The Power Of Zero Show
Tax rates 10 years from now are likely to be much higher than they are today. Is your retirement plan ready? Learn how to avoid the coming tax freight train and maximize your retirement dollars.
S1 E335 · Wed, April 02, 2025
In What Order Should I Spend Down My Assets in Retirement?
David McKnight addresses the most efficient order in which to spend your assets in retirement. Online programs and algorithms that forecast and run calculations related to your retirement assets suggest starting with your tax-deferred assets like 401(k)s or IRAs. Such tools recommend spending down your tax-deferred assets now, when tax rates are low, and your tax-free assets later – when tax rates are likely to be higher than they are today. Reminder: regardless of the distribution strategy you choose, it should aim to maximize the likelihood that your money lasts as long as you do. David’s recommended strategy involves spending small slivers of each of your assets all in the same year. In other words, instead of mowing through one asset class all at once and then moving on to the next, you spend a little from each asset over time. There’s a scenario in which you could receive your Social Security 100% tax-free – this could extend the life of all your other resources by five to seven years. David explains why you shouldn’t aim to spend down all your tax-deferred assets in the early years. David touches upon using a Roth conversion as a strategy. Roth IRAs, Roth 401(k)s, and tax-free Social Security (when you can keep your provisional income low enough) are other sources of tax-free income you may accumulate along the way. David discusses why it may be better to take a more nuanced approach, rather than simply spending down your tax-deferred assets first and your tax-free assets later. Mentioned in this episode: David’s national bestselling book: The Guru Gap: How America’s Financial Gurus Are Leading You Astray, and How to Get Back on Track DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com
S1 E334 · Wed, March 26, 2025
Suze Orman Says Have 3 to 5 Years of Living Expenses in CASH During Retirement (Good Idea?)
Today’s episode of The Power of Zero Show looks at a recent podcast episode in which Suze Orman recommended having three to five years of living expenses in cash during retirement. Experts have long debated the rate at which retirees can draw down their assets while maintaining a high likelihood of not running out of money before they die. Since the early ‘90s, the gold standard for sustainable distributions has been the 4% Rule. According to the 4% Rule, whether the market goes up or down, you can reliably withdraw 4% each year with high confidence that you won’t outlive your money. David McKnight points out that Orman’s advice – keeping money in a volatility buffer account – is at odds with her stance on sustainable withdrawal rates. For Suze Orman, you shouldn’t be taking 4% withdrawals from your retirement portfolio. Instead, she recommends a 3% distribution rate. Studies show that if you withdraw only 3%, regardless of market conditions, you have a near 100% chance of never running out of money. David believes that by promoting the 3% rule AND encouraging people to keep 3-5 years of living expenses in a savings account, Suze Orman is doing a disservice to her listeners. The first problem with Orman’s advice is that, while she got the volatility buffer concept right, she failed to adjust her sustainable withdrawal rate accordingly. Following Orman’s approach could result in massive loss of purchasing power by keeping a significant portion of your net worth in a low-yielding savings account over an extended period. David explores whether there’s a “safe and productive” way to grow your money during retirement. Cash value life insurance, specifically in the form of Indexed Universal Life (IUL), is a financial vehicle that protects against market loss and grows at a rate of 5-7% (net of fees) over time – within a tax-free environment. David wraps up with some final words of advice for Suze Orman. Mentioned in this episode: David’s national bestselling book: The Guru Gap: How America’s Financial Gurus Are Leading You Astray, and How to Get Back on Track DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free video series) @mcknighta
S1 E333 · Wed, March 19, 2025
5 Huge Benefits of the Roth IRA!
Today’s episode addresses five reasons why a Roth IRA is one of David KcKnight’s favorite tax-free investments. Unlike other retirement accounts, Roth IRAs give you 100% liquidity on all contributions. While David isn’t necessarily suggesting that you use your Roth IRA as an emergency fund, it’s nice to know that you won’t have to wait until age 59 ½ to be able to access those funds. If you happen to take out your Roth IRA contributions, you can put that money back within 60 days as long as your Roth IRA was not involved in a rollover during the 12 months preceding the date of distribution. Tax regrowth is a second reason why David is an advocate for Roth IRAs. For David, going for a Roth IRA could be the right move if you believe that your tax bracket in retirement is likely to be higher than it is today. The Penn Wharton School of Business recently said that if the U.S. doesn’t write its fiscal ship of state by 2040, no combination of raising taxes or reducing spending will prevent the financial collapse of the country. Some experts are even predicting that tax rates could have to double in order to honor the nation’s massive financial obligations. A third huge benefit of a Roth IRA is that whatever money you don’t spend during your lifetime passes to your heirs, 100% tax-free –though they’ll have to liquidate those dollars within 10 years. Thinking about Roth IRAs? Just know that distributions from Roth IRAs don’t count as provisional income. In other words, they don’t count against the thresholds that cause Social Security taxation. David explains what can cause up to 85% of your Social Security to become taxable at your highest marginal tax bracket – leaving a huge hole in your Social Security. David has done the math hundreds of times: when you pay tax on your Social Security, you run out of money five to seven years faster than people who don’t pay tax on their Social Security. Finally, Roth IRAs are a tool worth leveraging for the fact that Roth IRA distributions don’t count as income-related monthly adjustment amount (also known as IRMAA). That translates to distributions from your Roth IRAs not counting against the thresholds that cause your Medicare Part B and Part D premiums to go up. David sees the Roth IRA as one of the crown jewels in the IRS tax code. Mentioned in this episode: David’s national bestselling book: The Guru Gap: How America’s Financial Gurus Are Leading You Astray, and How to Get Back on Track <a href="https://www.dav
S1 E332 · Wed, March 12, 2025
Two Huge Problems with Whole Life Insurance
This episode of The Power of Zero Show is part of David McKnight’s podcast interview with Caleb Guilliams and Tom Wall, PhD. David touches upon a recent Ernst & Young study where whole life insurance was used as a buffer-type strategy. When it comes to the “risk continuum”, David sees IUL as slightly on the right side of whole life insurance. IUL is something worth doing only if you think that risk premium can get you a slightly higher rate of return over time. David recognizes that IUL has risks but that, in exchange for those risks, you can get somewhat of a higher rate of return. Whole life policies aren’t something David sees as designed to build money up and then take money out permanently. One of the reasons why David likes the IUL is because you can find a carrier that gives you a guaranteed 0% loan. Some may argue that Wade Pfau, who wrote the foreword for David’s latest book, The Guru Gap , prefers whole life instead of IUL. David’s stated objective is to build up your net worth as effectively as you can. His suggestion for the accumulation period is to save as well as you can and to mostly invest in stocks. David explains his preference for IUL over whole life policies. Mentioned in this episode: David’s national bestselling book: The Guru Gap: How America’s Financial Gurus Are Leading You Astray, and How to Get Back on Track DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com Ernst & Young Dave Ramsey Wade Pfau
S1 E331 · Wed, March 05, 2025
Academics LOVE Annuities – Why Do Investors HATE Them?
Today’s episode of The Power of Zero Show features part of David McKnight’s conversation with Caleb Guilliams and Tom Wall, PhD. David kicks things off by addressing the liquidity issue. Handing a chunk of your retirement savings over to an insurance company in exchange for a stream of income that’s guaranteed to last as long as you do sounds great in principle, but people often have consternation about it… The thought of losing liquidity on a significant portion of their net worth is what prevents some Americans from opting for SPEAs and DIAAs. David explains why a fixed index annuity can be a valuable resource to leverage. David discusses what the annuity industry tends to do. In his book, Tax-Free Income for Life , David illustrates the so-called “piecemeal” internal Roth conversion. An internal Roth conversion allows you to convert your annuity into a Roth IRA – with an amount of your choosing and over a timeframe your financial plan calls for. Tom Wall discusses the two phases of an annuity, the accumulation and distribution phases, as well as the repercussions of the perceived loss of liquidity. Mentioned in this episode: David’s national bestselling book: The Guru Gap: How America’s Financial Gurus Are Leading You Astray, and How to Get Back on Track DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com
S1 E330 · Wed, February 26, 2025
How IUL Fits in a Balanced Approach to Tax-Free Retirement
This episode of The Power of Zero Show is part of David McKnight’s conversation with Caleb Guilliams and Tom Wall, PhD. David touches upon the “dangerous partnership” between the American people and the IRS. David is an advocate for a balanced, comprehensive, approach to tax-free retirement – he explains why that’s the case. One of the things David likes about IULs is the fact that they can perform specific applications that no other stream of income, such as Roth IRAs and Roth 401(k)s, can do. David goes over the unique trait of each of the streams of tax-free income he sees as key components of “the Holy Grail of financial planning”. A Roth IRA, for example, gives you immediate liquidity, while a Roth 401(k) gives you a match. A Roth Conversion allows you to convert an unlimited amount of assets to tax-free. Taking money out of your IRA up to your standard deduction allows you to get a deduction on the front end, grow your money tax-deferred, and take your money out tax-free. An IUL, on the other hand, enables you to get a death benefit in advance, for the purpose of paying for long-term care. A balanced, comprehensive, approach to tax-free retirement capitalizes on all the nooks and crannies in the IRS tax code. David is in agreement with a recent Ernst & Young study inviting people to have 30% of their retirement savings go towards cash-value life insurance. Mentioned in this episode: David’s national bestselling book: The Guru Gap: How America’s Financial Gurus Are Leading You Astray, and How to Get Back on Track DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com TikTok <a href="https://www.ey.com/en_us" target="_b
S1 E329 · Wed, February 19, 2025
Your Authoritative Guide to Tax-Free Retirement Planning in 2025
In this episode of The Power of Zero Show , David McKnight addresses different strategies for tax-free retirement planning in 2025. Most Americans are a little nervous when it comes to the fiscal trajectory of the U.S.. According to expert forecasts, the likely extension of the 2017 Trump tax cuts would take the current $36 trillion of national debt beyond the estimated $54 trillion by 2034 – taking it all the way to $59 trillion. A recent Penn Wharton study predicts that if the U.S. doesn’t right its fiscal ship of state by 2034, no combination of raising taxes or cutting spending will arrest the financial collapse of the nation. “Former Comptroller General of the Federal Government David Walker says that we may have to double tax rates within the next 10 years in order to keep our country solvent”, says David McKnight. Something important to consider is how to best shield your retirement savings from the potential tsunami of higher taxes down the road. David recommends creating a balanced, comprehensive strategy that takes advantage of all the “nooks and crannies” in the IRS tax code. The cost of getting money into tax-free vehicles is that you have to be willing to pay a tax. The next nine years represent a historical opportunity to pay those taxes while they’re on sale. The approach David suggests thinking about can incorporate as many as six different streams of tax-free income – none of which shows up on the IRS’ radar but all of which contribute to you being in the 0% tax bracket. A tax-free investment means no taxes at all: no federal income tax, no state income tax, or no capital gains tax. When taking distributions, tax-free investments should not count as provisional incomes – meaning that they don’t count against the thresholds which cause Social Security taxation. The Roth IRA is the first truly-tax free retirement account David believes you should be contributing to in 2025. The second truly tax-free account worth considering in 2025 is the Roth 401(k). The potential for a company match is the one thing that makes Roth 401(k) impossible to ignore – and turns it into an instant return on your investment. After a Roth IRA and a Roth 401(k), the third tax-free alternative you should think about this year is a Roth conversion. David discusses the ideal scenario in which you should opt for a Roth conversion. Your IRA or 401(k) is the fourth stream of tax-free income David touches upon. Tax-free distributions from your IRA or 401(k) are what David refers to as “the Holy Grail of financial planning” – since they do something no other strategy can do. The life insurance retirement plan and tax-free Social Security are two additional strategies David dives into. Tax-free Social Security is unique because it shields you from several risks, including tax rate risk, inflation risk, long-term care
S1 E328 · Wed, February 12, 2025
Expecting a Pension? Strongly Consider a Roth Conversion
David McKnight discusses a couple of really good reasons for doing a Roth conversion when you’re expecting a pension in retirement. David sees the American tax system functioning in a similar way as a graduated cylinder. Your income goes in and flows all the way down to the bottom. Some of your money gets taxed at 10%, at 12%, 22%, some at 24%, 32%, at 35%, and some at 37%. Jeff Bezos, too, has some of his earned income taxed at 10% (only for about 3 seconds, though!). If you’re planning on receiving a pension in retirement, understanding how this “tax cylinder” works will be crucial for maximizing your after-tax spendable income. David shares an example showing that your pension and the taxable portion of your Social Security will consume all of your 10% bracket, and most of your 12% bracket – and that’s before you draw $1 from your IRA or 401(k). When you take money out of your IRA or 401(k) in retirement, those dollars will flow into your cylinder and land right on top of all your other income and get taxed at 22%. David explains that after the expiration of Trump tax cuts, the 22% will become 25% and, over the next 10 to 15 years, your personal tax bracket could be even higher! If that scenario were to play out, the portion of your IRA or 401(k) that you get to keep could get smaller and smaller… In case the Trump tax cuts extension does go through, then you could convert your IRA or 401(k) to Roth over nine years of historically low tax rates. David likes to refer to the Trump tax cuts as the “tax sale of a lifetime” – he shares an example that illustrates why. David touches upon what you can do, until 2034, to maximize your after-tax spendable income. Mentioned in this episode: David’s national bestselling book: The Guru Gap: How America’s Financial Gurus Are Leading You Astray, and How to Get Back on Track DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free video series) @mcknightandco on Twitter @davidcmcknight on Instagram David
S1 E327 · Wed, February 05, 2025
Dave Ramsey: Fire Your Tax Advisor for Recommending a 401(k)!
This episode of the Power of Zero Show sees host David McKnight address Dave Ramsey’s advice – inviting a member of his audience to fire his tax advisor for recommending a 401(k). The problem with “financial gurus” like Dave Ramsey and the call-in shows they host is that they provide one-size-fits-all prescriptions that are delivered in very stark black and white terms. While David is an advocate for accumulating money in tax-free retirement vehicles, he also recognizes the importance of nuance with these types of recommendations. David explains that contributing to a Roth 401(k) is a good avenue to explore if you believe that your tax bracket in retirement is going to be higher than it is today. David believes that taxes will rise dramatically over the next 10 years. Following one-size-fits-all advice shared by financial gurus puts you at risk of running out of money faster because you may pay a tax along the way that you didn’t necessarily have to pay… David discusses when you should go for a traditional 401(k) and when it would be wiser to opt for a Roth 401(k) instead. According to a recent Penn Wharton study, if the U.S. doesn't right its fiscal ship of state by 2040, no combination of raising taxes or reducing spending will arrest the financial collapse of the country. David goes over a couple of strategies that could help your money last five to seven years longer. The fact that there are huge benefits to investing in tax-free accounts shouldn’t necessarily translate into you reflexively pouring all your retirement contributions into your Roth 401(k), says David. David shares his thoughts on when it may be a good idea to listen to Dave Ramsey and when it isn’t a clever move to follow his advice. Mentioned in this episode: David’s national bestselling book: The Guru Gap: How America’s Financial Gurus Are Leading You Astray, and How to Get Back on Track DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free video series) @mcknightandco on Twitter @davidcmcknight on Instagram <a href= "https://www.youtube.com/channel/UCGxUwL7NvZUyLfgO18
S1 E326 · Wed, January 29, 2025
The Guru Gap: How America’s Financial Gurus Are Leading You Astray and How to Get Back on Track
Today’s episode is a podcast guest interview David McKnight did for Josh Jalinski’s The Financial Quarterback Podcast . David gives Josh’s audience a quick bio that spans from his early days in the financial services space in 1997 all the way to his latest book The Guru Gap . The premise of The Guru Gap is the difference between the 1990s when people had very few options to vet out financial planning advice and today, where they have plenty of ways to vet out. Nowadays, whenever David makes a financial recommendation, 90% of his clients take to the internet to vet that recommendation. In The Guru Gap, David focuses on financial gurus Dave Ramsey, Suze Orman, Ken Fisher, Clark Howard, and Ramit Sethi – and their advice. Since financial gurus aim at taking important and complex financial principles and distilling them down into 10-second sound bites, they tend to give short shrift to a lot of details David’s clients would need to protect and grow their retirement savings. The #1 goal most Americans have is to have their money last as long as they do. Financial gurus have had an adversarial stance toward financial planners like David and Josh Jalinski. Some of David’s clients who seem to put more stock into what these gurus have to say tend to forget that their advice typically isn’t undergirded by math and actuarial science… Josh Jalinski shares a couple of stories that really tick him off when it comes to financial gurus and the consequences of their advice. David believes that America is better off with people like Dave Ramseys and the like in it than without them. “If you’re making $50,000 and spending $60,000 Dave Ramsey is precisely the person you should be talking to,” says David McKnight. David sees people like Dave Ramsey be “good for bad investors, and bad for good investors”. Wade Pfau thinks that following Ramsey’s advice of taking 8% withdrawal rates on your assets in retirement and putting 100% of your allocation in stocks, you’ll run out of money in advance of life expectancy 63% of the time. David touches upon the so-called Dave Ramsey circle of poverty: he gets you out of debt on the road to financial success, and then he promptly bankrupts you by taking an 8% withdrawal rate. Josh shares his thoughts on Dave Ramsey and explains that some people never save. Citing former Comptroller General David Walker and Penn Wharton David talks about what could be waiting for the U.S. in the near future. David gives out a couple of reasons why you should think about doing a Roth conversion. David and Josh talk about saving future taxes when someone passes away. A key question to ask yourself: Why not pay the tax today at 22% or 24%, so that your kids can inherit that money tax-free regardless of when they liquidate it? David reveals that, because of The Guru Gap , he has received
S1 E325 · Wed, January 22, 2025
Suze Orman: Here’s Why Annuities Are So Bad! (Avoid Them at All Costs!)
