be going to their Roth Conversions. If they have any money leftover in their taxable bucket, they should probably put that money into their Roth IRA's because they should have as many streams of tax free income as possible by the time they retire. Tax free streams of income include Roth IRA's, LIRP's, and Roth Conversions. With all those combined, they could get to the zero percent tax bracket while also getting their social security tax free.

The five key takeaways of The Power of Zero message have evolved considerably, especially since the recent Trump tax cuts. The first takeaway is that tax rates in the future are likely to be dramatically higher than they are today. Politicians are extremely averse to cutting spending in any way because cutting the programs that are going to consume the most in terms of resources like Medicare and Medicaid is the third rail of politics. We are at $22 trillion in debt and it will continue to grow because we are not able to even broach the subject of cutting spending. This means the only option at this point will be to double taxes, cut spending in half, or some combination of the two. Tom McClintock believes that if the US doesn't change course in a serious way, it will end up like Venezuela in 8 years. The only way to insulate yourself from the effect of higher taxes is to get to the zero percent tax bracket. Worry about the things you can control, not the things you can't. If you have money in an IRA and 401(k), why not shift all that money to tax free at the lowest tax brackets you are likely to experience in your lifetime? It is nearly impossible to get to the zero percent tax bracket by relying on just one stream of tax free income. Putting your eggs all in one basket is terrible advice, you need multiple streams of income to get the zero percent tax bracket. Each stream of income strategy has its own advantages that others don't. Leaving a small amount of money in your IRA in retirement can lead you to the holy grail of financial planning. You get a deduction on the front end and your required minimum distributions on that account get offset by your standard deduction. When it is low enough, it won't cause your social security to be taxed. Social security can be tax free, it functions like an annuity in that the longer you live the greater the investment you get out of it. It also functions as a volatility shield by providing you money to rely on for your lifestyle, instead of drawing from your portfolio in down years. The Life Insurance Retirement Plan gives you safe and productive growth, is tax free, and it can also give you a death benefit that can solve your long term care insurance problem. As of January 1st, 2018, tax rates went on sale. Given the Trump tax cuts and the sunset provisions on those cuts we now know the exact day that tax rates will go up. People are afraid to do things like Roth conversions because of the possibility of tax rates going down in the future, but at this point taxes going up is all but guaranteed by 2026. You want to pay as little tax as possible and stretch out the tax liability over the next seven years, but you also want to do it quickly enough to get all the heavy lifting done before tax rates go up. [ Whether you did your financial planning wrong is up to you. If you treat the next seven years perfectly you have a chance to make it right. You now have the next seven years to move your money from tax deferred to tax free and wring the most out of your retirement dollars.

When you take social security ultimately comes down to how long you are going to live. If you can accurately predict how long you are going to live you can accurately predict at what age you should draw social security. The question becomes "how do you figure out how long you're going to live?" One of the best answers is to simply go through the underwriting process for the Life Insurance Retirement Plan. When you go through the underwriting process you get one of thirty different ratings and you can use that to help determine when the best age to take social security is. If you presuppose that you are going to live a nice long life you should put off social security for as long as you can. For every year after your full retirement age that you put off taking social security your monthly benefit increases by 8% per year. A Roth Conversion counts as provisional income. If you do that in the years that you are taking social security you could cause up to 85% of your social security to become taxable. This is why it's not a great idea to take your social security at a young age. If you take social security at 62, you are also locking yourself in to the lowest amount of social security you could get. If you are doing Roth Conversions while taking social security at the age of 62, not only are you taking the lowest amount, you are also having your social security taxed. Any money taxed could have gone to accrue interest that would have benefitted you for the rest of your life. The longer you live, the better off mathematically you are taking social security as late as possible. It also gives you more time to get your Roth Conversions done. There are a lot of benefits to pushing your social security off, especially if you are going to live a long life and plan on doing Roth Conversions. It comes down to going through the underwriting process and seeing if you can qualify for a Life Insurance Retirement Plan. If you get a good rating, it makes sense to puch social security off as much as possible. If it looks like you're not going to live very long, then take your social security as soon as you can. There is a huge opportunity cost when you pay a tax that you didn't otherwise have to pay. Not only do you lose that tax, you lose what the money could have earned for you by investing it.

You're saying tax rates are going up, so you mean I've done this all wrong? Not necessarily… you want to put money into your tax deferred bucket when the deduction means the most to you, when tax rates are historically high. You want to take money out of your tax deferred bucket when taxes are low. Most people put money into their tax deferred accounts during a time when tax rates were higher than they are today. Starting Jan 1, 2018 and going until Jan 1, 2026, we have currently have as a low a tax rate as we will experience in our lifetime. Whether this becomes a deal of historic proportions for you will depend on what you do over the next 7 years. We now know the year and the day when tax rates will go up so if you play your cards right you can reposition your money from tax deferred to tax free and do all the heavy lifting to protect those assets. It's easy to get discouraged when talking about the fiscal realities facing our country. In 2035, Social Security will go bust, the same will happen for Medicare in 2026. It's important to start repositioning your money to be tax free quickly enough to get it done before 2026 but slowly enough that it doesn't give you tax heartburn. We will look back at 2019 as a time when tax rates were at historically low levels and it was the tax deal of our lifetimes. David has been saying that tax rates are going to go up for a long time now, so some people are beginning to doubt whether or not the message is true. With the 2018 Trump tax cuts, we did the exact opposite of what we were supposed to do. This means that when the tax rates do come due, and they will, they will be all the more draconian and austere. We always kick the can down the road and wait as long as possible simply to avoid making the tough decisions because tough decisions are what get politicians voted out of office. Finland is going through a similar situation as America, they are trying to reform their universal health care because the program is going bankrupt but now they are mired in a major financial crisis because no one would vote for the reform. This is your window of opportunity to take advantage of historically low tax rates. If you have a ton of money in your tax deferred bucket, this may be the perfect time to reposition it into your tax free bucket.

The question often comes up, which is better? A chronic illness rider or a long term care rider? For 50 to 65 years, the primary benefit of the Life Insurance Retirement Plan is the ability to receive your death benefit in advance of your death in order to pay for long term care. The long term care rider basically says that for an extra charge you can receive your death benefit in advance of your death at a certain rate per month. Requiring assisted living in two out of six activities of daily living triggers eligibility for this benefit. One critical thing to note is that since it's a long term care rider, the insurance company is going to underwrite you for long term care. This means that if you have an existing health problem it can be cause for rejection of your application. It also comes with an additional cost where you are paying for the option to take your death benefit early on the front end. If you die peacefully in your sleep without ever needing long term care you don't recoup that money. The chronic illness rider is essentially the same as the long term care rider with the same trigger conditions and a similar pay out. The main difference is that the insurance company doesn't charge you on the front end, they charge you on the back end. The insurance company will discount the payout based on a function of your age as a way of compensating themselves for giving you the money prior to when they expected they would. Another difference between the two is that the insurance company will not underwrite you for long term care with the chronic illness rider. Even if you have an existing health problem they will accept you which makes it a great option for people that would otherwise not qualify. One of the biggest problems with the traditional long term care approach is that you are paying for something you hope you never have to use and if you don't use it you don't get the money at the end. It's not that different from the long term care rider. You're paying extra up front and that is money that could have been invested in your growth account. David prefers the chronic illness rider over the long term care rider mainly because if you do die peacefully in your sleep without having used the money you don't lose any money along the way. There is no drag on your cash value or opportunity cost of paying for something you never wanted to use. Being able to qualify for a chronic illness rider if you have an existing health condition is also a big advantage, and it neutralizes the single biggest source of heartburn that comes with traditional long term care approaches. The primary motivation for many of David's clients that use the LIRP is the long term care aspect and David typically recommends a chronic illness rider. It comes with many of the benefits and nearly none of the downsides. [ Between the two options for your traditional life insurance approach to long term care, the chronic illness rider is probably your best option.