David McKnight takes a closer look at Suze Orman’s take on annuities – and at why she recommends her audience avoid them at all costs. Suze Orman labels the 5.4% compounded annual rate of growth one of her audience members (Janet) has had over the last six years as “horrific in today’s market.” David believes that the main issue with Suze Orman’s approach is that it engages in a classic case of apples to oranges comparison. According to David, index annuities are a bond alternative and were never meant to be a stock market replacement. David makes the case for index annuities performing far better than bonds – with a lot less risk. The average return on corporate bonds is between 4% and 5%, the one for treasury return is 3-4%, while the average return on municipal bonds is 2.12%. In David’s opinion, Janet should only feel bad about her 5.4% return over the 6 year time frame if the advisor who sold it to her sold it as a stock market alternative. Suze Orman’s audience member Janet purchased a so-called non-qualified indexed annuity, which tends to get a “last in, first out” treatment for tax purposes. David isn’t big on non-qualified annuities for the fact that a person purchasing them will have to pay tax on the growth before they’re able to access the principal tax-free. Another flaw in Orman’s assessment: she doesn’t tell you that you can hold an annuity in an IRA and pay ordinary income, or you can hold an annuity in your Roth IRA and pay no taxes at all… Something financial gurus like Suze Orman have in common: they DON’T have the luxury of nuance. Dollars earmarked to retirement accounts generally have a 10% penalty when you access them pre-59 and a half. David points out how Suze has wittingly demonized all forms of annuities – even the IRA and the Roth variety. While Suze is right saying that most annuities have surrender charges, she misses the entire point of why people usually get annuities: to get a guaranteed stream of income they can never outlive. 401(k) has a surrender charge that’s far more punitive than any annuity David has ever seen. Mentioned in this episode: David’s national bestselling book: The Guru Gap: How America’s Financial Gurus Are Leading You Astray, and How to Get Back on Track DavidMcKnight.com DavidMcKnightBooks.com <a href="https://www.powerofzero.com" ta
S1 E324 · Wed, January 15, 2025
Congress Approves $200 Billion in Additional Social Security Benefits: Do You Qualify?
This episode looks at whether you qualify or not for the $200 billion Social Security benefits approved by the U.S. Congress. Host David McKnight shares that, with the current status quo, the Social Security Trust Fund is on pace to go bust by 2033. If that were to happen, only about 83% of benefits would be paid out… If signed into law by President Joe Biden, the Social Security Fairness Act would provide an additional $200 billion in Social Security benefits to nearly 2.8 million Americans over the next 10 years. The Social Security Fairness Act would eliminate two policies that have reduced benefits for public service employees: the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO). The people most likely to be affected by the elimination of these two provisions are about 28% of state and local government employees who are covered by alternative retirement systems and permanent civilian federal employees hired prior to January 1, 1984. U.S. Senators Sherrod Brown (Ohio) and Susan Collins (Maine), co-sponsors of the Social Security Fairness Act, believe that the WEP and GPO have historically penalized people for choosing to serve their communities by dramatically reducing Social Security benefits. While David believes that Americans should get their due when it comes to their Social Security benefits, he wonders whether this is something that America can really afford… According to the Nonpartisan Committee for a Responsible Federal Budget, the passage of the bill in question will accelerate the insolvency of the Social Security Trust Fund by six months. David sees the Social Security Fairness Act and its repercussions on Americans as “yet another unfunded obligation on the balance sheet of the Federal Government.” Mentioned in this episode: David’s national bestselling book: The Guru Gap: How America’s Financial Gurus Are Leading You Astray, and How to Get Back on Track DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free video series) @mcknightandco on Twitter @davidcmcknight on Instagram <a href= "https://www.youtube.com/channel
S1 E323 · Wed, January 08, 2025
At What Tax Bracket Should I STOP Contributing to Roth: Responding to The Money Guy Show
In this episode, host David McKnight tackles a question about the tax bracket at which you should stop contributing to the Roth IRA and start contributing to the traditional IRA. The inspiration for this episode was a recent episode of The Money Guy Show . David believes that advice such as that shared on The Money Guy Show doesn’t consider most of the people asking questions like the one addressed in the episode. Those are people whose combined marginal tax rates fall between 25% and 30%. Generally, David likes the idea of having a rule of thumb tax bracket that helps you determine whether or not you should go Roth or traditional. However, he warns against providing advice that ends up confusing a huge swath of investors. In fact, David sees the particular rule of thumb like the one shared on The Money Guy Show as something that isn’t going to be all that helpful to many Americans. David breaks down the power of zero rule of thumb when it comes to deciding between Roth or traditional. Your state tax in retirement is likely to be very similar to what your state tax is now. David’s rule of thumb: if you’re in the 24% federal tax bracket or lower, then go Roth all day. That’s because your current 24% bracket is still lower than the future version of the 22%, which is 25%... Remember: if you’re in the 24% or lower in the federal marginal tax bracket, go Roth. If you’re in the 32% bracket or higher, then go tax deferred. Generally, David DOESN’T recommend filling up your entire tax-free bucket and ignoring tax deferred altogether if you decide to go Roth. Simply allocating your match to the tax deferred portion of your 401(k) is a great way to accumulate the required amount in your tax deferred bucket. David tends to like the Money Guy Show, but he feels that, in this instance, they should simply ignore state taxes in the Roth vs. traditional calculus and draw a red line at the 24% tax bracket. Mentioned in this episode: David’s national bestselling book: The Guru Gap: How America’s Financial Gurus Are Leading You Astray, and How to Get Back on Track David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com <a href="https://www.davidmcknightbooks.c
S1 E322 · Wed, January 01, 2025
New Study: Retirees with Annuities Spend MORE than Those Who Rely on Investments Alone
David McKnight looks at a recent study on retirees that seems to tell a different story compared to what many people in the U.S. tend to believe. Americans often view guaranteed lifetime income annuities skeptically – they’re perceived as a drag on the growth of their stock market portfolio. According to the study by retirement researchers David Blanchett and Michael Finke, retirees with guaranteed lifetime income spend about twice as much as their counterparts who rely on stocks and bonds alone for income in retirement. Those who rely purely on investments alone in retirement end up spending less because they fear running out of money in advance of life expectancy. David explains that “retirees with annuities spend more, not because they are wealthier, but because they have a form of wealth – a guaranteed income – that encourages them to spend.” Comparing two couples, a risk-averse couple with a risk-tolerant couple, Blanchett and Finke’s study found a 1.1% difference in them taking an annual withdrawal rate from their portfolio. David couldn’t have been any clearer: “If you want to spend more in retirement, taking an investment-only approach is usually the worst way of going about it.” Mentioned in this episode: David’s upcoming book: The Guru Gap: How America’s Financial Gurus Are Leading You Astray, and How to Get Back on Track David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com David Blanchett <a hre
S1 E321 · Wed, December 25, 2024
The US Debt Crisis: Will DOGE Really Move the Needle?
The episode explores whether the proposed Department of Government Efficiency (DOGE) will move the needle when it comes to the U.S. debt crisis. Some people see DOGE as the bold move America needs to solve its looming debt crisis. Elon Musk believes that DOGE can rip out at least $2 trillion out of the $6.5 trillion Biden-Harris budget – however, David McKnight disagrees. David gives a breakdown of the federal budget, including the so-called non-discretionary spending. Former U.S. Comptroller General David Walker shares his thoughts on what he sees as the potential impact of DOGE on the federal deficit. David explains that, unless actions are taken right away, Social Security, Medicare, and Medicaid will eventually bankrupt America. Moreover, the more time passes with the Federal Government failing to dramatically scale back such programs, the more onerous and draconian the fix will be on the back end. Does David see DOGE as being able to move the needle on solving the national debt crisis? “Probably not,” he says. Mentioned in this episode: David’s upcoming book: The Guru Gap: How America’s Financial Gurus Are Leading You Astray, and How to Get Back on Track David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com DOGE Donald Trump <a href="https://en.wikipedia.org/wiki/Elon_Musk" target= "_b
S1 E320 · Wed, December 18, 2024
Why I Wrote a Book Exposing Dave Ramsey
The episode kicks off with David McKnight sharing his view of the guru’s approach: “to go about half an inch deep and ten miles wide.” David discusses a sort of clash that financial planning gurus are creating by trying to attract — or even 'steal' — clients from financial planners who already have them. The goal of financial planners should be to provide a bridge between the advice clients get from financial gurus and their ultimate objective of ensuring that their money lasts as long as they do. David categorizes Dave Ramsey’s advice as “good for bad investors but bad for good investors.” David explains the so-called “Dave Ramsey’s circle of poverty.” According to Wade Pfau, who wrote the foreword for David’s new book The Guru Gap, adopting Ramsey’s approach will lead people to run out of money in advance of actuarial life expectancy 63% of the time.” David shares that nobody he has ever talked to actually agrees with Dave Ramsey’s retirement advice. Running out of money before running out of life is the #1 fear most Americans have. David sees instilling hope as the main reason why Dave Ramsey’s approach tends to exacerbate the #1 fear Americans have — instead of removing that fear. Mentioned in this episode: David’s upcoming book: The Guru Gap: How America’s Financial Gurus Are Leading You Astray, and How to Get Back on Track David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com <a href= "https://www.ramseysolutions.com/?srsltid=AfmBOoqLwZOjIMEg6vxg2q_-rx1ljHF2GR18IO
S1 E319 · Wed, December 11, 2024
First Major Book Critical of Dave Ramsey Retirement Advice Set to Publish
This episode is based on David McKnight’s interview with Lane Martinsen on Financial Fast Lane. David shares how he started in the financial planning industry, as well as the backstory of his new book, The Guru Gap . The Guru Gap focuses on several financial gurus such as Dave Ramsey, Suze Orman, Clark Howard, and Ramit Sethi. David finds it interesting to see financial gurus demonizing the types of recommendations him and his peers share – recommendations based on math and actuarial science. For David, America is better off for financial gurus being in the picture than out of the picture. The main issue is the fact that they aren’t trying to cultivate an adversarial relationship with mainstream financial advisors, says David. David brings up a real-life example of bad advice shared on the Dave Ramsey Show . The ideal reader of The Guru Gap is the sophisticated, disciplined, investor. Most Americans strive for their money to last until they die. David sees Dave Ramsey as an expert who is “good for bad investors, and bad for good investors”. There are lots of stories of people who, following Ramsey’s advice, have run out of money much sooner than they predicted. David believes that it’s time for disciplined investors to adopt an entirely different paradigm when it comes to maximizing their retirement savings. David goes over three challenges he faced when writing The Guru Gap . Hope is something Dave Ramsey seems focused on. However, in the context of financial planning, David sees hope as something that can be the opposite of math. David and Lane Martinsen discuss the chapters David is most excited about. David’s ultimate goal with The Guru Gap is to engender a massive dialogue between Americans and financial gurus. David hints at a future book that will focus on Millennials – a generation that is saving less and is less educated on investing than their Gen X and Baby Boomer forebears at the same stage in their life. Mentioned in this episode: David’s upcoming book: The Guru Gap: How America’s Financial Gurus Are Leading You Astray, and How to Get Back on Track David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com <a hr
S1 E318 · Wed, December 04, 2024
First Book Critiquing Dave Ramsey's Retirement Advice Set to Publish
This episode is based on David McKnight’s recent interview for Stephen Gallo’s podcast. David explains how the advice shared by gurus tends to work – and the role financial advisors play. David touches upon his concept of “Dave Ramsey’s circle of poverty.” According to Wade Pfau, adopting the approach shared by Dave Ramsey will lead to you running out of money in advance of actuarial life expectancy 63% of the time. To avoid falling in league with financial gurus, financial advisors should stay away from dispensing one-size-fits-all financial planning. David analyzes Dave Ramsey’s approach – including why, instead of addressing America’s #1 fear when it comes to money, he exacerbates it. David shares a couple of anecdotes about his new book The Guru Gap . In researching financial gurus for The Guru Gap , David realized that they are even more wrong on key topics than what he had previously believed. David discusses how you can discern good advice from bad advice when consuming content such as podcasts and YouTube channels. Cash value life insurance is something that’s sort of universally panned by financial gurus, but it’s easy to make a mathematical justification for it. Mentioned in this episode: David’s upcoming book: The Guru Gap: How America’s Financial Gurus Are Leading You Astray, and How to Get Back on Track David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com <a href="https://www.linkedin.com/in/stephen-gallo-963565231" target="_blank" rel="noopener
S1 E317 · Wed, November 27, 2024
How to Tell If a Financial Guru Is Telling You the Truth
This episode is part of David McKnight’s guest interview with Kyle Solon. David talks about the importance of math when it comes to decisions related to using cash value, life insurance, and annuities. A recent Ernst & Young study showed a surprising stat about who had the highest income in retirement and passed the most money on to the next generation. David illustrates the concept of the volatility shield, also known as volatility buffer. The #1 concern of Americans all across the country is running out of money before they run out of life. David shares a key question people should ask themselves when listening to gurus such as Dave Ramsey: “Is there a mathematical justification to what I’m being told?” . David is a strong believer of leaning on the strategies that historically give you a much higher mathematical likelihood of increasing the life expectancy of your money. Dave Ramsey is someone who David really likes for some things, while he isn't a big fan of him for other matters. He sees Ramsey as good for getting people out of debt but not good at helping people have their money last through life expectancy. David gives a breakdown of a couple of sections of his new book – The Guru Gap – and what people should do to educate themselves about the financial industry. Mentioned in this episode: David’s new book: The Guru Gap: How America’s Financial Gurus Are Leading You Astray, and How to Get Back on Track David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com </
S1 E316 · Wed, November 20, 2024
What Trump’s Election Means for Your Roth Conversion Strategy
David McKnight describes the Trump tax cuts situation before Trump’s victory at the 2024 presidential elections. There’s likely going to be changes under a new Trump administration – something that David sees as great news. When it comes to Roth conversion strategy, David is a believer in two things. The first is to convert your money slowly to avoid rising into a tax bracket that gives you heartburn. The second is to convert your money quickly enough to get all the heavy lifting done before tax rates go up for good. While the posting of the end of the Trump tax cuts to 2032 would be good for American citizens, there’s a big downside for the country as a whole. Several experts have predicted a need for a tax rate increase to prevent the U.S. from going broke as a country. Eight more years with historically low tax rates would be especially critical for pre-retirees and retirees looking to shield their retirement savings from a predicted spike in tax rates in the future. David shares something he believes can dramatically increase the likelihood of retirees having their money last as long as they will. Mentioned in this episode: David’s upcoming book: The Guru Gap: How America’s Financial Gurus Are Leading You Astray, and How to Get Back on Track David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com Donald Trump Committee for a Responsibl
S1 E315 · Wed, November 13, 2024
The Huge ERROR in the Dave Ramsey-George Kamel Plan to Pay Off Your Home in 10 Years
This episode is a critique of a recent video by George Kamel on the supposed benefits of paying off your house in 10 years. David McKnight examines Kamel’s viewpoint on early mortgage payoff and whether it’s truly beneficial – do you really come out ahead by eliminating your mortgage as fast as possible? A major point David sees as a disadvantage is the fact that by paying off your mortgage early, you may lose access to the equity in your home. David highlights the opportunity cost of using funds to pay off a low-interest mortgage (as low as 3%) instead of investing them in the stock market for potentially higher returns. Kamel believes that the longer you take to pay off your loan, the more interest you pay. According to Kamel, how much interest you pay depends on three things: the loan amount, the interest rate, and the time it takes you to repay the loan. David shares an example that illustrates why following the advice of George Kamel’s video isn’t a good idea – and why it could cost you (a lot!) of money. “Dave Ramsey is so fixated on getting people out of debt that he hasn’t bothered to calculate the opportunity costs associated with doing so,” says David. Mentioned in this episode: David’s upcoming book: The Guru Gap: How America’s Financial Gurus Are Leading You Astray, and How to Get Back on Track David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com <a href= "https://www.ramseysolutions.com/?srsltid=AfmBOoqLwZOjIMEg6vxg2q_-rx1ljHF2GR18IOA-c3HNpOcWeYHKFbPM" target="_bl
S1 E314 · Wed, November 06, 2024
The Top 6 Reasons to Do a Roth Conversion
Today’s episode looks at the top 6 reasons why doing a Roth conversion may be the right move for you. The disastrous fiscal condition of the U.S. is the first reason why you should consider doing a Roth conversion. David explains why debt in and of itself isn’t the issue – and what the real problem with it is. Doing a Roth conversion with today’s low tax rates can be a way for you to shield your retirement savings from the impact of higher taxes down the road. Not sure what tax rates could double in your lifetime? There’s still a possible scenario in which your tax bracket could double. David touches upon the “widow penalty”, the tax bracket compression, and what the IRS tracks to determine whether they’re going to tax your social security. The so-called IRMA and the lack of required minimum distributions are two additional reasons to consider doing a Roth conversion. Mentioned in this episode: David’s upcoming book: The Guru Gap: How America’s Financial Gurus Are Leading You Astray, and How to Get Back on Track David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com Penn Wharton Comeback America: Turning the Country Around and Restoring Fiscal Responsibility by David M. Walker
S1 E313 · Wed, October 30, 2024
Understanding the Tricky Roth 401(k) Distribution Rules
David McKnight explains how a lack of knowledge about Roth 401(k) distribution rules can lead to unexpected taxes and penalties. This episode dives into practical insights to help you steer clear of unwelcome surprises from the IRS. David illustrates what happens if you withdraw from your Roth 401(k) before age 59½, and how these rules differ from those of a traditional Roth IRA. He subsequently tackles the question of when post-59½ withdrawals of Roth 401(k) growth can be completely tax-free. Roth 401(k) distributions can be confusing – especially if you’re planning to take funds before age 59½. And there’s an alternative you should consider. Planning to use your Roth 401(k) as an emergency fund? “Think again!,” says David. He goes over why this may not be the best choice (and what to do instead). Mentioned in this episode: David’s upcoming book: The Guru Gap: How America’s Financial Gurus Are Leading You Astray, and How to Get Back on Track David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com
S1 E312 · Wed, October 23, 2024
Is Dave Ramsey STILL Wrong on Roth Conversions?
In the past, David McKnight has been critical of gurus like Dave Ramsey. However, this episode looks at a video in which Ramsey seems to have slightly changed his views. Ramsey emphasizes that one key benefit of a Roth IRA is the potential to drastically reduce or even eliminate Required Minimum Distributions (RMDs). David explains that the decision to pursue a Roth conversion typically depends on whether you expect your future tax rate to be higher than it is today. David discusses a missed opportunity in Ramsey's advice to a caller, highlighting a critical point Ramsey seems to have overlooked. While David acknowledges a solid point made by Ramsey, he also identifies what he describes as "a huge blind spot in Ramsey’s worldview." David highlights a "right move" by Ramsey – whether it’s a deliberate policy shift or Ramsey unintentionally cornering himself remains to be seen… David praises Ramsey’s advocacy for Roth accounts, a sentiment he wholeheartedly agrees with. Mentioned in this episode: David’s upcoming book: The Guru Gap: How America’s Financial Gurus Are Leading You Astray, and How to Get Back on Track David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com Dave Ramsey David M. Walker Ed Slott <a href="https
S1 E311 · Wed, October 16, 2024
Grant Cardone: Never Own a Home, Go to College or Invest in a 401(k)! (YIKES)
In a recent video, real estate influencer Grant Cardone made some bold claims, advising against attending college, owning a home, and he even suggested that people should cash out their 401(k)s to invest in real estate. David McKnight calls this advice irresponsible, dangerous, and lawsuit-worthy. Far more Americans achieve millionaire status through consistent stock market investing than through real estate. David shares a more sustainable approach to building wealth through homeownership that directly counters Cardone's anti-homeownership stance. Cardone claims that 401(k) plans are designed to "imprison" people financially. David digs deeper into the true purpose of retirement accounts and the importance of having an emergency fund. There is one point where both David and Cardone align: the likelihood that future tax rates will be higher than they are today. Finally, David touches upon the steep tax penalties of withdrawing from your 401(k) before age 59½ – an important consideration Cardone seems to overlook. Mentioned in this episode: David’s upcoming book: The Guru Gap: How America’s Financial Gurus Are Leading You Astray, and How to Get Back on Track David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com Grant Cardone
S1 E310 · Wed, October 09, 2024
The Easiest, Low-Hassle Way to Become a Millionaire (2nd Place isn’t even close)
This episode explores the easiest and most hassle-free way to achieve millionaire status. According to Fidelity, the number of 401(k) millionaire accounts they manage has skyrocketed from 100,000 in 2017 to nearly 500,000 in 2024. “The slow and steady approach to building wealth is the best way to become a millionaire today,” says David McKnight. David explains why this method often outperforms owning real estate or running your own business when it comes to low-stress wealth accumulation. He also delves into the stock market and the single greatest engine of wealth creation Plus, David discusses one of the huge ways that makes 401(k)s a powerful wealth accumulation. There are different ways to build wealth – each with its own “hassle factor”. Directing your contributions to the Roth portion of your 401k is the best way to shield your 401k from the impact of taxes down the road. Mentioned in this episode: David’s upcoming book: The Guru Gap: How America’s Financial Gurus Are Leading You Astray, and How to Get Back on Track David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com Fidelity
S1 E309 · Wed, October 02, 2024
Ben Shapiro: Here’s What Will Happen to the National Debt Under Kamala Harris
In this episode, Ben Shapiro shares his insights on the growing national debt and its potential trajectory under a Kamala Harris administration. Shapiro provides a historical overview of U.S. interest payments, starting from the 1960s. He highlights the alarming rise in the national debt, which has doubled in the last decade, and examines Harris’ proposed solutions to address it. According to Shapiro, there are only two viable paths to resolve the debt crisis: significant economic growth or substantial cuts in government spending. The primary drivers of the national debt, Shapiro explains, are interest payments, along with Medicare and Social Security obligations. A Wall Street Journal article by Phil Graham and Jodey Arrington is referenced, citing welfare programs as a major contributor to the federal budget strain. Shapiro argues that the U.S. economy would stagnate under a Kamala Harris presidency. David McKnight offers a different perspective, arguing that Social Security, Medicare, and Medicaid are not the root causes of the debt crisis. He outlines the true factors behind the ballooning debt. A recent study by Penn Wharton Business School challenges Shapiro’s views, suggesting that neither raising taxes nor cutting spending alone will prevent a financial collapse if the U.S. reaches 200% debt-to-GDP. David also shares strategies to protect your retirement savings from potential tax increases. Mentioned in this episode: David’s upcoming book: The Guru Gap: How America’s Financial Gurus Are Leading You Astray, and How to Get Back on Track David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax
S1 E308 · Wed, September 25, 2024
How Do I Do a Roth Conversion and Which Forms Will I Need?
This episode answers the question, “How do I do a Roth conversion, and what forms do I need to fill out with the IRS?” David explains that there are three basic steps to convert your IRA to a Roth IRA. Carrying out these three steps will likely take a few weeks – the process could be slightly shorter if everything is handled by the same financial institution. Starting this process in December isn’t ideal because financial institutions are often overwhelmed with conversion requests. If the conversion isn’t completed by December 31st, the Roth conversion window will close, and you won’t be able to reopen it for that tax year. David discusses when and why 100% of your IRA conversion may not be taxable. He also touches on the different forms you’ll need to fill out, including instances where you may want to use form 8606. As David puts it, “Double taxation is something you should avoid at all costs.” Mentioned in this episode: David’s upcoming book: The Guru Gap: How America’s Financial Gurus Are Leading You Astray, and How to Get Back on Track David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com
S1 E307 · Wed, September 18, 2024
Eight IUL Deal-breakers You Should Watch Out For
This episode is part of David McKnight’s interview with Mark Byelich, founder and owner of Attleboro Wealth Management. David and Mark discuss why the money inside a Life Insurance Retirement Plan (LIRP) "bucket" is treated differently for tax purposes and benefits from low fees. When it comes to life insurance, David recommends "having as little of it as the IRS requires, and stuffing as much money into it as the IRS allows." Remember: not all Indexed Universal Life (IUL) policies are created equal. Starting an IUL is like getting married – it only works if it’s 'til death do you part. Mark and David touch on the so-called IUL deal-breakers. David is firm in his view: for LIRPs and IULs, you must ensure a 0% loan is guaranteed in the contract. David also shares one of the biggest reasons his clients tend to favor an IUL. Mark Byelich highlights a significant risk that he and his team monitor closely. David and Mark discuss participating and variable loans, as well as interest in arrears – and David explains why he’s recently taken a step back from a particular approach. David is a fan of the COMDEX rating, and he explains why, along with one of the Achilles' heels of life insurance policies. Mark recommends reviewing your financial plan annually. David shares why they only do business with companies that conduct daily or weekly sweeps. Mentioned in this episode: David’s upcoming book: The Guru Gap: How America’s Financial Gurus Are Leading You Astray, and How to Get Back on Track David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at <a href= "http://t
S1 E306 · Wed, September 11, 2024
Updated Rules on Missed RMDs
This episode looks at the recent IRS updates on the required minimum distributions due for 2024 and 2025. David touches upon which accounts are and which aren’t subject to RMDs. Historically, when someone missed their RMD, they had to pay a 50% penalty on whatever they were supposed to withdraw but did not… David goes over what the new regulation for missing an RMD says. David explains how SECURE Act 2.0 changed what was a popular policy in regards to RMDs and paying penalties. To avoid confusion over penalties and various statutes of limitation, David recommends ensuring that you’re taking your RMDs at the appropriate time. “If you consolidate all your IRAs into one account, it’s going to be a lot easier to make the correct RMD calculation,” says David. Mentioned in this episode: David’s upcoming book: The Guru Gap: How America’s Financial Gurus Are Leading You Astray, and How to Get Back on Track David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com Secure Act 2.0
S1 E305 · Wed, September 04, 2024
4 Ways to Build Tax-Free Wealth for High-Income Earners
Today’s episode addresses how to create multiple tax-free income streams that don’t show up on the IRS’s radar and that contribute to you being in the 0% tax bracket in retirement. Having some money in a tax-deferred account, like an IRA or 401k, is the first way high-income earners can create tax-free wealth for retirement. Contributing to your Roth 401k or Roth 403b, as well as leveraging a backdoor Roth, are a couple of additional ways to build tax-free wealth in retirement. David touches upon what CPA and retirement expert Ed Slott calls “the single greatest tax benefit in the IRS tax code.” David makes a comparison between Indexed Universal Life vs. a taxable brokerage account. David believes that “the higher your tax bracket, the more it makes sense to reposition surplus savings from your taxable account to indexed universal life.” Mentioned in this episode: David’s upcoming book: The Guru Gap: How America’s Financial Gurus Are Leading You Astray, and How to Get Back on Track David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com Ed Slott
S1 E304 · Wed, August 28, 2024
Can I Avoid IRMAA When Doing a Roth Conversion?
David starts the conversation by explaining what IRMAA is, if you should be worried about it when doing a Roth conversion, and whether there are ways around it. David defines the acronym IRMAA, Income-Related Monthly Adjusted Amount. This is an additional charge you could be required to pay on your Medicare Part B premiums. As your income goes up in retirement, your Medicare Part B premium increases with it. David explains why standard deductions do not apply when calculating IRMAA. What is the link between IRMAA and doing Roth conversions? Roth conversions are construed as part of your annual income in the IRMAA calculation. David explains why you could do a Roth conversion before ever getting on Medicare and still end up paying that increased premium. The IRS has a two-year look-back period when doing IRMAA calculations. So if you did a Roth conversion at age 63, for example, that would be included in the IRMAA income calculation at age 65 when you finally get on Medicare. If Roth conversions could potentially cause IRMAA, should you avoid them altogether? According to David, the answer is no--and that's because of two reasons. First, if you don't do a Roth conversion, you could risk growing and compounding your IRA or 401K to the point where RMDs at 73 are so large that you could get hit with IRMAA every year for the rest of your life. Secondly, tax rates will go up in the future. So you certainly don't want to forego a Roth conversion, only to pay much higher taxes on your IRA or 401k distributions down the road. According to David, if you get enough Roth conversions done by the time you reach 63, you could avoid IRMAA altogether. Why? Because distributions from Roth IRA are not included in the IRMAA income formula. By doing a Roth conversion and taking the IRMAA hit in the short term, you could put yourself in a position where you avoid IRMAA for the rest of your life and stay off the IRS's radar when it comes to Social Security taxation. Mentioned in this episode: David’s upcoming book: The Guru Gap: How America’s Financial Gurus Are Leading You Astray, and How to Get Back on Track David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com <a href="https://www.davidmcknightbooks.
S1 E303 · Wed, August 21, 2024
Suze Orman goes on EPIC IUL Rant--“I’m BEGGING you not to do them!”