After seeing what happened in 2008, Doug has been interested in creating films that can move the needle for society, specifically topics like the national debt, exercise, education, healthcare, and finances. In 2009, David Walker produced the landmark movie "IOUSA" that exposed the fiscal challenges facing the United States, and in many ways, he was the person that got Doug interested in the topic of national debts. Films have a finite lifespan, so creating another film on the topic is another chance to reach new audiences that haven't heard the message yet. The audience for the Power of Zero film is geared more towards financial advisors. It is more focused on how to protect yourself and is less about a call to action to prevent anything. That time has passed already. 8 million Baby Boomers are marching into a future where tax rates are likely to be much higher than they are today given our fiscal reality. The movie not only raises your awareness of what's happening, it also tells you what you can do about it. There are a number of prominent guests interviewed in the movie and in many ways, it was a major challenge getting them on board. There are almost no documentaries being made on the topic and it's a major hurdle to get people to talk about it. Many economists were reluctant to speak on the topic after "An Inside Job" came out and people saw the way the featured economist was treated. Doug had to get a few prominent economists on board before anyone else would entertain the idea. There were two people that really stood out to Doug who were in the film, Martin Eichenbaum and Tom McClintock. Everything Dr. Eichenbaum said would happen has come true. His message was basically "It doesn't matter how we look at the problem, taxes are going up." Tom McClintock was interesting for different reasons, mainly because of his ability to pull back the curtain of what really goes on in American politics. One of the things Tom McClintock talked about was a sovereign debt crisis which happens when countries stop loaning us money because they believe we won't be able to pay it back. When that happens, that's when we really run into trouble. It's not possible to print our way out of the problem. Many of the social programs are tied to inflation so if we print money, the cost of those programs go up commensurately. If we can't print money or borrow money, the only remaining options are raising taxes or cutting spending. Seeing what the real numbers are, and understanding the fact that even if taxes were raised it wouldn't do too much to fix the problem, has Doug deeply concerned about the issue. There is no scenario that Doug sees where taxes do not get much higher than they are now and he's expecting some tough times ahead for the United States. Doug didn't want the film to be too focused on the doom and gloom aspects of the problem. It will get ugly, but it's not the end of the world. When you get down to it, the country is either going to have to double taxes, cut spending in half, or some combination of the two. Many of the film's guests believe that we can still avoid a catastrophe if we change things soon enough. The biggest difference between the Power of Zero and when IOUSA was released is the latter came out right at the beginning of the Great Recession. We have been enjoying an economic boom since then and that would have been the perfect opportunity to be fiscally responsible. We have never had this kind of deficit spending during peacetime in the history of our country. There seems to be no concern about the national debt right now which is why it's so important to get the film's message out there into the public discourse. The fiscal gap should go on the balance sheet of every country in the world. Nearly every country has adopted that way of accounting except for the United States. If we were to measure our debt the way that Japan measures theirs, it would be over 1000% of GDP. No matter what the numbers turn out to be, we are facing a huge problem. The canary in the coal mine will be when we start having trillion dollar deficits, which has since happened after the launch of the movie. The film has been theatrically released and now it's also available for private or commercial screenings as well. You can obtain the license from tugg.com and can show the film in whatever venue you want. At thetaxtrain.com, you can select the quantity of codes you want which you can then send to your clients so they can get free access to the Power of Zero film. You can also go to realhouse.com and purchase a copy of the film as a gift for someone and send it to them directly.

The best way to pay for long term care protection is by way of a permanent life insurance policy. If you die peacefully in your sleep 30 years from now someone is still getting a death benefit. You are better off dying than requiring long term care, at least if you die your spouse becomes the beneficiary on all of your retirement accounts. Long term care insurance can prevent your spouse from enduring a bare-bones subsistence living in retirement if you end up needing to pay for long term care. 70% of people will need long term care insurance in retirement. There are four ways to insure the need for long term care. The first is a Traditional Long Term Care policy but they are falling out favor because the prices are not guaranteed on these programs. Actuaries have been mostly unable to predict how much money to set aside. They are one of the least expensive options overall but the insurance company can increase the price at their leisure. The big number on Traditional Long Term Care is 0. If you pay into the policy and die without ever having used it, your spouse gets nothing back at the end. There is no death benefit. The second option is known as Hybrid Life Insurance or Asset Based Insurance. It's more expensive than the Traditional LTC option but it comes with a slightly superior payout for long term care and the death benefit at the end is little more than a refund of the money paid into the policy. The third option is Permanent Life Insurance. The biggest benefit of this option is that the death benefit is passed on to your heirs tax-free. David relates the story of a life insurance agent that was working with a farmer client who wasn't sure what approach to take. He gave the client a copy of the Volatility Shield and that convinced the client to opt for the Permanent Life Insurance policy. The fourth option is a Deferred Income Annuity, many of which come with long term care options. It requires a lot more money up front but it accomplishes both long term care coverage and a decent death benefit for your beneficiaries. When you compare all the options, Permanent Life Insurance really stands out due to the considerably larger payout upon death. You also don't have to liquidate your assets right away in the year that you die to pay for expenses if the market is down. The Permanent Life Insurance can be used to pay for expenses because it isn't affected by the decline in the market and it can serve as a Volatility Shield of sorts. This is why the LIRP can be a great strategy. You get the long term care coverage as well as the death benefit to pass on to the next generation if it turns out you don't need it.

The audio version of the Volatility Shield won't be released for another three weeks, so David gives you a sneak peek at the opening chapter of the book. The story opens with Jack driving down the highway preparing to leave his life behind and start something new. His plans change when he receives a call from his stepfather Ted. Jack visits Ted at his sports store and gets some surprising news. Ted has sold his business and needs a little help from Jack. Ted always seems to have some sort of ulterior motive; in this case he's hoping Jack can take a look at his finances to make sure that his retirement portfolio will last the rest of Ted and his mother's life. Jack takes a look and notices that the financial plan in front of him may have some problems with it. It may be less a 'set it and forget it' than Ted's financial advisor first told him. If Ted's portfolio can average a 9% return each year, theoretically they will never run out of money. Jack asks for a favor that Ted is reluctant to give. The Volatility Shield has a great plot, a nice twist ending, and a $5 million dollar crime that needs to be solved and Jack Wheeler is on the trail. Get your copy of the book on Amazon or pick up the Audible copy when it's released in a few weeks.

Every once in a while an advisor will attempt to elevate the LIRP by diminshing the Roth IRA. They may, for example, say that the Roth IRA has some inherent limitations, including income limitations--if you make too much money or too little money--lack of plan completion insurance, and the inability to access the money until you're 59.5 years old. You're also susceptible to declines in the stock market. The Life Insurance Retirement Plan, on the other hand, has no contribution limits and no income limitations. It's often referred to as the rich man's Roth because it has many of the tax-free attributes of the Roth IRA without the limitations. Given the perceived superiority of the LIRP, many advisors will tell you to put all of your money into that. In an effort to lift up the LIRP, they will denigrate everything else. This is folly. You don't ever want to have only one investment strategy arrow in your quiver. The Power of Zero says that every tax-free stream of income has a purpose. Each has their benefits and limitations. They fit together like a puzzle and compliment each other. None of them are the perfect investment on their own. The more streams of tax-free income you have, the better off you will be. The Roth IRA doesn't count as provisional income and is truly tax-free as long as you're 59.5 years old. It also has much more liquidity than a LIRP in the early years, and it can double as an emergency fund. The LIRP is great because it is safe and productive, typically mirroring the growth in the stock market up to a cap while guaranteeing you don't lose money. With an Indexed Universal Life policy, you can take advantage of Variable Loans, and if you play the arbitrage correctly, it can help your cash value grow significantly. IRA's on the other hand, have benefits that they above-mentioned alternatives don't have. For example, if you can get your IRA down to the ideal balance through Roth conversions, your required minimum distributions will be offset by your standard deduction. Of all the tax-free streams of income, this is the only one that gives you a deduction on the front end, allows your money to grow tax-free, and let's you take money out tax free, by offsetting taxation with the standard deduction. Basically, it's the holy grail of financial planning. [ Everything has its place because each strategy can do things that the others can't. [ The Roth 401(k) may offer free money since the company you work for is probably offering some sort of match when you contribute. That free money helps you pay the tax on the back end (if there is any). If you have money inside your traditional 401(k) you should put money into your Roth 401(k) account and the match money into the traditional account. [ If you have all these different streams of tax-free income that are respecting the different thresholds, then your social security becomes tax-free. For Baby Boomers, this means they are getting way more out of these programs than they put into it. [ Because you have a consistent stream of income (SS), you won't have to rely entirely on your stock market portfolio. This means you're less likely to deplete your portfolio during down years in the market and decreases the odds of you outliving your retirement funds. [ The Power of Zero point of view when it comes to which is better, the Roth IRA or the LIRP, is neither. Each has qualities that the other does not. The LIRP is not a silver bullet; it is merely a compliment to the other strategies you can make use of. There is a proper and corret amount of money that should be allocated to your LIRP, just like all your other tax-free accounts.