This episode addresses Suze Orman’s epic IUL rant on her Women and Money podcast . Suze Orman begged her audience not to do Index Universal Life insurance policies. This very broad brush and no nuance approach of every financial guru is what David’s upcoming book The Guru Gap touches upon. David explains why the generic approach financial gurus tend to have is leading people astray. David brings up Orman’s advice to one of her listeners who has been investing $200/month into an IUL policy. David recreated this listener’s exact policy through one of the top IUL carriers in the industry – he shares his findings. Starting an IUL is like getting married: it only really works if you plan on keeping it until death do you part. David goes over the reason why IUL should be the last bucket to turn to for liquidity in the early years. These days, most IUL carriers these days allow you to receive your death benefits in advance for the purpose of paying for long-term care. David believes that “an IUL can serve as a great volatility shield in retirement”. A recent Ernst & Young study showed how people can dramatically increase their sustainable levels of income in retirement in the context of IULs. Mentioned in this episode: David’s upcoming book: The Guru Gap: How America’s Financial Gurus Are Leading You Astray, and How to Get Back on Track David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com <a href="https://www.suzeorman.com/podcast" target="_blank" rel= "no
S1 E302 · Wed, August 14, 2024
The #1 Reason Why People Don't Do a Roth Conversion
David and Mark Byelich talk about why people don’t want to pay a tax before the IRS absolutely requires it of them. David touches on the 2018 documentary The Power of Zero: The Tax Train is Coming . Mark Byelich explains that the longer someone hasa tail of the overage in their IRA hanging out there, the more risk they have. Mark discusses what happens in financial planning when people ease. When it comes to people around the country, the initial tax payment is typically the thing that’s really hard to get over. David shares what tends to occur when people get over the “shock” of paying that initial tax. Mentioned in this episode: David’s upcoming book: The Guru Gap: How America’s Financial Gurus Are Leading You Astray, and How to Get Back on Track David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com Mark Byelich The Power of Zero: The Tax Train is Coming Doug Orchard George Shultz Ed Slott
S1 E301 · Wed, August 07, 2024
Why You Must Do a Roth Conversion Before Your Spouse Dies (Bonus: Your Kids Will Love You)
Today’s episode is part of David’s interview with Mark Byelich. David and Mark address Mark’s concept of “suddenly single”. David once met an Uber driver who had saved $1.5M. All financial advisors gave him the same advice “don’t change anything” but David had something different to share. A Roth conversion is something married couples should consider to avoid being automatically catapulted into the 22% or 24% tax bracket if one spouse dies. David breaks down the thought process behind considering a Roth conversion even if you feel like you’ve done everything right. Mark and David touch upon the potential challenges of inheriting an IRA from your parents – and the two types of people who typically inherit them. You may think “I’m never going to be in any bracket other than the 10% or 12%”. But think about what would happen to your heirs if you passed away, says David. David sees the Roth conversion as the single greatest tool that’s available to you today to be able to maximize the amount of money that your kids are going to be able to spend. Mentioned in this episode: David’s upcoming book: The Guru Gap: How America’s Financial Gurus Are Leading You Astray, and How to Get Back on Track David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com Mark Byelich
S1 E300 · Wed, July 31, 2024
Critiquing George Kamel’s 8-Step Plan for a Successful Retirement (#5 Will Sink You)
This episode addresses the 8-step plan for a successful retirement plan that was recently shared by Dave Ramsey’s “sidekick,” George Kamel. Just like in any field of life, a good financial plan benefits from assessing where you are, where you want to be by a given date, and what needs to be done to get there. David dislikes the approach of painting everything with a broad brush and characterizing niche financial planning principles in broad, one-size-fits-all financial planning terms. That’s what, in his opinion, many so-called “financial gurus” like Dave Rasmey tend to do. David mentions his upcoming book, The Guru Gap: How America’s Financial Gurus Are Leading You Astray, and How to Get Back On Track. George Kamel has found that 8 out of 10 millionaires have reached their millionaire status by investing in their company’s 401k plan. David shares his philosophy: “If you’re in a 24% bracket or lower, opt for the Roth 401k. If you’re in the 32% bracket or higher, stick with the traditional 401k.” David contradicts Kamel and explains that the reason you invest in a Roth IRA is because you think that your tax bracket in retirement is likely to be higher than it is today. For David, when it comes to millionaires who have paid off their homes, it’s important to distinguish between causation and correlation. A problem with Kamel’s view on Social Security is that Social Security is likely to never go away. What may happen, says David, is that the retirement age will be changed. Kamel and David are in agreement: investing is a marathon, not a sprint – and it isn’t for the faint of heart. According to an April 2024 study by Dalbar, investors continue to be their own worst enemies when it comes to saving for retirement. Except for step 5, David sees George Kamel’s 8-step plan as a pretty sound solution. Mentioned in this episode: David’s upcoming book: The Guru Gap: How America’s Financial Gurus Are Leading You Astray, and How to Get Back on Track David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com Pow
S1 E299 · Wed, July 24, 2024
How Life Insurance and Annuities Can Help Maximize Your Retirement
Today’s video comes from David’s interview with Dave Christy. They discuss how life insurance and annuities can help maximize your retirement. They start by describing the three different ways cash value life insurance can positively impact your financial plan. David reveals how IULs can be an excellent replacement for the bond portion of your portfolio. David explains why most people get heartburn when they think about paying for traditional long-term care. David goes over the unique aspects of cash value life insurance--if you ever need long-term care, the insurer will start paying your benefits in advance of your death to pay for long-term care. David covers how cash value life insurance can extend the life of your investments when it comes to sustainable withdrawals in retirement. According to David, the problem with the 4% Rule is that it's an expensive way of mitigating longevity risk. David describes how cash-value life insurance works and why it's an excellent volatility shield in retirement. When you utilize cash value life insurance, annuities, and traditional investing together, you will yield higher income in retirement than any other alternative. Dave defines prudent asset allocation and how to use it to protect your retirement. They both agree that the number one rule to being a successful investor is to not sell things when your investments are down. For David, every investor should aim to accumulate three to five years worth of living expenses in their cash value life insurance by day one of retirement. The IUL is not a stock market replacement. But it will give you more productive returns than a whole life policy. Mentioned in this episode: David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com
S1 E298 · Wed, July 17, 2024
Will Trump Extend The Tax Cuts If Elected?
Today’s video is part three of David’s interview with Dave Hall. They discuss whether Trump will extend the tax cuts if re-elected. David cites a recent report from the Committee for a Responsible Federal Budget that says that if they extend the tax cuts, the government will have to borrow $5 trillion to pay for those tax cuts. David explains why he doesn’t see another tax cut happening without a commensurate reduction in spending. David tackles people’s assumptions that tax cuts can stimulate enough economic growth to be able to pay for themselves. Dave and David agree that more people are starting to come to terms with the fact that taxes will go up in the future. David explains why individual investors need to be realistic about the types of tax rates they're likely to pay down the road. David shares his thoughts on whether the Inflation Reduction Act was successful in bringing inflation down and cutting government spending. Why you need to take advantage of historically low tax rates today and protect your retirement before tax rates go up for good. David covers the benefits of taking advantage of historically low tax rates while they're still around and why you need to get your savings systematically repositioned to tax-free. Dave talks about doubling taxes and how they could easily ruin retirements that would have otherwise worked out well. Politicians are in the business of getting re-elected. That is their number one job. You may think their number one job is to represent you, but their number one job is to get re-elected. Mentioned in this episode: David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com
S1 E297 · Wed, July 10, 2024
Can Social Security, Medicare and Medicaid Be Saved?
Today’s episode is part 2 of David’s interview with Dave Hall. David shares his thoughts about moving the retirement age to what it currently is. Dr. Larry Kotlikoff has suggested raising taxes to 4% – 2% on the employee and 2% on the employer – as a way to solve the issues around Social Security. David sees the combination of pushing back the retirement date and increasing revenue as a valuable avenue to tackle the Social Security issue. Dave and David talk about the current and future state of Medicare. Medicare is the largest of the three programs that constitute the $239 trillion underfunding. David touches upon David Walker’s answer to the question “Do you foresee a future in which they could raise income taxes to pay for that underfunding?” States like California and Washington are concerned about the future viability of their Medicare programs because of all the long-term care needs the country has. There’s a 70% chance that, among spouses, one will end up needing long-term care. David unpacks the potential repercussions of that. Mentioned in this episode: David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com Dave Hall Dr. Laurence Kotlikoff Suze Orman David M. Walker
S1 E296 · Wed, July 03, 2024
How the Current U.S. Debt-to-GDP Trajectory Could Kill Your Retirement Plan
Today’s episode is part 1 of David’s interview with Dave Hall. David shares what he considers the fundamentals of his financial movement: “numbers don’t lie.” David cites a recent Penn Wharton study that illustrates two things that should be done by 2043 – and what will happen if these conditions aren’t met. Dave and David discuss the debt-to-GDP ratio, and why debt isn’t the problem. According to experts, when the debt-to-GDP gets past 75% it’s when there’s an eroding influence on your economic output over time. Dave and David go over when they started to track the $21 trillion dollar debt situation and related aspects. There’s a demographic “time bomb” and it will have an impact on Social Security, Medicaid, and Medicare. David talks about the big inverted pyramid, its relation to benefits, and the increasing tax rate forecast. Medicare is five times more expensive than Social Security, making it a harder thing to fix. Mentioned in this episode: David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com Dave Hall Comeback America and <a href= "https://www.amazon.com/America-2040-Superpower-Pathway-Success/dp/1665500840/ref=sr_1_1?crid=5A99ETRKCRTE&dib=eyJ2IjoiMSJ9.ELsbCg7lvM_FEBl9bPQzUmQn_p66DBRVR5rVlwa7_0HGjHj071QN20LucGBJIEps.KBoPgFgr_yT7cM_m0SU8aTDF5FYNA_
S1 E295 · Wed, June 26, 2024
How Soon Will AI Replace Financial Advisors?
Today’s video is part four of David’s interview with the co-founder of Power of Zero, Larry DeLegge. They discuss whether AI will replace financial advisors and if Congress will take away the tax advantages of cash value life insurance. According to David, financial planning is more of an art than a science. This is why he is not all that convinced that AI has the capabilities to successfully handle people’s unique and complex financial situations. 2043 will be a big year for our country. Once we hit a 200% debt to GDP, no combination of increasing taxes or reducing spending will arrest the fiscal collapse of our nation. David breaks down the options and solutions we still have to put our country back on a sustainable fiscal path. David shares his thoughts on whether Congress will change the rules on cash value life insurance. The book, Power of Zero, works best for people who have already accumulated money and are looking for ways to wring the most efficiency out of their savings while shielding themselves from the impact of higher taxes. David reveals that his next book will target the younger generation--the people in their 20s, 30s, and 40s. David agrees with Harrison Young’s famous saying that the people who contribute 30 percent of their retirement savings to cash value life insurance take much more income in retirement than people who do investments alone. David shares why he believes financial advisors need to redeem life insurance and tax-free planning principles by teaching the principles to the younger generation. If you're going to write a book, find some good stories and make those stories the centerpiece of what you're trying to drive home. That’s how you write a good book. David’s advice for people looking to write a book on finances: don't ever start a book with your own personal story. Start your book with a story that will grab your reader’s attention and then keep them for the rest of the book. Mentioned in this episode: David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twitter @davidcmcknight on Instagram <a href= "https://www.youtube.com/channel/UCGxUwL7NvZUyLfgO18h3e2g" target= "_blank" rel="noope
S1 E294 · Wed, June 19, 2024
Beware of This Tax Bracket When Doing a Roth Conversion
Today’s video is part two of David’s interview with Larry DeLegge, the co-founder of Power of Zero. They discuss the tax bracket you should avoid when doing a Roth conversion. They start the conversation by describing why it’s a no-brainer to pay your taxes today at 22 or 24% marginal rates. Instead of rushing to complete Roth conversions by 2026 and potentially bumping into higher tax brackets, David suggests stretching the conversions over several years. After 2026, the tax brackets are expected to increase, with the 22% bracket becoming 25% and the 24% bracket becoming 28%. However, these brackets are still lower than the higher brackets (32%, 35%, 37%) that one might be forced into if they rush the Roth conversion. David reveals why he advises people to do Roth conversions but only follow a restrained approach to Roth conversions. David talks about the ideal balance for saving money in taxable, tax-deferred, and tax-free buckets. What will happen to standard deductions come 2026? David is not worried about the standard deduction. He explains that standard deductions will be around for the foreseeable future, and there are no indications of the government getting rid of them. For David, it’s more prudent to plan for higher taxes than to speculate on the complete elimination of the standard deduction. All financial advisors agree that tax rates will be significantly higher in the future, which supports the strategy of paying taxes now at lower rates. Should people use cash to pay tax on Roth conversions now, or should they contribute it to a Roth 401(k) now? David’s advice is for people to go with the Roth 401K. Mentioned in this episode: David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com
S1 E293 · Wed, June 12, 2024
The Ticking Time Bomb in Your Cash Value Life Insurance
Today’s episode is part 1 of David’s interview with Power of Zero co-founder Larry DeLegge. The two talk about value life insurance policies, children, and whether life insurance can serve as a viable volatility shield in retirement. David shares his thoughts regarding the “IUL vs. whole life insurance policy” debate. For David, starting a life insurance policy is like getting married – he explains why. When it comes to life insurance policies, there are two key things David looks at. The first one is safe and productive growth, the second thing is a guaranteed 0% loan. David touches upon the 4% rule and the so-called volatility buffer. “The problem with the 4% rule is that it’s a pretty expensive way to go about saving for retirement,” says David. A recent Ernst & Young study looked at whether there is any reliable way to get an 8% distribution rate. David cites a study that said that bonds are much more correlated to the stock market than we previously thought and are much more volatile than previously thought.. David discusses precautions to take with the LIRP for your children to avoid unpleasant surprises. Mentioned in this episode: David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com MetLife Hancock Midland Dave Ramsey Ernst & Young Curtis Ray
S1 E292 · Wed, June 05, 2024
The Most Dangerous Retirement Advice from Suze Orman, Dave Ramsey and Ken Fisher
This episode is part 3 of David’s interview with Power of Zero co-founder Larry DeLegge. The two discuss the most dangerous retirement advice from Suzie Orman, Dave Ramsey, and Ken Fisher. Financial gurus in the business of dispensing one-size-fits-all financial planning advice is David’s biggest pet peeve. Why do they do it? To appeal to a broader range of Americans. David explains what his so-called Dave Ramsey’s circle of poverty is all about. Two out of three people who reach financial independence following Ramsey’s advice will run out of money before they run out of life…two-thirds of the time! David believes that Dave Ramsey is good for bad investors, but bad for good investors – and cites a couple of examples to illustrate that. David talks about why he believes Ken Fisher is averse to bringing up Roth conversions to his clients and prospects. There’s a key difference between Ken Fisher and the likes of Dave Ramsey – David tells it all. David opens up about something he’s really excited about regarding his new book. Mentioned in this episode: David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com Dr. Wade Pfau Tom Hegna Graham Stephan Power of Zero YouTube Video Dave Ramsey Eviscerates Co-Host George Kamel for Preaching the 4% Rule Clark Howard
S1 E291 · Wed, May 29, 2024
The Fatal Flaw in Suze Orman and Dave Ramsey's Retirement Planning Advice
Today’s video is part six of David’s interview with financial advisor Chris Martens where they discuss the fatal flaw in Dave Ramsey and Suze Orman's retirement planning advice. They discuss David’s new book, “The Guru Gap,” and how America’s financial gurus are leading people astray. David believes that Dave Ramsey and Suze Orman have done an incredible service helping many Americans get out of debt and even become rich--but they’re not all that good at helping you stay rich or secure your retirement. According to David, the problem with most financial gurus is that they're trying to appeal to as broad an audience as possible. To do that they dispense one-size-fits-all financial advice. Unfortunately, because of this really broad un-nuanced approach, most financial gurus cannot stay behind products like permanent life insurance that require nuance. David reveals that his main goal is to uncover sustainable retirement strategies and help people wring the most efficiency out of their retirement plan. David and Chris agree that people should not take financial advice from advisors on TikTok. David further explains why TikTok is not his favorite place to get financial advice. Mentioned in this episode: David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com
S1 E290 · Wed, May 22, 2024
Here’s What Happens When You Put 30% of Your Retirement Savings into Cash Value Life Insurance
Today’s episode is from David’s conversation with CFP Adam Olson. They discuss why mega-CPA firm Ernst & Young is saying that if you want to maximize your income in retirement, you should put 30% of your retirement savings into a cash value life insurance. David reveals what percentage of your savings you should put into a life insurance retirement plan. David shares the benefits of accumulating three years worth of living expenses in your cash value life insurance–this is to pay for your living expenses in the year following a downturn in your stock market portfolio. According to David, the benefit of doing so is it gives your stock market portfolio a chance to recover before taking further distributions. If you’re 50 years or younger, put 30% of your retirement savings towards cash value life insurance. This move alone will double your sustainable withdrawal rate in retirement. So, if you’re saving 25% of your income for retirement, David recommends putting around 8% into a cash value accumulation product. Mentioned in this episode: David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com
S1 E289 · Wed, May 15, 2024
What Dave Ramsey DOESN’T Want You to Know About Indexed Universal Life
Show host Arturo Johnson shares his experience with coming across David’s content – and how it has changed his perspective. David mentions a study that illustrates the benefits of putting 70% – and not 100% – of your retirement savings into a Roth 401k and the balance into cash value life insurance. Dave Ramsey is famous for stirring up a hornet’s nest among CFPs all across the U.S. David unpacks a shortcoming with one of Ramsey’s principles. David goes over what can happen when you utilize life insurance as a volatility shield/buffer. The only way to get an 8% distribution rate in retirement is by utilizing a financial tool that Dave Ramsey says is a hot pile of garbage: cash value life insurance. The reason why David likes IUL is because history shows that you can get five to seven percent net of fees over time in your IUL. David talks about something he dislikes in Ramsey’s views on IUL and that many “gurus” such as Suze Orman, Clark Howard, and Ramit Sethi say it’s a scam. “The IUL is not a stock market replacement, it’s a bond alternative,” says David. Mentioned in this episode: David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com Arturo Johnson Dave Ramsey Suze Orman Clark Howard Ramit Sethi George Kamel Tom Hegna
S1 E288 · Wed, May 08, 2024
First Glimpse at Your Tax Bracket in 2026 (And What It Will Cost You)
David talks about what tax brackets will look like starting from January 1st 2026. One of the things that will change in 2026 are the actual tax rates – with an increased percentage of tax attached to a given range of income. In 2026, tax rates will return to what they were in 2017. David points out that some people online mistakenly believe that, in 2026, things will simply revert back to the same tax rates of 2017, with the same income ranges attached to those rates. An important thing to note is the federal government will index the 2017 tax brackets for inflation, treating your 2026 tax bracket as if the tax cut had never happened. David shares a fairly accurate way of determining what your tax brackets are likely to be and what it will end up costing you. Those in the 24% tax bracket or lower will see a slight uptick in their taxes in 2026 – not because of tax bracket compression but due to their tax rate increasing. David sees doing a Roth conversion as a huge planning opportunity to protect yourself. The idea is to take advantage of the Trump tax cuts while they’re still around so that, by the time they expire, you’ll have safely transferred a portion of your retirement savings to Roth IRAs. David believes that, even though tax rates will go up in 2026, they’ll increase even further in 2030 and 2031 to pay for interest on the national debt in Social Security, Medicare, and Medicaid. Mentioned in this episode: David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com
S1 E287 · Wed, May 01, 2024
How Gen Z Should Save for Retirement
David talks about the Power of Zero “philosophy,” as well as a recent Penn Wharton study saying that, if all we do is continue on this same course, by 2043 there will be no arrest in the financial collapse of our country. 95% of Americans have the lion’s share of their retirement savings sitting in what we call tax-deferred vehicles like 401(k)s and IRAs. A big problem most Americans face: every year the IRS gets a vote on what percentage of your profits they get to keep. David shares the Power of Zero origin story and he explains what someone should do to get as close as possible to someone else. David addresses the question “Where should we be investing our retirement dollars? $29,200 is the limit under which you’ll get to experience the water. “A lot of people don’t realize that their social security number can be taxed,” says David. Mentioned in this episode: David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com Penn Wharton The Insurance Buzz
S1 E286 · Wed, April 24, 2024
Why Ken Fisher Does NOT Want You to Do a Roth Conversion
Today’s video is from David’s conversation with financial advisor Bruce Hosler. They discuss why financial advisors like Ken Fisher don't want you to do Roth conversions. David reveals why there is a lot of incoming resistance from financial "Gurus" about moving to tax-free and using the tools necessary to get to the 0% tax bracket. David talks about his new book, Guru, and all of the interference he’s facing in trying to get the Power of Zero message out to the American people. Most of these gurus believe that tax rates in the future are likely to be higher than they are today. But when you go to their websites, there are no practical strategies on exactly how you should arrange your assets to best shield yourself from the impact of higher taxes. David highlights why Dave Ramsey is against any form of permanent life insurance. He even has a famous quote, “Permanent life insurance is 100 % crap, 100 % of the time.” If you can fund your lifestyle out of your cash value life insurance in the year following a down year in the stock market, it gives your stock market portfolio a chance to recover before you take further distributions. David explains how this act alone can increase the sustainable withdrawal rate on your stock portfolio from 4 % to 8%. David and Bruce agree that people need to find ways to create multiple streams of tax-free income from multiple sources. David reveals that conflict of interest is what prevents fee-based advisors from promoting the power of zero message. David and Bruce talk about the unfunded obligation for Social Security, Medicare, and Medicaid--and the amount of money the government needs to have to pay for Medicare over the next 75 years. Financial advisors are not educated enough about the reality of future higher tax rates. If they were, David believes they would be more familiar with the ways to mitigate against rising taxes down the road. Mentioned in this episode: David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube</
S1 E285 · Wed, April 17, 2024
How Much of Your Social Security is REALLY Getting Taxed? (and At What Rate?)
How much of your social security is getting taxed, at what rate, and is there anything you can do about it? Unfortunately, the IRS doesn't make it easy for people to understand how much of their social security is taxable and at what rate. David explains that the best way to understand social security taxation is to first know about provisional income--this is the income the IRS tracks to determine how much of your social security will be taxable. As you continue to increase your IRA distributions and, therefore, your total provisional income, the percentage of your social security that becomes taxable quickly begins to rise. The IRS says that if your provisional income is between $32,000 and $44,000, up to 50% of your social security can become taxable. Fortunately, there are some scenarios where you wouldn't pay any taxes, thanks to standard deductions. The most obvious thing to do if you don’t want social security taxation is to do a Roth conversion. According to David, any income taken from a Roth IRA does not count as provisional income and, therefore, does not count against the thresholds that cause social security taxation. However, the only time it makes sense to do a Roth conversion is if you believe that your tax rate in the future is likely to be higher than it is today. Mentioned in this episode: David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com
S1 E284 · Wed, April 10, 2024
Why Don't More Financial Advisors Recommend Indexed Universal Life?
This episode addresses whether the mainstream financial planning community is justified in avoiding Indexed Universal Life. Lately, social media has been filled with videos praising the virtues of a financial tool known as Indexed Universal Life (IUL). David explains why the IUL has been taking such a beating from traditional financial planners. David discusses three different viewpoints against the IUL – including that of scammy salesmen on TikTok who often describe the IUL as “a stock market replacement on steroids.” Financial gurus tend to be jack of all trades but masters of none with IUL critiques that are either plain wrong or far too simplistic, says David. As a result of these groups’ cumulative efforts, IUL is widely viewed as a caricature of a financial product. David goes over how to objectively evaluate IUL on its merits and shares three of its positive utilizations as a dynamic financial tool. Mentioned in this episode: David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com Suze Orman Dave Ramsey George Kamel Ernst & Young
S1 E283 · Wed, April 03, 2024
Your Roth Conversion Roadmap for the Next 10 Years and Beyond
David discusses how much of your IRA you should convert, in what amounts and over what time frame. If you’re not convinced by the possible dramatic increase in tax rates in 2031 to bump you into the 32% bracket, you’re not alone… A whole battery of experts predict that tax rates will have to rise dramatically to help service the national debt and with the $200 trillion in shortfalls in Social Security, Medicare, and Medicaid. In Comeback America, former Comptroller General David Walker predicted that effective tax rates for all taxpayers need to double by 2030. David touches upon what would happen if the government doesn’t increase its taxes by 2043. David mentions what your Roth conversion roadmap should look like in the next 10 years – and beyond – if you have the lion’s share of your retirement savings in tax deferred accounts like IRAs and 401(k) plans. There’s one thing that you shouldn’t do before the “tax deadline.” You should not bump into the 32% tax bracket or higher. David goes over what he refers to as a “wait-and-see approach.” Mentioned in this episode: David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com Comeback America: Turning the Country Around and Restoring Fiscal Responsibility by David Walker Penn Wharton
S1 E282 · Wed, March 27, 2024
Clark Howard Says Fixed Indexed Annuities Stink! (My Response)
David addresses Clark Howard’s viewpoint that seems to want to invite people to never consider a fixed index annuity. Despite interacting with thousands of financial advisors who offer fixed index annuities every year, David has never heard one of them describe them the same way as Clark Howard. Since financial gurus have to get their points across in short three-minute segments, they don’t have the luxury of nuance, says David. David explains how fixed index annuities actually work, and why you can’t lose money in a fixed index annuity in its simplest form. David touches upon the role of surrender charges and how Howard is wrong about them. In traditional stock market investing, you’re not supposed to withdraw more than 4% per year. Mentioned in this episode: David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com Clark Howard
S1 E281 · Wed, March 20, 2024
Is IUL the Dream Investment that Doug Andrew Claims?
Doug Andrew called the IUL a dream investment, but is it the silver bullet retirement account he claims it to be? David goes through Doug Andrew’s controversial remarks about IULs, and explains why he politely disagrees with his one-size-fits-all approach to index universal life. David explains why the 4% rule is a very expensive way to pay for retirement. He reveals why it's much more economical to guarantee your living expenses with a lifetime income annuity. If you only utilize the IUL, you will dramatically underperform the stock market over time. Furthermore, you won't be taking advantage of all the unique benefits each of the tax-free alternatives the IRS tax code affords you. The IUL should only be used as a complement to all these other streams of tax-free income, not a replacement for them. David goes through the characteristics that make the IUL a unique investment avenue. Would you rather adopt a retirement approach where you put every last dime of your retirement savings into an indexed universal life insurance policy? Or would you prefer your IUL to be just one component of a balanced, comprehensive approach to tax-free retirement? For David, the IUL is not the only way to grow your money productively over the course of a lifetime. When you have an experienced financial advisor shepherding you through the process, you can get extremely productive returns from the stock market. If you're younger than age 50, David recommends earmarking 30% of your retirement savings towards an IUL. Why 30% and not 100%? Because 30% is a much more balanced, math-corroborated approach to using the indexed universal life policy. The IUL is not a dream in a dream. It's merely a financial tool. When utilized in concert with all of the other available alternatives in the IRS tax code, it can help you create a balanced, comprehensive approach to tax-free retirement planning. David reveals why Wall Street wants you to believe that the stock market is the only solution to stress-free retirement planning. Most financial experts agree that tax rates in the future are likely to be higher than they are today. But that doesn't mean that you must reflexively default to putting all your retirement savings into an IUL. If you want to make money in the stock market, you're supposed to buy low and sell high. Unfortunately, most do-it-yourself investors do the exact opposite. Mentioned in this episode: David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com</a
S1 E280 · Wed, March 13, 2024
The Two 5-Year Roth Rules Explained
This episode explores the two different five-year rules for Roth IRAs instituted by the IRS to prevent people from abusing them. The first five-year rule applies to earnings on Roth contributions and determines whether those distributions can be taken tax-free. The second rule concerns Roth conversions and lets you know whether conversion principles can be accessed penalty-free. David explains that, for the purposes of the five-year rule, the clock starts the first time any money is contributed to a Roth IRA by either contribution or conversion. Once the five-year rule has been met, it’s been satisfied for good. Remember: any recent contribution to a Roth IRA can count as qualified tax-free distributions, even if they’ve been in the account for less than five years. David shares that Roth 401k plans have their own five-year rule, which is counted separately from a traditional Roth IRA. In case you’re unable to make a Roth contribution due to income limitations, you can make a non-deductible contribution to an IRA and then do a Roth conversion. Don’t forget that there aren’t income limits for IRA contributions. Dave discusses the fact that “the ordering rules for Roth IRA stipulate that withdrawals of after-tax contributions are made first, then conversions, and finally, earnings.” The Roth conversion five-year rule lets you know if you can access your converted principal penalty-free. The Roth contribution five-year period, on the other hand, lets you know if you can access your Roth earnings tax-free. Mentioned in this episode: David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com
S1 E279 · Wed, March 06, 2024
Warren Buffet Says AVOID Financial Advisors Like the Plague (Is He Right?)
At a recent Berkshire Hathaway annual shareholder meeting, Warren Buffett shared his thoughts on why he sees financial advisors as the worst people to trust with your money. Buffett believes that financial professionals in aggregate can’t do better than the aggregate of the people who just sit tight. David agrees with Buffett’s view on active versus passive investing. According to David, Buffett’s point of view and approach don’t account for the high cost of investor behavior. The fact that 90% of investment decisions are driven by emotions is a big problem David sees in Buffett’s line of thinking. David sheds light on what has become known as the Prospect Theory. What leads “DIY investors” to buy high and sell low, instead of buying low and selling high as logic would suggest? David shares his thoughts on the matter. Adopting an index-based, Do-It-Yourself, motion-driven approach to investing will make you less likely to remain invested during extreme market volatility. For David, one of the main purposes of a financial advisor is to hold your hand and keep you invested during jittery periods in the market. Mentioned in this episode: David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com Warren Buffett Berkshire Hathaway
S1 E278 · Wed, February 28, 2024
George Kamel Swings and Misses on Indexed Universal Life
George Kamel recently released a video on index universal life. On the surface, it looks like a ruthless exposé of a financial scam that millions of Americans are falling for. But when you scratch just below the surface, his critique of IUL is a steaming cesspool of half-truths and outright lies that are designed to sell you a term insurance policy through a Dave Ramsey-sponsored term insurance broker. According to Kamel, the IUL is a financial scam marketed as a secret wealth hack, yet in reality, it’s a money-eating monster. Yes, IULs are marketed by pretty scammy people on social media. However, there is a big difference between scammy life insurance agents and scammy life insurance products. IUL products are not created equal. It all depends on your personal situation and needs. Some products can be fantastic tools for building and protecting wealth and others can be catastrophic to your retirement. For David, not only does the IUL serve as an extremely competitive bond alternative, but it’s also a great volatility buffer in retirement. Financial gurus are not in the business of nuance. It’s all about making sweeping black-and-white characterizations that fit neatly into their tiny box. According to David, recent studies demonstrate that bonds are much more volatile and much more correlated to the stock market than was previously thought. David explains that fees are only a problem in the absence of value. And when utilized in the right context, an IUL provides value that you simply can’t get any other way. David explains how the IUL fees are a strength and not a liability that the uninformed life insurance critics make it out to be. When George says that the IUL is a money-eating monster, he’s only fixating on the fees in the early years of the contract. If he were to look at the average fees over the life of the program, a much different picture would emerge--one that paints the IUL as lower than the most cost-effective 401K plan. David goes through the things George gets wrong about the death benefit options in an IUL. The entire purpose of George’s video is not to educate you on the evils of an IUL. It's to get you to buy a term life insurance policy through Dave Ramsey’s endorsed broker of choice. George's ultimate goal is to get you to take the money that you might otherwise have allocated towards an index universal life policy and redirect it towards a term insurance policy from which Ramsey himself ultimately benefits. Mentioned in this episode: David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com <a href="https://
S1 E277 · Wed, February 21, 2024
Is Ken Fisher's Anti-Annuity Stance Illegal?