With a Roth IRA you have income limitations. At a certain amount of income, the amount you can put into a Roth IRA begins to reduce and at $203,000 in yearly income you can no longer do a Roth IRA. This is problematic for people that have a lot of taxable income in a given year. There are ways around the limitation but it comes with strings attached. If you make more than $203,000 in gross income as a married couple, you can take advantage of a Traditional IRA. The tradeoff here is you get a tax deduction now and pay the taxes later but if you make more than $123,000 and have a plan at work like a 401(k), you can no longer do a deductible IRA. The back door Roth strategy says that you can convert that IRA to a Roth IRA and since you've put in after-tax dollars into that account, it functions just like it would had you just put the money into the Roth IRA. If you have money sitting in more than one IRA, the IRS says you have to make an additional calculation that basically feels like a double tax. Another option that allows you to avoid this calculation is to roll your IRA into a 401(k), and that will allow you to perform the back door Roth without any implications at all. Before you consider the Back Door Roth strategy, consider your portfolio. If you have money in other IRA's you could end up paying what feels like a double tax. One of the interesting things about a Roth conversion is you have to make up your mind by Dec 31 of any given year. This means you may not fully understand the taxable implications because you haven't done your taxes for the year. A Roth Recharacterization used to be a way that you could reverse the Roth IRA decision in the subsequent tax year if you felt that it was a bad deal. Given the changes in the tax code, you can no longer do a Roth Recharacterization. This underscores the importance of understanding the taxable implications of a Roth conversion and working with someone who understands your situation as well. You do not want to do a Roth conversion if you don't understand the taxable implications and can't undo your decision. If you're going to do a Roth IRA, make sure you understand the implications and how it's going to impact you.

The 4% Rule says that when you retire there is a finite amount of money you can pull out of your portfolio per year if you want your money to last your life expectancy. Based on Monte Carlo simulations, that number is 4%. If you take more than 4% out of your portfolio during down years, you're getting hit twice. Too many years like that and your portfolio could go into a death spiral from which it may never recover. If you want your money to last, 4% is all you should ever take out. For example, if you have a million dollars in your portfolio and take out only $40,000 per year, you can have a strong expectation that your money will last roughly 35 years. Is there a way to beat the 4% rule? That's what the concept of the Volatility Shield is all about. If during the down years, instead of taking money out of your stock market portfolio, you take money out of a completely separate account. This can give your stock market portfolio a chance to recover. Studies have shown that with this strategy you can take out much more than 4%. The Volatility Shield account must be safe and productive. It can't just be a savings account. It also has to be tax free and absolutely be in place before retirement. The account that will best serve as a Volatility Shield is called the Life Insurance Retirement Plan. Many of those policies fulfill all four major criteria. The funds for the account have to be in place before you retire and will probably come from the funds you are using for your retirement. Will you have enough lifestyle money accumulated before you retire based on what you're contributing? If the money is growing safely and productively, that could mean you will have 6-7 years of lifestyle money set aside for the inevitable down years in retirement. The Volatility Shield will allow you to take a much higher withdrawal rate even though your retirement portfolio will have a little less money in it. The Volatility Shield book is written a little differently than the other books. It's a fiction story that teaches the principles of the concept while delivering an unexpected narrative twist at the end.

The first type of LIRP is Whole Life. It goes back to the very beginning of life insurance and is designed to last you your whole life. You contribute money to your account and that money grows in a predictable way, earning anywhere from 3-5%. Because of this steady, predictable growth, people sometimes use this kind of insurance as the bond portion of their portfolio, enabling them to take more risk in other areas of their portfolio. Similar to Whole Life but with a few distinct differences is Universal Life. This type of insurance is affected much more by the fluctuation of interest rates. This policy tends to not have as many guarantees. Universal Life policies are not used as much in a Power of Zero paradigm. You generally see them minimally funded with guarantees that the policy will stay in force to a given age. This can be the cheapest way to guarantee a death benefit. A Variable Universal Life policy is another type of policy that basically says that your money will be invested in mutual funds called sub-accounts. This is good for people under the age of 45 but becomes more worrisome when you're older. One problem with VUL is that when the cash value goes down due to market fluctuations, the amount of life insurance you have to pay for goes up. If the market goes down multiple years in a row, a Variable Universal Life policy can go into a death spiral from which it may never recover. If you don't have at least $1 in your cash value at the time of death, all of the tax free growth you experienced along the way becomes taxable to you all in the same year. Indexed Universal Life is an alternative that tries to mitigate the issues with the Variable Universal Life policy. In this policy your money flows into a growth account that is linked to the upward movement of an index in the market. When the market goes up, you get to keep the gains up to a limit and when the market goes down you are credited a zero. Too many down years in a row can still be problematic since you are still paying the expenses associated with the policy. This policy can average between 5 and 7% net of fees over time. Every ten year period averages between 2 and 3 down years. If you are ok with an average of 3% to 5% growth over time, a Whole Life plan can be a good option for some of the money in your portfolio. No matter which policy you have, you need to fund them correctly. The fees you're charged in your policy are generally always the same no matter how much you contribute, so it makes sense to put in as much as you can. You want the proportion of the fees to the overall cash value to be as small as possible. Which of the four types of life insurance policies is best for you will depend on your situation. Talk to the person that gave you the Power of Zero book or go to davidmcknight.com to find out more.

The whole Power of Zero paradigm is predicated on tax rates being much higher in the future than they are today. If you don't believe that, the Power of Zero paradigm is not one you're likely to warm up to. Step one is to recognize that taxes will be higher in the future than they are today. The fiscal gap is an estimated $239 trillion. That's the difference between what we have promised and what we can deliver. Step number two is to recognize that in a rising tax rate environment, there is a perfect amount of money to have in your taxable and tax deferred buckets. The perfect amount for your taxable bucket is six months of basic living expenses. Any amount above and beyond that is costing you money. For the tax deferred bucket, the balance should be low enough that required minimum distributions are equal to or less than your standard deduction and also low enough that it doesn't cause your Social Security to be taxed. Anything above and beyond those ideal amounts in the first two buckets should be systematically shifted to tax free. You should do it quickly enough to get the heavy lifting done before tax rates go up for good but slowly enough that you don't rise too rapidly in your tax cylinder. Once you recognize your magic number (the amount of money you need to shift to tax-free in a given year), you have to recognize that that money is probably going to be allocated to three different places. The first is the IRS, you may not enjoy it but you have to pay the piper first. The second is the Roth conversion, and the third is the Life Insurance Retirement Plan. If you're between the ages of 50 and 65, someone you know is likely dealing with a long-term care issue. People aren't opposed to having long term care insurance, they're just opposed to paying for it. The LIRP is a good option to protect yourself from a long-term care event while at the same time growing your money in a similar risk environment as your savings account. The average expense per year with the LIRP is 1.5%, but in exchange for that, you are getting a death benefit that doubles as long-term care. The LIRP covers the risk that 70% of Americans will be confronted with at some time in their retirement. You want a meaningful and impactful amount of long-term care insurance. That's somewhere between $400k and $500k in coverage. If you have too little coverage, then the LIRP can be a little like rearranging the deck chairs on the Titanic. The four steps are: 1. recognizing that tax rates are going to be higher than they are today, 2. recognizing that in a rising tax rate environment there is a mathematically perfect amount of money to have in your taxable and tax deferred buckets, 3. repositioning the surplus balances and contributions into the tax free bucket, and 4. funneling the money into the appropriate places which may include Roth IRAs, Roth Conversions, Roth 401(k)'s and the LIRP.