According to David, Ken Fisher’s hate toward annuities is visible in what can be considered “one of the most successful attacks on any financial product in history”. David discusses why, in his opinion, Ken Fisher sees annuities as the perfect marketing tool to build his own asset management firm. There are two things annuities can do that no other financial product can – David explains what they are. Academic studies that go back to the early 1960s seem to suggest that annuities are the best way to maximize retirement income. There appears to be a massive information gap facing a generation of retirees who are unaware of the value annuities can play in helping them spend more income in retirement. David shares an example by Dr. Michael Finke, one of the foremost experts on the benefits of guaranteed lifetime income. David touches upon whether what Ken Fisher is doing can be considered illegal. Mentioned in this episode: David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com Ken Fisher Richard Thaler’s New York Times articles Peter Diamond “Ken Fisher Can’t Have It All” by Dr. Michael Finke
S1 E276 · Wed, February 14, 2024
Suze Orman vs. Dave Ramsey on Sustainable Withdrawal Rates in Retirement
Financial expert and author Ric Edelman has stated that, in his opinion, anyone following Dave Ramsey’s 8% retirement withdrawal strategy is…doomed! The 4% rule has been the distribution rates’ gold standard for over 30 years. However, Suze Orman said that she wouldn’t use the 4% rule on any level. David touches upon what he considers a “massive unintended consequence” of adopting Suze Orman’s 3% withdrawal rate in retirement. According to David, there isn’t a winner between a 3%, a 4%, and an 8% retirement withdrawal strategy. He gives a couple of examples that illustrate why that’s the case. David believes that, to get the best bang for your buck with the highest success rate over a 30-year retirement, a guaranteed lifetime income annuity is – almost always – the best way to go. Mentioned in this episode: David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com Dave Ramsey Suze Orman Ric Edelman
S1 E275 · Wed, February 07, 2024
Is a 100% Tax-Free Retirement Really Possible?
A recent Penn Wharton study found that the federal government will have to dramatically raise taxes within the next 20 years to avoid sliding into a debt spiral of high interest rates and debt payments. Former comptroller General David Walker has stated several times that taxes would have to double by 2030 or the U.S. will go broke as a nation. When it comes to retirement savings accounts, the federal government typically gives people a choice between paying taxes at the time of contribution or paying them on your distribution years down the road. A big advantage of contributing to a Roth IRA is that you’d be paying taxes at today’s historically low tax rates. David thinks that believing Walker and the Penn Wharton study means accumulating the lion’s share of your retirement savings in tax-free vehicles like Roth IRAs and Roth 401ks. David shares the approach he recommends having when it comes to Roth Conversions. The Roth 401k is one of David’s favorite tax-free investments – he explains why. For David, the real allure of the LIRP is that it provides a death benefit that you can receive in advance of your death for the purpose of paying for long-term care. David lists the pieces of the puzzle that make for a balanced and comprehensive approach to tax-free retirement. Mentioned in this episode: David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com David Walker Penn Wharton study: “When Does Federal Debt Reach Unsustainable Levels?” </
S1 E274 · Wed, January 31, 2024
A Recent Penn Wharton Study Says that the U.S. has 20 Years to Fix Debt or Face Cataclysm
Former comptroller general of the federal government, David Walker, believes that tax rates will have to double, in order to avoid a financial collapse. The U.S. Government should be helped in preventing their growth. David McKnight points out a potential course of action that should be followed to avoid a possible financial collapse. Permanent solutions to stabilize the debt outlook are needed now…not 20 years from now when the crisis is already upon us. David touches upon the role that higher federal taxes and lower spending may have. What’s the best tool to shield yourself from the coming tax apocalypse? David knows and shares it on the show. Mentioned in this episode: David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com Jagadeesh Gokhale David Walker Penn Wharton Ken Smetters
S1 E273 · Wed, January 24, 2024
How to Figure Out How Much Money to Save for Retirement
Today’s episode is part 4 of David’s interview for Jesse Wright’s podcast, and it addresses the best way to figure out how much money you’ll need to be able to retire. David explains how to be able to identify what your retirement shortfall is going to be. There are different approaches and each one comes with its unique traits – David discusses his favorite. Citing Suze Orman, David shares his thoughts on what the new retirement age should be. Jesse and David touch upon living abroad while in retirement, what that actually entails, and Act 60. David shares his experience living in Puerto Rico, and shares his #1 actionable retirement planning tip for people in their 50s. Mentioned in this episode: David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com Suze Orman
S1 E272 · Wed, January 17, 2024
The Best Way to Make Sure Your Money Lasts as Long as You Do
Today’s episode is part three of David’s interview on Jesse Wright’s podcast. They discuss the best way to ensure your savings last as long as you do. Jesse shares a shocking stat: 65-year-old married couples have an 18% chance that at least one person in the relationship will live to be 95 years old. This means that there is a very real chance that at least one of them will outlive their savings. For David, most Americans outlive their savings because they don’t save or invest enough to fund a 30-year retirement. The majority of people who save enough are also at risk of running out of money because they’re not managing their money well enough in retirement. David defines sequence of return risk and how market declines in the early years of retirement could significantly reduce the longevity of your savings. David talks about the benefits of owning annuities as well as the ones that work best for retirement planning. According to David, the biggest mistake people make in retirement is having all their savings in tax-deferred accounts by the time they retire. The name of the game is not just saving enough by the time you retire, but distributing in a way that your savings last through your actuarial life expectancy. The 4% rule is hard to follow because it only works if you can constrain yourself to 4% each and every year of retirement. If you can constrain yourself to 4% distributions adjusted for inflation in retirement, you have an 86% chance that your money will last through life expectancy. Every time you take out more than 4%, that success rate drops like a rock. The assumptions we use in our retirement plans are important and have real life implications if we use the wrong assumptions. Mentioned in this episode: David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com
S1 E271 · Wed, January 10, 2024
Exposing the IUL TikTok Trap
Today’s episode is the second part of David’s interview for Jesse Wright’s podcast. Beware of what you see on social media, says David. A lot of that content is by wayward life insurance agents employing pretty despicable tactics. David shares an example of bad advice and highlights why this is advice you should stay away from. For David, 99% of TikTok videos misrepresent what the IUL can do and the role it should play in your retirement. David explains why an IUL is sort of like getting married, including the “until death do you part” side of things. It’s important to get to the 0% tax bracket and to shield yourself from the impact of higher taxes…but getting help from someone who has experience is just as important. David points out two traits you would want your financial advisor to have as you plan for your retirement. David goes over what he considers a balanced and comprehensive approach to tax-free retirement planning. Many people forget that not all of the money that’s growing in your 401k is accruing to your benefit. A portion of that belongs to the IRS. Mentioned in this episode: David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com David Walker
S1 E270 · Wed, January 03, 2024
Expert Warns Your Effective Tax Rate Could Double by 2030
Today’s episode is part 1 of David’s appearance on Jesse Wright’s podcast. Jesse asks David where one should start from when thinking about retirement. David points out that the types of accounts which one saves money for retirement really matter. According to David, there’s essentially two ways to save money for retirement. The first is to get a tax deduction today. The second is to pay the tax today and invest your money so that, in the future, you’ll be able to take that money out tax-free. David goes over why he wrote The Power of Zero back in 2014. One key question David believes people should ask themselves is whether their tax rate is likely to be higher today or in 20 years. For Former Comptroller General David Walker, the 20% of the income Americans are paying between federal, state, and local taxes, could go up to 40% by 2030. David believes that the farther out your investment horizon and retirement date, the more critical it is for you to invest in tax-free accounts like Roth IRAs, Roth Conversions, etc. David recommends planning for 50% tax rates and explains that there are three basic types of account to save money for retirement. These three buckets are: the so-called taxable bucket, the tax-deferred bucket, and the tax-free bucket. David goes over the characteristics of each bucket. Mentioned in this episode: David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com David Walker Comeback America: Turning the Country Around and Restoring Fiscal Responsibility by David Walker
S1 E269 · Wed, December 27, 2023
HonestMath.com Weighs In on Dave Ramsey's Epic Meltdown Over the 4% Rule
David and Khalen Dwyer discuss HonestMath.com's research proposing a conservative 4% annual withdrawal for a 30-year retirement--contradicting Ramsey's long-standing advice of an 8% withdrawal rate. Khalen explains how Ramsey's assumptions defy both mathematical principles and historical data. He also reveals the financial instability retirees may face when following Ramsey's controversial 8% withdrawal rate. Khalen and David agree that the primary job of an advisor is to help investors set reasonable expectations. If doing that means the advisor is a hope stealer, then advisors can wear the hope stealer’s badge with pride. The first three to five years of retirement are very important and can set the economic tone for the rest of your retirement. For Khalen, investors must realize that their risk appetite might change as they get closer to retirement. The closer you get to retirement, the more your need to protect accumulated savings becomes more critical, as there is less time to recover from significant market downturns. When you’re 100% invested in stocks, the swings in the market tend to be much wider, and that exacerbates the sequence of return risk for the investor. David adds that poor investment performance during the initial years of retirement can deplete the portfolio more quickly than anticipated. Retirees who experience market downturns in the early years of their retirement and withdraw a higher percentage of their portfolio to cover living expenses might accelerate the depletion of the portfolio. Even if the market rebounds in later years, the portfolio may struggle to recover because the initial losses reduce the base from which subsequent returns are generated. Khalen highlights the substantial risk associated with an 8% withdrawal rate using real-life examples and historical data. David and Khalen question Ramsey's aversion to bonds and insistence on a 100% stock allocation. They discuss the psychological impact of market volatility in retirement, the importance of investing in bonds for portfolio stability, and why Ramsey's all-stock approach just doesn’t make sense. According to Khalen, one of the most important aspects of retirement planning is addressing the sequence of return risk. The sequence of returns risk is the risk of experiencing poor investment performance, particularly negative returns, in the early years of retirement. Mentioned in this episode: David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKni
S1 E268 · Wed, December 20, 2023
The Worst IUL TikTok Video You’ve Ever Seen (Financial Malpractice on FULL Display)
David makes a clear preface: “If anyone ever tells you to cash out your 401k and put it all into an IUL, you’re to turn around and run the other way!” This episode addresses what David refers to as “the worst IUL TikTok video I’ve ever seen; a video that’s so replete with manipulative sales tactics and lawsuit-worthy financial advice.” David points out one of the manipulative sales strategies included in the video: making the prospect feel as if she needs help by making her feel confused and overwhelmed by the number of alternatives. “Cash now vs. an awesome retirement plan later” is another unethical tactic David discusses. Beware: if you don’t liquidate your 401k prior to 59 and a half you’ll incur a 10% penalty. Need to liquidate your 401k before then? Don’t do it all in one year. Otherwise, all of that money would be realized as income and taxed at your highest marginal tax bracket – all in the same tax year. Remember: closing out your 401k and stopping contributions will lead to you no longer receiving the company match. Over the course of your retirement, this last point will end up costing you hundreds of thousands of dollars. David stresses the lack of relevant questions being asked by the financial advisor featured in the TikTok video. David deems the video to be one of the worst cases of IUL malfeasance he’s ever seen on social media. Moreover, he believes that advisors like the one in the video should be outlawed and fined. Mentioned in this episode: David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com
S1 E267 · Wed, December 13, 2023
How to Take SUSTAINABLE 8% Withdrawal Rates in Retirement (Not the Dave Ramsey Way)
One of the things Dave Ramsey is famous for is telling his audience that they can take sustainable 8% distributions from their stock market portfolios in retirement. David has two issues with this recommendation: it ignores reams of academic data on sustainable withdrawal rates, as well as the concept of sequence of return. David points out the potential repercussions of following Ramsey’s approach. According to the mainstream financial community, 4% is the actual “golden rule” for sustainable distribution rates in retirement. Ramsey has long complained about the 4% rule being a pretty expensive way to go… David illustrates a key problem with an 8% withdrawal rate and discusses the role of a volatility shield. David explains that the money you can put in a volatility shield has to grow tax-free and allow for tax-free distributions. It’s possible to increase your sustainable withdrawal rate on your stock portfolio to as high as 8%, with a 95% chance of never running out of money – David explains how. On an apple-to-apples basis, guaranteed lifetime income annuities give you a much higher income than living by the 4% rule in retirement. Following this Dave Ramsey strategy? David believes that it’s likely going to force you to run out of money 15-20 years in advance of life expectancy. Mentioned in this episode: David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com
S1 E266 · Wed, December 06, 2023
How to Become a Tax-Free Millionaire (with Tom Hegna)
David talks to Tom Hegna, an economist, author, and popular industry speaker considered by many to be the retirement income expert. David reveals how he learned about the unstable fiscal trajectory of the U.S. and why he wrote the book, "The Power of Zero." The book emphasizes the importance of preparing for higher tax rates. It offers strategies to help you protect your retirement savings against the impact of potentially higher tax rates in the future. David talks about teaching financial principles to his children--tithe 10%, save 20%, spend the remaining 70%. Did you know Americans have 95% of their accumulated retirement dollars in IRAs and 401Ks? It’s great that Americans are saving for retirement but the downside to this strategy is that traditional IRAs and 401Ks are tax-deferred. Taxes are deferred until the funds are withdrawn. Meaning you’ll potentially pay more in taxes in retirement. David reveals why it’s okay to preemptively pay taxes before the IRS absolutely requires it of you. Tips for individuals in their 20s and 30s on how to save and invest in tax-free accounts. Why it’s never a good idea to spend most of your income on depreciating assets. David shares how his system for investing differs from mainstream financial advice. Tom and David agree that people cannot become wealthy by borrowing money to put into depreciating assets. David’s investing principle is built on a simple formula: start saving money as early as today, put it in tax-free accounts, do it consistently for 40 years, wait, and you’ll have a great retirement. According to David, whatever you decide to do in college, someone has to be willing to pay you money in exchange for the services you provide. The longer your investment horizon, the more likely your taxes will be higher in the future. Not only do you need to start investing early, you also need to invest tax-free. Remember, the longer your investment horizon, the more it makes sense for you to invest in tax-free accounts. We are marching into a future where the cost of servicing the national debt will consume the entire federal budget. When this happens, David believes the Federal Reserve will be forced to raise taxes or risk going bankrupt. So, how can Americans protect themselves from the risk of rising taxes? First, acknowledge that taxes will be higher in the future, invest early, and start investing in tax-free accounts. David and Tom share their thoughts on why permanent life insurance is by far the best tax benefit in the IRS tax code. David announces his upcoming book, "Guru: Why Financial Gurus Are Leading You Astray and How to Get Back on Track," which critiques mainstream financial advice and offers a more personalized approach to tax-free investing. Mentioned in this episode: David's <a href="https://www.davidmcknightbooks.c
S1 E265 · Wed, November 29, 2023
The Caller on Dave Ramsey's Viral 4% Rule Meltdown Speaks Out! (My Interview with Jay Disberger)
David talks to Jay Disberger, the caller on Dave Ramsey's viral 4% rule meltdown. They start the discussion by describing why the clip went viral and how people can get their questions answered live on the Dave Ramsey Show. Jay's motivation for the call: To get clarity on how best to withdraw your money in retirement and get Dave to take a stand on sustainable withdrawal in retirement. Jay shares his journey to finance coaching and saving for retirement. David and Jay discuss why George Kamel was right about the 4% withdrawal strategy and why Dave Ramsey's 8% withdrawal rate is misleading. Why Dave Ramsey is not a huge fan of the 4% rule or the people who preach it — He believes it's too low and unrealistic. You don't need to withdraw 4% of your savings for your nest egg to survive. According to Dave Ramsey, you're missing out on a big opportunity if you only withdraw 4% from an investment portfolio earning 12%. David and Jay agree that Dave Ramsey lives in a fantasy world where he thinks stratospheric distribution rates are sustainable in retirement. The biggest issue with an 8% withdrawal rate is that it doesn't account for market volatility. Just because you average 12% per year doesn't mean you're guaranteed 12% returns yearly. The only way to have a productive conversation with people who don't think they can be wrong is to ask them open-ended questions in the hope that they come to the conclusion themselves. According to David, we live in a world where anything you say that flies in the face of reason will be clipped and posted online. Dave Ramsey does a great job of motivating people to get out of debt and get on the path of financial independence. The problem lies in his absurd retirement planning advice. The biggest problem with Dave Ramsey is that he's not very nimble when it comes to changing his thoughts according to new research and data. Jay and David agree that the 4% rule is not for everyone, but it's also not sustainable to follow the 8% rule. Jay reveals what he would tell Dave Ramsey if he ever got the opportunity to talk to him again. Mentioned in this episode: David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twitter <a href="https://www.instagram.com/davidcmcknigh
S1 E264 · Wed, November 22, 2023
Dave Ramsey Eviscerates Co-Host George Kamel for Preaching the 4% Rule
Dave Ramsey recently eviscerated his co-host George Kamel for preaching the 4% rule. According to George, withdrawing only 4% of your savings is the easiest way to guarantee your money lasts throughout retirement. George further adds that the 4% rule is a math-based approach to sustainable withdrawals in retirement. For Dave Ramsey, the 4% is senseless and only geared toward stealing people’s hope for a brighter retirement. He believes an 8% withdrawal rate is more sustainable since your savings will be growing at a rate of 12%; factor in 4% for inflation, and you’re left with 8%. It’s clear Dave Ramsey is oblivious to the sequence of return risk, which could force you to run out of money 15 to 20 years early if you experience a series of negative returns in the first decade of retirement. The fact is, even if you average 12% rates of return throughout retirement, you won’t be getting 12% every single year. Some years, you’ll get 20%, and other years you’ll get -26%. David explains that the 4% rule gives you peace of mind that regardless of the swings in the market, you’ll have a reasonably high chance of not outliving your money. Because Ramsey has millions of dollars, he has the license to utilize planning assumptions that are wildly at odds with history and academic research. If you’d like a stress-free retirement, ignore Dave Ramsey’s advice and embrace strategies that are built on sustainable retirement planning principles like the 4% rule. Mentioned in this episode: David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com
S1 E263 · Wed, November 15, 2023
The Three Types of Tax-free Retirement Advisors (And Which One’s the BEST for You)
David talks about the three main types of tax-free retirement advisors and the one that will guarantee a hassle-free retirement. The first type of advisor is the TikTok advisor. This is the advisor who will preach the prospect of dramatically higher tax rates in the future. The only downside to their message is that they believe the only way to shield yourself from the rising tax rates is to put all your retirement savings into an IUL. If you believe in a balanced and comprehensive approach to retirement planning, steer clear of these types of advisors. It’s unwise to build a retirement plan on the foundation of an IUlL and exclude every tax-free alternative in the tax code. The second type of advisor is the one who believes in tax-free retirement planning but is not acquainted with the data that proves tax rates will rise dramatically in the future. If you are interested in shielding your assets against the impact of higher taxes, avoid these types of advisors like your retirement depends on it. Because it does. The third type of advisor is knowledgeable on data that proves tax rates will dramatically rise in the future and advocates for a balanced, comprehensive approach to tax-free retirement. If you believe that tax rates in the future will be dramatically higher than they are today, then you also need to recognize that not all financial advisors are equally equipped to help shield your retirement savings from those higher taxes. Your job as an investor is to get an advisor who understands the unique fiscal challenges facing our country and understands that the best way to protect yourself from those challenges is to implement a balanced, comprehensive approach to tax-free retirement. Mentioned in this episode: David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com
S1 E262 · Wed, November 08, 2023
How to Get Rich the Dave Ramsey Way! (Hint: 10% Withdrawals in Retirement)
David breaks down a recent Dave Ramsey interview where he advised a 50-year-old widow on the best way to save, invest, and withdraw her retirement savings. According to Ramsey, if the lady invests $1000 every month for 15 years, she will have accumulated $500,000, which gives her permission to withdraw 10% of her savings every year for the rest of her life. The problem with this recommendation is that she will likely earn 9% returns per year, not 12%. She is also more likely to run out of money before running out of life if she withdraws 10% of her savings every year. The gaping hole in Dave Ramsey’s investment approach is that he seems to have a limited understanding of the sequence of return risk. This is the order in which you experience investment returns in retirement. Generally, it’s safe to show future returns based on a historical track record consistent with your future investment horizon. For example, if you want to know what rates of return you’ll likely experience in the next 15 years in the S&P 500, you need to look at how the index performed in the past 15 years. According to David, Ramsey’s overly inflated retirement variables are setting his listeners up for failure. By inflating his assumptions, Dave Ramsey gives his listeners an overly optimistic view of how much money they must save to reach their retirement goals. But why does Dave Ramsey have such a flawed view of retirement planning? David believes it comes down to two things: Dave Ramsey likes to portray himself as the retirement planning outsider who is at war with the mainstream financial planning community. He believes that if he can show his followers lucrative investment projections, more of them will sign up for his financial independence programs. Don’t be seduced by Ramsey’s inflated rates of return or his massive withdrawal rate assumptions. You’re much better off using a 9% rate of return and a 4% sustainable distribution in retirement. Mentioned in this episode: David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twitter @davidcmcknight on Instagram <a href= "https://www.youtube.com/channel/UCGxUwL7NvZUyLfgO18h3e2g" ta
S1 E261 · Wed, November 01, 2023
Complete Your Roth Conversion by THIS Date or LOSE!