Anyone can do a Roth conversion. You need to have money in an IRA. There are no income limitations. The question comes down to how much tax you want to pay. Do you feel like your tax bill will be lower or higher if you were to postpone the payment of that tax? Some opponents of Roth conversions will say that you won't get the full amount of money in your IRA working for you. However, you have to remember that the IRS partners with you in that account and their portion of that money grows right along with yours. If you to convert that money to a Roth IRA, all of that money is growing to your benefit but the scenario stays basically the same. The key to the calculation is what happens if tax rates are much higher in the future. Once you get your money into a Roth IRA, you don't have to worry about tax rates rising in the future. The rationale to Roth conversions is a bird in the hand is worth two in the bush. It all comes down to the tax rates and where you think they will be in the future. There is a sweet spot with Roth conversions. If you're a high income earner it may not make sense to do a Roth conversion today. When you retire, you have to keep in mind what tax cylinder you will be in. If you're in the 10% or 12% tax bracket, you should be converting the maximum amount to get to the top of that tax bracket. The real question becomes "how do we feel about the 22% and 24% tax brackets?" You don't have to go very far back in history to find tax brackets much higher than today. In 1960 to 1963 the lowest tax bracket was about 22% and the highest went up to 89%. Larry Kalikov is predicting that tax rates will have to rise by 51% and spending would have to decline by 35%. If tax rates stayed level in the future, it would probably be a mistake to do a Roth conversion. It really comes down to whether we as a country can afford to be charging 10% to 12% on people's distributions ten years from now. 24% is only 2% higher than the 22% tax bracket. For an extra 2% you can protect another $150,000 of your IRA conversion. We will look back on today ten years from now and think that was the deal of a lifetime. You have to feel like the tax rate that you will pay today will be lower than what you will pay in the future. If you are younger than 50, it's a no brainer. It makes a lot of sense to pay taxes at today's low tax rates. If your 401(k) distributions will fall in the 22% tax bracket once your retire, you should absolutely maximize the 22% and even the 24% tax bracket today. The very best way to insulate yourself from the impact of higher taxes is to get to the 0% tax bracket. David tells the story of his limo driver during a conference that David was speaking at. Even if you don't believe that tax rates will be higher in the future, you should probably look at how long a widower will survive after you die. The minute you or your spouse dies, the cost of taking money out of your IRA or 401(k) pretty much doubles. If your kids inherit your IRA, it will almost certainly not be taxed at the 12% tax bracket since it will probably occur during the peak of their earning years. If you have money in a Roth IRA, your spouse or kids don't have to worry about that income because you will have already paid the piper.

The basic gist of the fiscal gap is that the publicly stated national debt is $20 trillion which is more than enough to cripple our economy, but that's not the whole picture. The fiscal gap is the difference between everything that we've promised to pay over the next 70 years and what we can actually afford to pay. According to Allan Arback and Larry Collicof, the real number is closer to $222 trillion. When you figure in all the numbers, the fiscal gap is growing an additional $6 trillion each year. To get a true vision of the fiscal condition of our country, we need to express our national debt the same way that everybody else in the world is expressing it. If we were a private corporation, we would have to list every debt on the books, not just the debt that is actually owed. There are two kinds of debt, intragovernmental debt and debt borrowed from the public. The more responsible thing to do would be to express what we promised back but can't afford to deliver. In the last week, the number has been revised to $239 trillion. This means that if nothing happens, there will come a day of reckoning. The government will have to raise taxes by 51% and cut spending 35%. This makes the Power of Zero more relevant than ever. If you are thinking about putting money into a 401(k) in order to get a deduction at today's historically low tax rates you should reconsider it. Putting your money into a 401(k) is like going into a business relationship with the IRS and they get to vote each year to decide what percentage of the profits you get to keep. Politicians love to make promises. When they are telling us the national debt is $22 trillion but the real number is $239 trillion, they are making promises they can't actually deliver on. If you are in a 10% or 12% tax bracket, even a 22% or 24% tax bracket, you should probably not be putting money into your IRA or 401(k), put it into a Roth 401(k) instead. The bad news is it's much worse than we thought, the good news is you're now armed with the knowledge of what you can do about it.

The question is "how can we take money out of our life insurance tax free?" Is it possible to take money out of your life insurance policy and have it feel like a distribution from your Roth IRA? Every life insurance policy allows you to take out tax-free distributions, but not all of them allow you to take out tax-free and cost-free distributions. With a traditional life insurance policy, anyone can take out whatever they've put in. This is referred to as your basis. The trick comes in taking out money above and beyond your basis, and the solution is by way of a loan. The first type of loan is the standard/preferred loan. A standard loan is typically for the first six ten years of your policy and is usually done in less than optimal circumstances. You should exhaust your other sources of emergency income first before doing this. A preferred loan typically starts in the first six to ten years of your policy but you are not taking a loan from your own policy. You're not taking a distribution from your policy either. You're taking a loan directly from the life insurance company. They will charge you a real rate of interest on the loan, and at the same time will take an equivalent amount of money from your growth account and assign it to a loan collateral account with an assigned rate of interest. If your collateral account is being credited at the same rate as the loan you received, all you know is you received the money from your account and didn't have to report it as income. If the life insurance company has guaranteed the rate of interest remains the same on the loan and your loan collateral account, it doesn't matter how big the loan gets. The rate at which they are crediting you and the rate at which they are charging you is the same. There are some possible issues with this strategy. Some companies will guarantee that rates won't change but not under every circumstance. When it comes to loan provisions, the devil is in the details. If you have a spread on the interest rates between the loan and the credit, you will eventually run out of money. If you run out of money and you're not dead yet, all the of those tax free distributions become taxable to you. Over the course of your life, a spread loan can crater your distributions. [ The additional interest you owe on your loan will come out of your cash value. This leads to geometric growth of the interest you own on the loan interest and it starts to take a toll. This can bankrupt your policy. [ You don't buy a life insurance retirement plan simply because the guy across the table tells you it's a good idea. That's like getting married after the first date. [ You should have a list of things you want to have in your ideal life insurance retirement plan. A divorce from a wife can be painful, but a divorce from a life insurance plan can be likewise as painful. [ Having the wrong loan provision can really sink your ship. [ There is a second loan type called a Participating Loan that relates to a plan called Index Universal Life. It works similarly to a standard or preferred loan except the interest on your loan may be slightly higher and the interest on your loan collateral account is tied to the index within your universal life plan. The insurance company will give you the growth of that index up to a certain cap and in the event of a down year, they simply credit you a zero. [ Historically, the indexes grow at 7% to 7.5%. If you can get 7.5% growth without taking an more risk than you are used to taking, that's a pretty safe and productive way to grow your assets. [ The way to look at this kind of loan is: will you have more positive arbitrage or more negative arbitrage over a period of time? The Monte Carlo simulations bear out the usefulness. [ You have to find a company that will guarantee that the rates will never go up over a certain number. [ The preferred loan is the conservative way to go. You don't have arbitrage working for you but you won't have the risks associated with it as well.

David believes that life insurance in most cases is the best way to handle long- term care needs in retirement. Why do financial gurus say that you need long-term care insurance? 70% of us will need long-term care in our lives. Nobody wants to save money their whole life only to give it to a long-term care facility two years before they die. Typically a long-term care event lasts an average of 2.3 years and most people do not survive them. The idea behind long-term care insurance is to avoid blowing through all the money you saved up at the end of your life, but it's also about protecting your spouse. You're usually better off dying than experiencing a long-term care event. If you die, the life of your spouse from a financial perspective would go on relatively unchanged. But if you survive, all of your assets except for a small amount gets earmarked to the long-term care facility. If you have assets, the federal government isn't going to pick up the tab unless you've really spent down your savings. There is a massive difference in care in a Medicaid funded facility versus a privately funded long-term care facility. Studies show that you will probably die much sooner in a government funded facility. According to the Wall Street Journal, fewer and fewer people are using traditional long-term care insurance. This is due to a number of reasons including it's expensive and there's no guarantee it won't go higher. Traditional long-term care insurance is underwritten by morbidity criteria instead of mortality, which means you could have a condition that in no way affects the odds of you dying, but you may still be denied coverage. The biggest source of heartburn for people when it comes to traditional long-term care insurance is it's a use-it-or-lose-it proposition. Nobody wants to pay for something for 30 years and not get what they paid for. Instead of long-term care insurance people are switching to a form of life insurance that has a long-term rider or a chronic illness rider. A life insurance policy can be thought of as a bucket of money that grows in a variety of ways. Money drips out of that bucket through a spigot that goes to pay for annually renewable term insurance. When you have a long-term care rider, you are basically paying more expenses along the way for the privilege of using your death benefit to cover your long-term care expenses. [ You are paying for something that you hope you never have to use. If you die peacefully in your sleep, you don't get that money back, and that can be hard for some people to accept. [ The chronic illness rider gives you the same benefit of using your death benefit to pay for long-term care, but you don't pay anything along the way. The difference is that the insurance company discounts your death benefit depending on your age when you access it. [ Other benefits of life insurance retirement plans are being able to touch the cash in the bucket prior to age 59½ with no penalty, not receiving 1099's as your money grows, and if you take the money out in the right way, you can get it out tax-free. [ There are no contribution limits on how much you can put into the policy and there is no income limitations. [ Life insurance retirement plans may be immune from legislative risk. Any changes they have made in the past existing plans have been grandfathered in. [ Clients between 50 and 65 are looking towards the LIRP to cover their long-term care. If you are between 50 and 65 you are probably dealing with at least one person going through a long-term care event. [ People are asking themselves, "How do I avoid the financial carnage of a long-term care event?" [ There are two ways to approach the life insurance plan, you can pay upfront with a long-term care rider or discount the benefit at the end with a chronic illness rider. [ The Power of Zero movie will be released April 21, 2019.

When David speaks to his clients or the public, he's often talking about the nation's fiscal crisis, the national debt, and unfunded obligations. There are really only four ways to resolve our fiscal crisis. You decide what you think the most likely solution will be. The first thing we could do to prevent our country from going over a fiscal cliff is to cut expenses. We know that the real gushers in the fiscal budget are things that Congress doesn't even have control over. Congress controls around 30% of the national budget. These are things that they wouldn't have to pass a law to change. The remaining 70%, things like interest on the national debt, Medicare, Medicaid, and Social Security, are laws. Congress would have to pass a law to make any changes at all which is pretty unlikely given they would need to control the House and the Presidency. The real issue is Medicare, which is growing at least 6% per year. Much of the expense for that program is not on our radar yet. We would have to find a way to pass a law that requires people who already can't afford retirement to find a way to pay for their own healthcare later in life. The second option is to borrow more money. This also presupposes that there are countries that are willing to loan us money. We are on a path where we will get to a point where all of the money flowing into the US Treasury will go to pay only for the interest on all of our debt. If we can only pay the interest on our debt, other countries will not likely be willing to loan us money. This is what is known as a sovereign debt crisis. The third option is to print more money. David's critics believe that we will just start printing and return to 70's era inflation. They forget that Social Security is pegged to the CPI, which means that as inflation rises so does Social Security. Medicare is affected by inflation as well. You can't fix Medicare by inflating your way out of this. David Walker says that we will have to double tax rates in order to keep our country solvent. There is currently ground swell support for higher tax rates. For those that thought that we would never return to the tax rates of the past, you have to understand that these programs have to be paid for somehow. We know that the tax rate has been somewhat of a slush fund for Congress in the past. When there's a war or extraordinary circumstances, they raise taxes. As the highest marginal tax bracket goes up, all of the other tax brackets tend to ratchet up right along with it. You have to basically understand that there are really only four options: you can cut back on expenses, borrow more money, print more money, or raise taxes. It's much easier to raise taxes than it is to get rid of a government program.

The story David tells at the beginning of the book is a tale about David Walker, the former Comptroller General for the federal government. Back in 2008 he appeared on a radio show and told them that tax rates have to double. The math says that the country is going to go bankrupt unless tax rates go up dramatically in the next ten years. Most of us are putting money into tax-deferred plans hoping that taxes will be lower in the future than they are now. Back in the 70's and 80's the tax-deferred strategy actually made sense, but the Trump era tax cuts have changed the math. We are now at a point where taxes haven't been this low in a long time yet we continue to pile money into 401(k)'s and IRA's. A good analogy would be an American family that makes $50,000 a year but their expenses are over $100,000 and they just keep piling debt onto the credit card. At the same time all their neighbours are getting their financial houses in order. We're in a game with the IRS where they're our opponent, but they can change the rules on us at any time. When you put money into an IRA it's a little bit like going into a business partnership with the IRS, and every year the IRS gets to vote on the percentage of profits they get to keep. It makes it really hard to plan for retirement when you don't know how much money you actually have. The first bucket is the taxable bucket which is typically used for emergency funds, roughly six months of living expenses. The taxable bucket is the least efficient bucket. The second bucket is the tax deferred bucket, where you pay tax on the back end. The first problem with this bucket is you don't know what the tax rates are going to be when you take the money out. The second problem is when you do take money out, it counts as provisional income which the IRS keeps track of to determine whether they are going to tax your Social Security. If as a married couple you have more than $44,000 of provisional income, up to 85% of your Social Security becomes taxable at your highest marginal tax bracket. For a lot of David's clients, this can cause them to run out of money 5 to 7 years faster than people who don't have their Social Security taxed. It's not bad to have money in the tax deferred bucket, you should just have the prescribed amounts. Annuities within your tax deferred bucket can trigger the same issues of Social Security taxation. The tax-free bucket is everybody's favorite bucket. In this bucket you pay the tax on the front end and never pay those taxes again. When you take money out of a true tax-free investment it does not count as provisional income. The government may change the rules around Roth IRA's but you have to look at whole picture. There is $21 trillion in the cumulative IRA's and 401(k)'s in America and only about $800 billion in Roth IRA's. They could change the rules and break their promises but that would end with people getting voted out of office. It's easier to get the math done but raising taxes on the tax-deferred bucket. The Roth IRA is David's favorite tax-free investment, but it's not just the Roth IRA it's also the Roth Conversion. Not enough Americans are paying attention to those investments. January 1, 2018 is the date that tax rates went on sale. Every year that goes by where we fail to take advantage of these historically low tax rates is potentially a year beyond January 1, 2026 where we may be forced to pay the highest tax rates we'll see in our lifetime. We now know the year and the day when tax rates will go up. If we let this tax sale go by without taking advantage of it we will have really missed an opportunity. If David Walker is right, we will look back at today and ask ourselves why we didn't take advantage of these historically low tax rates. You don't have to like life insurance or life insurance companies. You just have to like them a little more than the IRS, because in the end someone is getting your money. The tax benefit for life insurance is the single biggest benefit in the entire tax code but many people don't take advantage of it because life insurance has a stigma of being expensive. When structured properly, life insurance will cost you about the same as your 401(k) per year over the life of the program, and comes with a few other benefits as well. There is a documentary coming out also called the Power of Zero. David found that the number one thing that prevents people from making the switch from tax-deferred to tax-free is that tax that they have to pay. They are not convinced that taxes will be higher in the future. All the experts David interviewed said the same thing, taxes will have to go up in the next ten years. The official debt-to-GDP ratio is 100% but our actual debt-to-GDP ratio is 1000%. We are the only country in the world where our debt-to-GDP ratio is getting worse and worse.

The best financial decision that David has ever made was to acknowledge that taxes are going to be dramatically higher in the future than they are today. David is a husband and father of seven and has been in the financial services industry since day one. He was selling insurance policies at the beginning of his career and became an independent financial advisor in 2001. David mainly deals with clients who are retiring or in retirement and focuses in particular on the tax outlook. He aims to maximize the amount of money his clients can take out in retirement. David's organization has about 160 advisors across the country. He self published The Power of Zero four years ago and sold around 150,000 copies, since then this lead to this movement around the concepts in the book. There are now quite a few advisors teaching courses to retirees all over the US. David describes the current environment as a tax sale. You're going to have to pay taxes sooner or later, so why not pay them before they go up. It takes an act of Congress to prevent a sunset clause from happening. In order for that to happen, the same party has to control the Senate, the House, and the Presidency. $0.76 of every tax dollar that the government brings in is spent on four things: Social Security, Medicare, Medicaid, and the national debt. We are going to have to keep borrowing money to pay for Medicare. The cost for servicing all that debt will squeeze out all the other items in the budget. George Schultz says we are already at the crisis point. We haven't had taxes this low in the last 80 years. You can't pay attention to just the number, you have to look at the income parameters that go with it. The real question for 75 million Baby Boomers is "will they take advantage of this tax sale?" Every year that goes by where they don't consider shifting money to a tax free investment, they are missing an opportunity that will never come back. The IRS says that if you make too much money, you can put after tax dollars into an IRA and in the same breath convert it into a Roth IRA. Since you have to pay the tax on the conversion relative to your other investments it can feel like a double tax. If you have money in other IRA's it may not be a great idea to do the Back Door IRA. The rich man's Roth is also known as the Life Insurance Retirement Plan. You buy as little insurance as the IRS requires of you and stuff as much money in it as the IRS allows to mimic the tax free benefits of the Roth IRA. Most Baby Boomers are dealing with a parent that is having a long term care event. There are a lot of long term care benefits that can make the Life Insurance Retirement Plan attractive to the right person. You can make your 401(k) tax free if you only take out your standard deduction. The best investment you can make is making the balance low enough so that your Required Minimum Distributions are low enough so that your they are equal to or lower than your standard deduction. The holy grail of financial planning is to find an investment that gives you a deduction on the front end, grows your money tax deferred, and you take it out tax free. If you have an IRA that's so big that your required minimum distributions are dramatically higher than $24,000, you're going to be in a tax bracket and it's not going to be 0%. According to David Walker tax rates are going to have to double in order to keep our country solid. If that's true, the best tax bracket to be in is the 0% tax bracket. If tax rates double, two times zero is still zero. Everyone recognizes that tax rates are going up in the future, the question is "why are we still putting money hand over fist into 401(k)'s and IRA's?" The reason is we are addicted to the tax deduction. The true purpose of a retirement account is not to get a tax deduction. It's to maximize cash flow at a period in your life when you can least afford to pay the taxes. That's the real value of a retirement account. If you feel like your tax rate is going to be higher than it is now, you should stretch your tax liability out over 8 years. You want to shift the money quickly enough to do all the heavy lifting before the tax freight train hits but slowly enough that you don't rise into a tax bracket that makes you uncomfortable. If you are in a position to manipulate revenue and be okay with your living standard, at the very least you should be maxing out your 10% and 12% tax bracket. You may not think that tax rates will double, but if your spouse dies your tax bracket doubles anyway. David's clients will take advantage of these tax rates but ultimately, the tax breaks were irresponsible to make. Every other country in the world is getting their fiscal house in order other than the US. David's worst financial decision was to buy a nice car, move to Puerto Rico, and then selling it only one year later. Cars typically make lousy investments.