Today’s episode is part three of David’s interview with Power of Zero Advisor Terry DuPont. Trump tax cuts were not permanent – David explains why 2026 is going to be a key year for that. In his book Comeback America, former Comptroller General David Walker predicted that, by 2023, tax rates would have to double – or more – to keep the U.S. solvent. David shares what he believes people should do in the next few years as the country approaches an “apocalyptic” scenario. Terry DuPont is amazed by the fact that families and individuals don’t seem to understand the fact that the largest expense in their lifetime will continue to be the same. According to Terry, the main issue is that people don’t calculate that expense into their future. Terry asks David about the one thing he knows now that he wishes he knew when he started. David opens up about the role David Walker has played in his journey as well as about his definition of success. David warns people against letting a year go by without taking advantage of historically-low tax rates. Mentioned in this episode: David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com Terry DuPont Comeback America: Turning the Country Around and Restoring Fiscal Responsibility by David Walker Bill Clinton David Walker on 60 Minutes Why Your Taxes Could Double (2009 CNN article by David Walker)</
S1 E260 · Wed, October 25, 2023
What your Financial Advisor Is NOT Telling You About Roth Conversions
Today’s episode is part two of David’s interview with Power of Zero Advisor Terry DuPont. David talks about the approach many major money management institutions follow, and how it differs from how David and Terry do things. There are situations where large money management institutions forbid their advisors from ever bringing up, for example, Roth conversions. David invites listeners to browse the web trying to find a Ken Fisher article discussing the benefits of a Roth conversion. David discusses what makes the Power of Zero approach stand out in the financial planning industry. People seem to be hungering for real solid strategies that can help insulate them from the impact of rising taxes, says David. David lists a few reasons why the advice people may get from gurus like Dave Ramsey or find on platforms like TikTok isn’t useful. David recommends having a balanced and comprehensive approach to tax-free retirement that takes advantage of all the nooks and crannies in the IRS tax code. There are different things David likes about Roth IRAs, Roth 401ks, Roth Conversions, Life Insurance Retirement Plans, and tax-free social security – he touches upon them. Mentioned in this episode: David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com Terry DuPont Ken Fisher Fisher Investments Dave Ramsey Suze Orman
S1 E259 · Wed, October 18, 2023
Why Cash Value Life Insurance is EXPLODING in Popularity (Despite What Critics Say)
Today’s episode features some of the highlights of David’s appearance on the Your Money with David Hays podcast. David touches upon what he would focus on and how long he believes he would last if he were president of the U.S.. David’s next book will probably have the title Guru . For a while, David Hays has half-jokingly said that he would accept the responsibility of mayor. David introduces two perspectives into the picture: the point of view of financial gurus like Dave Ramsey and Suze Orman, and that of Ed Slott – whom USA Today dubbed “America’s IRA Expert.” Many people underestimate the financial costs of long-term care for their parents, spouse, or partner, says David. David illustrates the traditional way to approach long-term care and what would make the most sense for those thinking about it for their loved ones. Mentioned in this episode: David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com Your Money with David Hays Dave Ramsey David M. Walker Bill Clinton George W. Bush Shark Tank Suze Orman Ed Slott <a href="https://www.usat
S1 E258 · Wed, October 11, 2023
Dave Ramsey Beat the S&P 500 Over the Last 30 Years Because “It’s not hard to do.”
In a recent interview, Dave Ramsey claimed he beat the S&P 500 over the last 30 years because “it’s not hard to do.” The big question is, is it really that easy to beat the S&P 500 over time? According to David, it’s not. In fact, most active fund managers fail to do it over time. A recent study revealed that 85% of fund managers underperformed in the S&P 500 in the last ten years - this underperformance caused the disappearance of mutual funds altogether. Based on these stats, how do we rate Dave Ramsey’s claims that he outperformed the index by 12% and 13% in some years? David believes it’s not advisable to collect all your money and move the index fund route. The first step should be seeking the services of a financial advisor. Good financial advisors will more than offset whatever fees they charge you in the form of enhanced returns that stem from sticking to your investment goals. Unfortunately, most investors let their emotions undermine their investment decisions. We’re supposed to buy low and sell high, but most investors do the opposite. Fuelled by emotion, they buy high and sell low. For David, a good financial advisor will help protect you from yourself and remind you of the plan you created and why you need to stay on track toward your goals. It doesn’t matter how much money you have. It only matters how much you actually get to spend after taxes. The three main takeaways from Dave Ramsey’s claims about beating the S&P 500: Take everything Dave Ramsey says with a grain of salt. His entire business is built on making investing seem easier than it actually is. Beating the S&P 500 is not as easy as Dave Ramsey claims. You need a qualified financial advisor to help you yield much higher returns over time to increase the likelihood that your life savings will last through life expectancy. Mentioned in this episode: David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at <a href= "http://taxfreetool
S1 E257 · Wed, October 04, 2023
Don't Buy an IUL Until You Listen to This Podcast!
David breaks down a recent article by financial advisor Brian Manderscheid on what insurance agents don’t tell you about Indexed Universal Life (IUL). David talks about the risk of consuming financial content online without seeking professional advice when making significant financial decisions. David reveals how the claims made by financial influencers tend to be overly promissory and exaggerate what the IUL can actually do for your retirement portfolio. He further adds that IULs were never exclusively available to the wealthy, and you should not expect 10% plus returns. In Brian’s article, he describes why you must have a life insurance need before investing in an IUL. If the IRS is willing to give you the benefit of a nearly unlimited bucket of tax-free dollars, you have to be willing to pay for life insurance and have the need for life insurance. According to Brian, you need to structure your IUL correctly if you are to enjoy all the perks that come with owning an IUL. David agrees with Brian’s views on the proper way to structure an IUL. In order for the IUL to work, you must buy as little death benefit as the IRS requires and pump in as much money as the IRS allows. Your goal is to go after all the benefits of a Roth IRA without all the limitations of owning a Roth IRA. According to David, IULs only work when considered as part of a balanced, comprehensive approach to tax-free retirement. David talks about the lies peddled by financial influencers online - they focus less on creating reliable and accurate content and more on likes and views. As an investor, it’s very important not to conflate actual historical returns with retro-engineered returns when considering an IUL. Anyone can create a retro-engineered index that looks great on paper. David is much more impressed with an actual track record, even if that track record nets you only 5 to 7% net of fees over time. One of the things not discussed in Brian’s article is how most solid IUL carriers give you the ability to receive a death benefit in advance of your death to pay for long-term care. For David, Brian’s piece is one of the more accurate IUL articles on the internet today. Mentioned in this episode: David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twit
S1 E256 · Wed, September 27, 2023
1-minute Summary of Every David McKnight Book on Retirement
David gives a 1-minute summary of all his books on retirement. The Power of Zero: How to Get to the 0% Tax Bracket and Transform Your Retirement. The book outlines a step-by-step plan for getting to the 0% tax bracket in retirement, because if tax rates double, as some experts predict, two times zero is still zero. Look Before You LIRP: Why All Life Insurance Retirement Plans Are Not Created Equal, and How to Find the Right One for You. David explains that while various LIRPs may help get you to the 0% tax bracket, not all will do so with the same efficiency or effectiveness. In fact, finding the right LIRP for your tax-free retirement plan can be just like finding the ideal spouse. Just as you likely had a list of qualities you were looking for in a life-long partner, you should have certain attributes and provisions in mind when looking for the ideal LIRP. The Volatility Shield: How to Vanquish the 4% Rule & Maximize Your Retirement Income. In this book, David breaks down financial truths that challenge conventional wisdom and reveal the gaping hole in people’s retirement picture. He also reveals how you can open a volatility shield account that allows you to pay for your retirement living expenses in the year following a down market. Tax-Free Income for Life: A Step-by-Step Plan for a Secure Retirement. David lays out a comprehensive, step-by-step roadmap for a secure retirement and how to shield yourself from longevity risk as well as the unintended consequences of higher taxes. The Infinity Code. This book speaks of the evils of the modern monetary theory, which says that we can print an unlimited amount of money to pay for our nation’s burgeoning debt load. David shares insights from his upcoming book, Guru . Americans love charismatic gurus who dish out one-size-fits-all financial advice that is easy to digest and implement. However, the dumbed-down financial advice offered by Dave Ramsey and other gurus is good for bad investors but bad for good investors. David believes that while these financial gurus sometimes dispense good advice, it’s nearly always at the expense of the best advice. Mentioned in this episode: David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video seri
S1 E255 · Wed, September 20, 2023
My Review of the Anti-IUL Book "Lapsed"
David reviews an anti-IUL book, LAPSED, written by financial advisor Elan Moas, who believes IULs are designed to fail rather than succeed. According to David, the book is written with dramatic and highly-charged rhetoric around what will befall you if you make the mistake of purchasing an IUL. So the big question is, “Are IULs too good to be true?” For David, IULs do exactly what they're meant to do. Their true purpose is to give you stock market exposure up to a cap with a guarantee against market loss. IULs are not meant to be a stock market alternative. They are a bond alternative with returns of between 5% and 7% net of fees over the life of the program. Insurance companies don't make money on Cap Rates. Cap Rates are a function of two things. First is the cost of options, which is informed by the volatility of the stock market. And second, the carrier's options budget, which is a function of interest rates. David debunks Elan's theory on how IUL providers are intentionally and aggressively working to confiscate your money. David shares a chart showing return rates from real and highly-rated IUL carriers. Only when you see that the author is out to sell you a whole life insurance policy will you understand the motivation behind his misinformed book. David believes the author's goal is to scare people out of their perfectly adequate IULs into a whole life policy that he would be more than happy to facilitate. If you like whole life insurance, great. If you like IULs, great. But please don't waste everybody's time with intentionally misleading scare tactics. Mentioned in this episode: David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com
S1 E254 · Wed, September 13, 2023
Dave Ramsey Says You Can Take an 8% Withdrawal Rate in Retirement! (Is He Right?)
Today’s episode revolves around whether Dave Ramsey is right – or wrong – in saying that people can take an 8% withdrawal rate in retirement. A group of fiduciary advisors recently confronted Dave Ramsey on Twitter. Just like David, they too thought that Dave Ramsey is living in a fantasy world because of the advice he shares with people. David points out a big flaw in Dave Ramsey’s recommendation of staying 100% invested in stocks your entire lifetime: the approach doesn’t account for investment volatility. Remember that just because you average 11.8% per year, it doesn’t mean that you’ll be getting precisely that result each and every year. That’s because the order in which you experience returns in retirement is one of the biggest keys in determining whether your retirement assets will last through life expectancy. David emphasizes the fact that most people who retire at age 65 need their money to last a full 30 years. Ramsey’s “one-size-fits-all” approach is the reason why, David believes, he takes positions even if they aren’t supported by the data. Mentioned in this episode: David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com Dave Ramsey Morningstar Ibbotson Associates Debunking the Myth of the 8% Return by Wade Pfau
S1 E253 · Wed, September 06, 2023
The Truth About Doug Andrew's Retirement Philosophy
David starts the conversation by describing why he’s not a huge fan of Doug Andrew’s retirement philosophy. David then talks about the differences between Doug’s approach and the Power of Zero approach for funding your retirement. According to Doug, you risk jeopardizing your retirement if you have money in an IRA or a 401K. There’s the danger of losing a sizable portion of your portfolio if the markets were to crash like they did in 2008. To protect your retirement, Doug believes it would be best to move all your money in the stock market into a Laser Fund/Indexed Universal Life Insurance. David interprets this to mean that Doug dislikes stock market investing. For David, the stock market is the single greatest engine of wealth creation the world has ever seen. What about risks and volatility? David explains that the longer you invest in the stock market, the more likely you won’t lose money and grow your assets over time. David prefers a retirement strategy that views the IUL as one component of a balanced, comprehensive approach to tax-free retirement. David reveals why the Roth 401K is an extremely useful tool for funding tax-free retirement. David shares what his preferred tax-free investment strategy would look like - and why the zero percent tax bracket is so powerful. David goes through the 3 things that make IULs a unique tax-free investment route: A death benefit that doubles as long-term care. Serves as a great volatility shield in retirement. Safe and productive returns. Also functions extremely well as a bond alternative. If you believe tax rates will be higher in the future than they are today, you should adopt a strategy that takes advantage of all the benefits in the IRS tax code. Mentioned in this episode: David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com
S1 E252 · Wed, August 30, 2023
Why do Major Money Institutions HATE Tax-free Investing?