The 4% rule says there is a percentage that you can withdraw from your assets once you hit retirement, and still have a reasonable expectation that your money will not run out before you die. The industry runs Monte Carlo scenarios where they look at your stock allocations and run simulations, to see the likelihood of your money outlasting you. They have determined that if you have a 60% stock allocation, you have an 85% chance that your money will last through your retirement, as long as you stay around the 4% withdrawal number. If you are constrained by the 4% rule, you have to save a lot more money than someone constrained by a 5% or 6% rule. Let's say you want to live on $100,000 a year in retirement, and you don't want the money to run out before you die. You need to have $2.5 million accumulated before you hit retirement. If you're not on track to hit your number, you basically have five options: save more, spend less, work longer, die sooner or take more risk in the stock market. The biggest factor in the 4% rule is something called "sequence of return risk." In the first ten years of your retirement, you will experience 2-4 down years. If you are relying on your stock market portfolio to fund your lifestyle, taking money out in the down years is brutal for your portfolio. You are removing the worker dollars that are funding your retirement from your portfolio completely. Studies show that if you take out too much money during those down years, you can run out of money 15 to 20 years faster than someone who didn't experience those down years. Without the 4% rule, you can send your portfolio into a death spiral from which it will never recover. If you can only take out 4%, you can weather those down years during the first ten years and still have a high chance of your money outlasting you. The basic premise behind the volatility buffer is you take money during your working years that would have gone into the stock market, and you set it aside and earmark it for those down years in early retirement. If you can get three or four years accumulated, you can dramatically raise the withdrawal rate that you can take out of your stock market portfolio. The Volatility Buffer has to have a couple of attributes. You can't just take four years of lifestyle money out your stock market portfolio and stick it into a savings account. Your Volatility buffer has to be safe. If it's correlated to the stock market, you haven't really fixed the problem. It also has to be productive because there will be a massive opportunity cost of not allowing that money to grow in your stock market portfolio. It also has to be tax-free. You won't be able to fund two to four years of lifestyle if you have to give 50% of the money to the IRS. The Volatility Buffer has to be in place before you hit retirement. You have to pack your bags before you go on vacation! In a perfect world you have unlimited contributions you can make and no income limitations. Avoid things like the Roth IRA because they could be constrained by how much you can put in. The Life Insurance Retirement Plan is a good fit.

About half of the people that David sees have pensions. The younger you are the less likely you are to have a pension. The burning question these people always have once they believe that tax rates are going to be higher in the future is "what can I do if I have a pension?" Have you elected the income option on the pension? Once you set that in motion, there is no way to unwind it. If you haven't made your payment option yet, your company may offer a Lump Sum Distribution Alternative where you can roll the lump sum into an IRA. This makes it easy to get that money into the tax free bucket and the 0% tax bracket. There is a dark underbelly of the pension world. When you receive a pension, it's going to be on the IRS's radar forever. It will come out of your taxable bucket and you will be exposed to the ebb and flow of tax rates over time. Pensions also count as provisional income. If your pension is big enough, when coupled with your social security, it will almost certainly push you over the threshold where your social security will be taxed. The only thing you can do is worry about the things you can control. The upside is at least you will have a consistent stream of income until you die. The reality of pensions is you may never be in the 0% tax bracket. The most you will ever own of your IRA or 401(k) is 78% because the IRS is a 22% stakeholder, and it will only get worse from here on out. You have to take a strong look at what your tax bracket is today during your working years. If you're in a 22% tax bracket today and will be in your retirement, don't let a year go by without maximizing your tax bracket through Roth Conversions. [ Why would you not, at the very least, convert your IRA's during your working years? The 24% tax bracket is only 2% worse but it lets you protect an additional $150,000 by shifting it to the tax free bucket by way of the Roth Conversion. We will look back 10 years from now at the 22% and 24% tax brackets and say "that was the deal of the century." Even if you don't think that tax rates will be dramatically higher than they are today, we know that come Jan 1, 2026 the 22% tax bracket becomes the 25% tax bracket and the 24% tax bracket becomes the 28% tax bracket. The huge upside of having a pension is having way more certainty in terms of what your tax bracket is today versus what it will be in the future and you have more certainty that you won't have buyer's remorse. Don't let a year go by where you aren't maxing out the 22% tax bracket. If you have already begun taking your pension, it makes a ton of sense to be shifting as much money as you can and maxing out your current tax bracket

There is no retirement planning class based on the Power of Zero book, but there is one that David created. He's taught it to hundreds of advisors across the country. The Power of Zero is not the basis of the class, but it may be a homework assignment. The workshop conveys the idea that even in a rising tax rate environment, there is still a mathematically perfect amount of money you need in your taxable and tax-deferred buckets LIRP's are the same greatness as Roth IRA's. As with all tools, they can be used inappropriately. A LIRP is not a silver bullet, it's just another tool you can use alongside all the other tools. A LIRP is a bucket of money that gets treated differently from the other buckets we've already talked about. You can't talk about the LIRP without talking about one of the primary reasons for having a LIRP: it provides a death benefit. You have to have a need for life insurance to be able to get the LIRP. The companies that sponsor LIRP's make it a little more attractive by allowing you to access your death benefits in the event that you require long-term care. As a result, many people are dropping their life insurance. The fees over the life of the LIRP are, on average, about the same as your 401(k), they just tend to be front loaded. They are higher in the early years and lower in your later years. Whatever road you take in life, somebody is making 1.5%. The question is "what are you getting in exchange for that 1.5%?" $350,000 doesn't correspond to any tax bracket and does make sense as a threshold of comparison. Financial gurus tend to paint everything with a very broad brush. They are in the business of dispensing general financial advice and target people who make less than $75,000 a year. You can't get custom-tailored financial plans from financial gurus because that is not what they get paid to do. You don't get the LIRP unless you die. If you quit after the first year, it will likely be the worst investment you've ever made. The longer you keep it the better your rate of return will be. If it is structured properly, the LIRP will almost never run out of money. Just because a salesperson makes a commission off the sale, doesn't mean the product is bad. No one would have a car or many other things we highly value if this were the case. There is always a mathematical basis for what David recommends. It's almost like the author fell asleep in 1985 with his ideas about Universal Life firmly decided. There is nothing magic about a life insurance policy. When used as a compliment to your other tools, they can be an excellent contributor to getting you into the 0% tax bracket. Guarantees cost money. They will also drag you cash value down. If you have money in your bucket to sustain the drips that are coming out of your spigot, that's what keeps the policy enforced. The program is not a miracle worker, it simply performs a function that other investments can't accomplish. Everyone should have level-term life insurance, but you have to remember that the cost of admission to the LIRP is you have to be willing to pay for some life insurance. If you're paying for term insurance, you are already paying for the bucket. You're just not putting anything in it. Retirement classes are often held and sponsored by universities. They are purely educational experiences. Failing to adopt some of these strategies could be the most expensive thing you do in your life. You could run out of money seven to ten years faster without them. Most people make emotion-based investment decisions. When you are feeling an emotional impulse to buy low and sell high, will your robo-advisor give you a call? Most of David's clients are between the ages of 50 and 65 so robo-advisors would not be ideal for them. There are no LIRP's that are only fee-based. It's hard to work with a LIRP when you are working with a fee-only financial planner. Being optimistic doesn't necessarily translate into being realistic. Let's look at the financial landscape of our country, and figure out how things are trending. You can be optimistic in nature and still believe that tax rates are going up so you should prepare accordingly. If tax rates in the future are going to be even 1% higher than they are today, there is one right strategy which is to position your money to tax free. The LIRP is one of many streams of tax free income and when used appropriately it can accomplish things that your other investments can't. Financial gurus will only get you so far, especially in a rising tax rate environment. Consulting with a qualified Power of Zero advisor can help lay out your roadmap and mathematically show you the best strategy for you.

Some people don't read books. Creating a documentary is a way to reach those people. Plenty of people read the book but are still unconvinced that tax rates are going to be higher in the future than they are today. The documentary was a way of bringing together the most compelling experts in the country with something meaningful to say about debt and putting them on record. The tax train is coming. If you were sitting on a train track with a huge freight train bearing down on you what you do. For those of us who have accumulated the lion's share of our retirement in 401(k)'s and IRA's, we have a huge freight train bearing down on us and it's coming in the form of higher taxes. You have a couple of choices of what to do: you can pretend like the problem doesn't really exist and the math doesn't add up, or you can face it head-on. David Walker made an Oscar-nominated movie back in 2009 called IOUSA about the debt at the time where it sat at around $10 trillion. Nearly ten years later we're sitting on over $21 trillion in debt. The stated national debt is $21 trillion but if you count the unfunded liabilities that have been promised it totals up to over $200 trillion. Allen Arbuck makes a very compelling case that printing our way out of our problems is not a solution. Printing money isn't going to do the trick. The real issue that we're facing here that's going to squeeze everything out of the budget is Medicare. It's not five years from now or eight years from now, we're in a crisis right now. -George Schult. Tom McClintock is a congressman and on the Republican Budget Committee and he doesn't pull any punches. According to Tom, in eight years we will be where Venezuela is now. According to Gary Herbert, the Governor of Utah, we have the Democrats and Republicans sitting in the front seat of the car and we're heading towards a fiscal cliff. If no one relinquishes the steering wheel and compromises, the car goes over the cliff and we all go with it. There are lots of nations in the history of the world that have taken the same course, it's not like we are forging into new territory. 401(k)'s and IRA's are like the government saying "Hey look, I want to loan you some money. I don't need the money to be paid back right now. I'm not going to tell you what the interest rate is on the loan I'm going to give you but I will come back to you when I do need the money." Would you ever cash that check? Van Miller speaks about the demographic issues facing the country that is only just beginning. Most of the Baby Boomers have yet to retire. The real heavy birth rates didn't happen until well into the fifties. Getting all these experts into the movie was very tricky. There were certainly some very harrowing weeks were no one had committed to be in the movie at all! But once we got David Walker to agree, we were able to use his name to convince others. One of the people we really liked in the movie was Armstrong Williams. He spoke very passionately and eloquently about the issues and says that now is the time to speak to your representatives. We are really getting to the point where, as Tom McClintock says, we could approach what is called a sovereign debt crisis. If you're a financial advisor, go to thetaxtrain.com to watch the movie and get DVD's to distribute to your clients. If you're a Baby Boomer that wants to know more, the movie will be available in April or you can ask your financial advisor.

One of the things we tell 75 million Baby Boomers preparing to retire is that tax rates are going to be higher in the future. Some people will point to the latest tax cuts and think that the urgency of David's message is diminished. David Walker has famously said we have to double taxes, reduce spending by a half, or some combination of the two. The question is what did we do with this latest tax cut? We lowered taxes but also increased spending by $1.5 trillion over the next ten years. All that means is that the fix on the back end is going to be even more draconian and aggressive than it already was going to be. We did the exact opposite of what we should have done. The cost of admission to the tax free bucket is you have to pay a tax. Either you pay now or you pay later. With this new tax cut, we now know the year and the day when tax rates will go up. It's no longer a guessing game, all the uncertainty and doubt has been removed from the equation. We now have the ability to understand where tax rates are today and where they are going to be in 2026, but who knows what will happen beyond then. With the latest tax cut, a lot of the media focused on Joe Mainstreet America and what he will be saving. While that's important to know, it's also important to understand what the opportunity is for people looking to get off the train tracks. The reason people postpone the decision is because of uncertainty and doubt. They don't want to pay a tax today only to regret it if tax rates get lower in the future. The general rule is you want to stay in your current tax bracket when you are doing things like Roth conversions. Don't let a year go by where you are not maxing out what you can do within your tax bracket. There is one exception, which David calls the sweet spot in the 2018 tax code, which is the 24% tax bracket. For 2% more you can shift an additional $150,000 dollars to the tax free bucket. Come 2030, we will look back at the 24% tax rate and think of it as the deal of the century. Tax rates will likely never be as low again. Every year that goes by where you fail to take advantage of historically low tax rates, there will potentially be a year beyond 2026 where you are forced to pay the highest tax rates you are likely to ever see. If you wait until 2027 to do the same Roth conversions, that will push you into the 33% tax bracket and you will pay an additional $15,000 each year. We know when the tax sale is going to be over. Every year between now and 2026 is a tax cylinder that you can take advantage of. When it comes to shifting money to be tax free, it all comes down to whether you believe tax rates will be higher or lower in the future than they are today. The only way for this new tax law to change before 2026 is for Democrats to seize the House, the Senate, and the Presidency which is pretty unlikely. You have an eight year period to stretch that tax liability out over time and get the heavy lifting done before 2026 when tax rates are going to go up and will likely be the highest you will ever experience in your lifetime.

The tax free paradigm essentially says there is an ideal amount of money you should have in your taxable and tax deferred buckets. Everything above and beyond that should be systematically repositioned in the tax free bucket. The ideal amount of money in your taxable bucket is around 6 months of your basic living expenses. The ideal amount of money in your tax deferred bucket should be low enough that Required Minimum Distributions in retirement are equal to or less than whatever your standard deductions are within that year. You want to be slow and steady when moving money into your tax free bucket. If you move too much in one year, you could bump up into a tax bracket that gives you heartburn. The Power of Zero roadmap gives you the plan to shift your money over 5 to 8 years. Sometimes despite all our efforts to get all that shifting done through traditional means, we have to use a different type of tax free tool called a Life Insurance Retirement Plan. An LIRP is a bucket of money that gets treated differently by the IRS tax code. You are not constrained by the typical rules of accessibility. There are no blackout periods with an LIRP. You do not pay taxes on this money as it grows. When you take out the money in the right way it does not count as taxable income. It also doesn't count as provisional income so it won't cause social security taxation. There are also no contribution limits or income limitations. Roth IRA's are really designed for mainstream America, they are not designed for the rich. If you make a lot of money and need to put a lot of money away, you're not going to make a lot of headway with a Roth IRA. If history serves as an example, there is no legislative risk to an LIRP. If you have the plan in place before a legislative change, your plan is grandfathered in. The more you want to put into this bucket, the higher your death benefit has to be. As we slowly go broke as a country, they will be looking at all quarters for more revenue. One of the places they may look is the tax exemption for life insurance, so get in while you can. You have to pay some expenses out of this bucket month in and month out in order to retain the benefits of the bucket. Annual renewable term life insurance is term life insurance that gets a little bit more expensive every year, and that's one of the major expenses that can come out of this bucket. In the event you suffer from a chronic illness, you can access your death benefit which deals with some of the most common issues people have with long term care insurance. You don't have to love life insurance, you just have to like it a little more than the IRS. If you're between the ages of 50 and 65, you likely have at least one parent that is experiencing a long term care event. People aren't opposed to having long term care insurance, they are just opposed to paying for it. If you don't die and need long term care instead, you may end up leaving your spouse or family the bare bones in terms of inheritance. One of the biggest threats to retirement can be long term care. There is a 70% chance that you will have long term care event that lasts at least three years during your retirement. You have to protect yourself or you could burn right through your life savings. There are three main ways to grow your money within your LIRP: the stock market (this one comes with a fair bit of risk), the general portfolio within the insurance company (mitigating risk is something that insurance companies are really good at), and the indexed approach. The indexed approach is a way to grow your money in an indexed type of account that mirrors the stock market, with some conditions. Historical rates of return on this approach can be anywhere from 5% to 7% after expenses. A recurring theme from LIRP critics is that the expenses are high, but you have to ask the question "high compared to what?" The average expense in a 401(k) is approximately 1.5% of your balance. As your money grows, you pay more for people to manage your money. The reverse is true about LIRP. The expenses are front loaded and it works about to be about the same 1.5% but the longer you keep it, the less the expenses are. The goal of this bucket is safe and productive growth, and you can't get safe and productive without paying for it. The longer you keep it, the better it gets. A LIRP is a compliment to everything we've already talked about, not something to put all your assets into.

Do you believe tax rates will be higher in the future than they are today? There is about $21 trillion in the 401(k)'s and IRA's across the country. If you were to look at the cumulative amount of money in Roth IRA's and Roth conversions, there is only about a trillion dollars. Most people believe taxes will be higher down the road and aren't doing anything about it. You are either going to pay the IRS now, or you are going to pay them later. It's as simple as that. If you put money into a tax deferred bucket, you are saying it makes more sense to pay taxes in the future when they will be higher rather than they are now. People just can't seem to be able to bring themselves to pay a tax preemptively, even if it will save them money. We love to procrastinate painful things. Paying taxes at historically low tax rates is going to be much less painful than if you wait until later. Leading economists believe that taxes may be dramatically higher as soon as in the next 8 to 10 years. There are a lot of investments that masquerade as tax free but in order to be tax free an investment has to be free from both state and municipal taxes. When you take a distribution from a tax free investment it shouldn't count as provisional income. Up to 85% of your social security can become taxable to you at your highest marginal tax rate. The Roth IRA is truly tax free as long as you are 59 and a half when you take the money out. There are other versions of the Roth that are also tax free. Taking up to standard deductions from your IRA or 401(k) can also be considered a tax free stream of income. The life insurance retirement plan works very similarly as a tax free investment that comes with a few other perks you can take advantage of. By prepaying taxes, you are shielding yourself from the ebb and flow of tax rates over time. The only way to truly insulate yourself from the impact of higher taxes is to get to the zero percent tax bracket. It's almost impossible to get to the zero percent tax bracket with a single stream of tax free income. Make sure you shift your money to your tax free bucket slowly enough to avoid dramatically increasing your tax rate in the meantime. On the other hand, you do want to shift it quickly enough that you get all the heavy lifting down before tax rates go up. The amount you should shift each year is your Magic Number and it depends on your investment horizon. There is another deadline that you have to consider, if congress does nothing 2028 to 2030 may be a big problem in terms of taxes. Small increases in the marginal tax rate are not the issue, what you should be prepared for is tax rates doubling some time in the future. Don't put all your eggs in one basket, the IRS or congress could legislate that one basket out of existence.

The number one piece of information you should consider when thinking about your tax deferred bucket is what you think the tax rate will be when you take out your money. Will it be higher or lower? You may hear the argument that If you take money out of your Roth IRA, you will have less money working for you and less money for your retirement. However, that's not true. People think the money in their Roth IRA account is theirs, but really you have entered into a business partnership with the IRS and they are joint owners of that account with you. It's not all your growth, a portion of it is owned by the IRS. When your money grows over time, the portion for the IRS is going to grow and compound over time just like your portion. The IRS loves it. If tax rates are always going to be at 30%, it doesn't matter if you use a Roth IRA, or a Roth conversion or a traditional IRA. It all ends up the same. If tax rates were to go up by just 1%, your portion of the account will go down, which is where a conversion makes more sense. It's very important to understand the fiscal landscape of our country. You have to try to anticipate where tax rates are going to be because at the end of the day, that should inform all of your decisions as it relates to these types of accounts. The true purpose of a retirement account is to maximize cash flow at a period of your life where you can least afford to pay the taxes. Any distributions you take out of your IRA count as provisional income and could cause your social security to be taxed. All tax deferred investments have two things in common: when you put money in you get a tax deduction, and your deductions will disappear when you need them most. A lot of financial gurus say that you will always be in a lower tax bracket when you retire, but that idea has largely been debunked. In retirement, every day is a Saturday. Most of your largest deductions are gone once you retire. Your house is mostly paid off. You probably aren't receiving a child tax credit anymore. You're not contributing to your 401(k). People tend to contribute time instead of money to charity. The IRS thinks nothing of your time because it is not tax deductible. After 2026, tax rates are likely to be dramatically higher than they are today as the national debt balloons up to $30 trillion. In a rising tax rate environment, there is a perfect amount of money to have in your tax deferred bucket. If you don't have a pension, the magic number is between $250,000 and $350,000. You want the balance in your tax deferred bucket to be low enough that the RMD's coming out are less than your standard deduction, and don't cause your social security to be taxed. You want your distributions to be tax free, while also maintaining your tax free social security. If you have a big enough pension, it will probably take up all of your standard deductions so make sure you get as much that money into tax free accounts. Quick quiz. Can you guess David's favorite tax free investment? The holy grail of financial planning is to get a deduction on the front end, it grows tax deferred, and you take it out tax free. Take advantage of your 401(k). Contribute up to your match, and not a penny more. Get that tax deduction on the front end. Mathematically, nothing beats this strategy for tax free income in retirement. When you put the puzzle pieces together, then the zero percent tax bracket emerges.

The taxable bucket contains investments that you get to pay a tax on. Things like savings accounts, money markets, stocks, and bonds. You know your investment is taxable when you receive a 1099 from the IRS. These are not the most efficient investments in the world. You can have as much money as you want in your taxable bucket, as long as you recognize that there is a financial consequence for doing so. It may not seem like a big deal, but if you take those inefficiencies and amortize them out to a lifetime it can cost you several hundred thousand dollars. The ideal balance in your taxable bucket will depend on your marital status, whether both spouses working, or if you're a business owner. A good rule of thumb is if you have at least two steady incomes in your family, you should have at least three months worth of barebones expenses set aside. If you have one income earner or are a business owner, you should have around six months worth of expenses set aside. Your taxable bucket is where your least valuable dollars go. Take a look at the contribution limits that the IRS defines for certain accounts, the more limited the contribution amount the better that account probably is in terms of taxes. You have to be contributing to your taxable bucket in a very defined way and limit it as much as possible. If your taxable bucket grows every year, so does your 1099. Your taxable bucket has a purpose, primarily to meet your needs in an emergency. There are taxes in life that we pay, that we are not required to pay. Provisional income is the income that the IRS keeps track of to determine if they are going to tax your Social Security. You can lose up to one-third of your social security if you have too much money in your taxable bucket. There are a number of accounts and strategies that you can use to keep as much money out of your taxable bucket as possible. Don't let a year go by where you are not taking advantage of all of the tax-free investments that the IRS makes available to you.

There is a massive disconnect between what people think the future of tax rates will look like and what they are doing to prepare for it. If you believe that tax rates will be 1% higher than they are today, you should have as much money as you can in tax-free vehicles like a Roth IRA. The national debt is currently around $21 trillion dollars. A lot of people think that is not necessarily a big deal since that is only 106% of GDP but that is only a piece of the overall picture. If we were to run our accounting like every other country in the world, we would actually have $200 trillion dollars in debt due to all the unfunded liabilities. We've made a huge number of promises that we can't afford to keep. The reason the media hasn't made a big deal about the debt is the cost of servicing the debt has been close to zero for the last 15 years. When interest rates start to creep up, the cost of renting the money could double or triple. The cost of servicing the debt would start to crowd out a lot of really important things in the national budget. The problem is not pork barrel spending, it's the obligations that we can't get out of by law. "This is crisis time." -George Schultz The real problem with our budget is Medicare, as Baby Boomers leave the workforce the cost of Medicare is going to crowd out everything else out of the budget. There is not a lot of upsides for politicians to try to change the existing law so as to modify what we are paying for Social Security or Medicare. People don't want to make tough decisions when it comes to either raising taxes or cutting spending. If we get to the point where we have a sovereign debt crisis, we risk financial insolvency. A lot of economists believe we won't get to that point until we see trillion dollar deficits, which we could see by the end of 2018. You can buy a trillion dollar bill from Zimbabwe and it only costs you $4, and that includes shipping and handling. Money is valuable because it is scarce, the more you print, the less valuable it becomes. As inflation goes up, the cost of basic services will go up as well. Reducing spending is known as the third rail of politics. If anyone brings it up, they will probably find themselves voted out of office. Every year that goes by where they fail to reduce spending, the fix will be more draconian and severe. The likelihood that taxes will go up is increasing every single year. You don't have to go very far back in history to find tax rates that were dramatically higher than they are today. Tax rates ebb and flow over time based on the needs of the government. There isn't any reason to expect that tax rates won't be higher in the future than they are today. When you take your money out at retirement, do you believe taxes will be higher or lower? If you believe it's going to be higher, then you should put as much money as you can in tax-free vehicles.