David starts the conversation by breaking down his book, Power of Zero , and the problem with America's ever-rising national debt. For David, the goal of the book is to guide people on how to move their assets into tax-free retirement vehicles - and how such a move is the only way to shield yourself from potentially higher tax rates in the future. David describes the difference between LIRPs and other life insurance products. All LIRPs are life insurance policies, but not all life insurance policies are LIRPs. David reveals why he believes HSAs(Health Saving Accounts) are the holy grail of financial planning - you get a deduction on the front end, let that money grow tax-free, and then take it out tax-free. Can you have too much money in your 401K? Yes. You want to ensure the balance in the IRA is low enough that RMDs (when you are finally forced to take them) are equal to or less than your standard deduction and low enough that they don't cause Social Security taxation. You can have a million dollars in your IRA, but unless you can accurately predict what tax rates are going to be in the year you take that money out, you don't really know how much money you have. David reveals why many financial planners detest tax-free investing. Life insurance is not a silver bullet for tax-free retirement. It only works as a complement to other tax-free streams of income. Is it a no-brainer to get life insurance? David believes it's not. It depends on your situation. Always remember that the IRS is looking at how much money you withdraw from your IRA and 401k. If you take out too much, they'll tax a portion of your social security. David talks about the benefits of having 4 to 6 different streams of tax-free income. According to David, we are in the tax sale of a lifetime because taxes in the next three years will never be as low as they are today. Mentioned in this episode: David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David
S1 E251 · Wed, August 23, 2023
Dave Ramsey Is WRONG About Fixed Indexed Annuities
David starts the conversation by describing why he believes Dave Ramsey is wrong about Fixed Indexed Annuities. In a recent live call, Dave Ramsey revealed why he is not a fan of annuities and what you should consider doing instead. Dave Ramsey’s thoughts on Fixed Indexed Annuities - They have a floor that cannot go below a specific number, say 6%. Fees are double what you might get in a mutual fund and the advisor commissions are four times as high. David’s response to Dave Ramsey’s thoughts on Fixed Indexed Annuities. Indexed annuities don’t have a 6% floor. If an index ever goes down in a given year, they simply credit you a zero. The floor is zero percent. Technically speaking, Fixed Indexed Annuities don’t have fees. You cannot lose money to fees or end up with less than your original contribution. David goes through the benefits of investing in Fixed Indexed Annuities. One of the dangers of being a financial guru is you have to project to your listeners that you’re an expert on every financial topic. For David, fixed Indexed Annuities are not a stock market alternative. They’re a bond alternative. David believes that if you’re a disciplined investor and want to purge longevity risk from your retirement picture, you should consider Fixed Indexed Annuities. It’s clear that Dave Ramsey knows far less about annuities, and it’s troubling that he consistently gives investment advice on subjects he’s not familiar with. Mentioned in this episode: David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com
S1 E250 · Wed, August 16, 2023
Financial Guru Loses $400k to Ill-Advised Roth Conversion (Is Your Money Safe?)
David starts the conversation by describing how a financial guru, Derek Sall, allegedly lost $400k in an ill-advised Roth conversation. According to Sall, you’re way more likely to have a lower income in retirement than you have today, so you’ll likely be in a lower tax bracket in the future. But as we all know, tax rates must go up as early as 2026 to pay for unfunded government obligations. David made 3 observations to counter Derek’s claims: Your income in retirement is not likely to be way lower than it is today. This is one of the huge myths foisted on a generation of baby boomers. The single largest factor that should determine whether you do a Roth conversion is whether you believe the taxes you pay will be higher now than in the future. You’re not necessarily guaranteed to be in a lower tax bracket in retirement. More and more experts are beginning to predict that tax rates in the future will have to rise dramatically to pay for unfunded obligations. David explains that Derek might have unknowingly made a wise financial decision by making a Roth conversation at the 22% tax bracket. You should always consider doing a Roth conversion, especially when young. Chances are, you will make a lot of money in your later years, so it makes sense to pay taxes now since taxes will likely go up in the future. For David, Derek Sall did not make the wrong move by converting his 401K into a Roth. In fact, he didn’t go far enough. He should have taken advantage of the 24% tax bracket as well. David reveals whether there are certain times it doesn’t make sense for some people to do a Roth conversation. Mentioned in this episode: David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com
S1 E249 · Wed, August 09, 2023
Jeremy Schneider--All CPAs, CFPs and FInancial Advisors Hate IUL (My Response)
Jeremy Schneider is a financial guru who claims to have retired at the age of 36 with four million dollars. He recently shared an anecdote about a young millionaire who owned around $90,000 in cash value life insurance. The reaction of the host was quite interesting, as none of the other millionaires interviewed for the show brought up life insurance as a means of building or holding their wealth. If you scroll around on social media though, there is a huge number of financial gurus recommending investing in Indexed Universal Life Insurance because of lax legislation that allows the conflation of the insurance product as an investment vehicle. The trouble with Jeremy’s dismissal of the IUL product is that he fails to distinguish between the deceptive practices of unscrupulous insurance salesmen and the product itself. He also makes the incorrect comparison by saying indexed funds outperform the IUL over time, but that’s like comparing stocks to bonds. They aren’t the same thing. If he were to acknowledge that IULs had a proven track record of between 5%-7% net of fees over time without taking any more stock market risk than you are accustomed to in your savings account, then he would undermine his anti-IUL narrative. His gimmick only really works when he compares the IUL to a portfolio entirely composed of stocks, but when you consider bonds, an entirely different narrative emerges. Jeremy Schneider also fails to acknowledge the reason that 70% of all people over the age of 50 buy the IUL is for the long-term care advantage. IUL plans with a chronic illness rider give you the opportunity to access up to 25% of your death benefit to pay for long-term care. In the event you die without ever having the need to use the long-term care coverage, your heirs still get the death benefit, so there isn’t that sensation of paying for something you hope you never have to use. As for his claim that no financial advisors would ever recommend an IUL, there are a number of experts and advisors that support the recommendation of the IUL. Ed Slott, America’s IRA expert, is a big fan of cash value life insurance as a part of retirement planning. What Jeremy is really addressing is the number of financial gurus on TikTok claiming that historically only the rich used cash value life insurance to build their wealth. The narrative is clearly false, and it’s important to realize that the IUL is not in competition with stock market investments and has some unique features that make it an attractive compliment to tax-free investment strategies. For almost all the millionaires mentioned, there is a case to be made for the IUL in their retirement strategies. Mentioned in this episode: David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , <em
S1 E248 · Wed, August 02, 2023
The Truth About Dave Ramsey's Investment Philosophy
Regardless of your age, proximity to retirement, or financial profile, Dave Ramsey recommends the exact same investment allocation: divided equally among four types of funds; growth, growth and income, aggressive growth, and international. Dave’s philosophy essentially boils down to investing in the stock market. The Money Guy show did a recent comparison between the Ramsey portfolio and the S&P 500. When the overall market was performing well, they both fared similarly, but the worst periods were considerably worse for the Ramsey portfolio because it’s inherently more risky without the surplus returns that would justify the extra risk. The S&P 500 outperformed the Ramsey portfolio in the last 1 year, 3 year, 5 year, and 10 year time periods. Another glaring error is that the Ramsey portfolio does not contain bonds, no matter how far you are from retirement. One tried and true investment approach is to take your age and subtract it from 100. That’s how much you should be allocating to the bond portion of your portfolio. Data supports this approach, but Dave feels they don’t perform as well as stocks. When examined closely, the statistics don’t support that conclusion. The Money Guy show did another comparison showing that the two different approaches have very different results. A 60/40 portfolio doesn’t have the highs of an all-stockportfolio, but the lows are where the real risk lies. A bond portfolio ends up taking less risk but earning a greater return over a 22-year timeframe. If you are relying on your investments to support you in your golden years, one bad year in the market can completely derail your retirement. A 100% stock market portfolio exposes you to sequence of return risk that could send your retirement portfolio into a death spiral that it can’t recover from. Dave Ramsey’s might have some merit if he didn’t unequivocally advise against guaranteed lifetime income annuities. With a bit of planning, an annuity when paired with a company pension and Social Security can completely cover your living expenses in retirement. This allows you to earmark your stock market portfolio for extra expenses and also take more risk in the stock market portion of your portfolio. With your lifestyle needs taken care of with this method, you could even remove the bond portion of your portfolio. By allocating 100% of your portfolio to higher yield stocks, you dramatically increase the likelihood your portfolio will last through your life expectancy. Dave Ramsey’s one-size-fits-all anti-bond investment approach is contradicted by years and years of academic studies and empirical data. The question is why? The unfortunate truth is that as a financial guru, Dave Ramsey does not have the luxury of nuance and has to dispense one-size-fits-all advice. Mentioned in this episode: David's <a href="https://www.davidmcknightbooks.com/" ta
S1 E247 · Wed, July 26, 2023
How Roth IRAs and Life Insurance Can COMPLETELY SHIELD You and Your Heirs From a Doubling of Tax Rates
The national debt is fast approaching $32 trillion dollars, nearly double from only a few short years ago. Neither parties are blame-free for the situation we find ourselves in as of 2023. That $32 trillion does not include the unfunded liabilities and obligations that we will be paying for over the next ten years. We got to this point without including the added costs of Social Security, MediCare, and Medicaid. Politicians are facing a situation where they either cut those programs, which is a surefire way to get kicked out of office, or dramatically raise taxes. David Walker predicted that effective tax rates for Americans will rise to 45% by 2030. Right now, the effective tax rate for Americans on average is only 18%. Rising tax rates aren’t just speculation, it’s in the tax code. The tax rates are scheduled to rise already unless the law is altered. In 2026, the steps between tax rate tiers are going to get much less steep. The trust fund for MediCare is scheduled to go bust by 2027. The trust fund for Social Security is scheduled to go bust in 2032. Many people think we can print our way out of our problems, but that’s not going to work with entitlement programs. Rising inflation due to printing money will ensure that we never really catch up with the problem. Historically, the highest tax rate in America was 94%. There is historical precedent for both raising taxes dramatically and cutting expenses. The trouble is that politicians haven’t had the backbone in the past to deal with these issues before they become crippling to the economy and average Americans. Further trouble is due to the different circumstances in how we spend money. Unlike in the past, the debt-to-GDP ratio is worse and we are living beyond our means by a considerable margin. We are spending money like drunken sailors and there doesn’t seem to be any willpower in Washington to change the direction. Politicians also have the tendency to avoidtelling people what they really need to hear. The Power of Zero strategy is basically the idea of systemically positioning your retirement savings to the tax-free bucket and protecting yourself from the ebb and flow of future tax rates. We could see tax rates rival the 1970’s. The Trump Tax Cuts are the tax sale of a lifetime. Most people that David works with are good at saving and find themselves in the 22% tax bracket. By converting up to the 24% tax bracket, those people have much better odds of converting the majority of their savings to tax-free before tax rates rise, possibly for good, once 2030 comes around. 2026 is an important date, but not as important as 2030. People should take advantage of historically low tax rates while they are still around and get their houses in order by 2030. It can be especially challenging for widows in retirement when you factor in how the loss of a Social Security payment
S1 E246 · Wed, July 19, 2023
Why the Roth IRA Is NOT Enough (Graham Stephan Is Wrong!)
There are a number of popular finance YouTube personalities like Graham Stephan talking about how you can be a millionaire by simply contributing $18 a day into a Roth IRA, but that doesn’t tell the whole story. Not only is that advice too simple, it doesn’t take into account the value of a million dollars thirty years in the future. Inflation will approximately reduce the spending power of that million into $250,000. The 4% Rule says that if you constrain yourself to only taking 4% of your day one retirement balance, adjusted for inflation as income, you have an 86% chance of your money lasting through your life expectancy. When you crunch the numbers, this would mean surviving on $10,000 a year in today’s dollars in retirement. You have to be much more aggressive with your investing and saving as a 30 year old person. Instead of just fully funding your Roth IRA as a 30 year old, you could also befully funding your Roth 401(k). By investing $82 a day, your final balance after thirty years would be over $4 million, or roughly $1 million after you factor in inflation. According to a recent Ernst & Young study, if you were to earmark 30% of your retirement savings to cash-value life insurance you could as much as double your sustainable withdrawal rate in retirement. It gives your stock market balance a chance to recover from any down years during the crucial first decade of retirement. Even when you factor in that your Roth IRA and 401(k) will have lower balances, your ability to pay your lifestyle expenses allows you to take 8% distributions from your portfolio in retirement. Because your cash value life insurance is growing safely and productively, it effectively replaces the bond portion of your portfolio. This gives you a permission slip to take more risk in your stock market portfolio and yield a higher overall return on investments. When you factor all that in, with the 8% distribution rate, even with inflation, your distributions in retirement would be closer to the equivalent of $80,000 a year in today’s cash value. If you heed these YouTuber’s advice, it’s a good start but you will end up with very little spendable cash flow in retirement. If you instead up your savings rate and fully fund your Roth IRA and 401(k), while allocating 30% to your cash value life insurance, you can supercharge to your tax-free retirement plan. Mentioned in this episode: David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code Come Back America by David Walker <a href="https://www.davidmcknigh
S1 E245 · Wed, July 12, 2023
How to Implement the Power of Zero Retirement Strategy
Step one of the Power of Zero strategy is to realize that due to unfunded obligations for Social Security, Medicare, and Medicaid and interest on the exploding national debt, tax rates in the future are going to be dramatically higher than they are today. Step two is to understand that in a rising tax rate environment there is an ideal amount of money to have in your taxable and tax-deferred buckets. For your taxable bucket, that’s around six months of living expenses. For your tax-deferred bucket, the amount should be low enough that your RMDs in retirement are equal to or less than your standard deduction and low enough that it doesn’t cause Social Security taxation. For married couples, that amount is around $350,000, and for single filers, it’s half that amount. If you have a sizable pension, the amount could be zero. Step three is to calculate how much time it will take to shift your balances to tax-free in order to achieve those balances. Preferably slow enough that you don’t rise into a tax rate that will give you heartburn, but quickly enough that you get all the heavy lifting done before tax rates rise for good. 2030 is currently the target date. Step four is to see if you qualify for the Life Insurance Retirement Plan. With the LIRP, it gives you a death benefit that counts as long-term care and it can greatly extend the life of your stock market portfolio. One of the primary reasons you are paying for your LIRP is being able to access your death benefit if you need long-term care, but if you die peacefully in your sleep your heirs still get the death benefit. Step five is calculating your income shortfall in retirement. Figure out your after-tax needs in retirement that subtract any sources of guaranteed income like Social Security or a pension. Step six is to contribute a portion of your IRA to an annuity in the form of a fixed indexed annuity with the piecemeal internal Roth conversion feature. You want to contribute enough today so that by the time you have finished your Roth conversion it will produce enough tax-free guaranteed lifetime income that it will bridge the shortfall in your after-tax shortfall. Mentioned in this episode: David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code Come Back America by David Walker DavidMcKnight.com DavidMcKnightBooks.com <a href="https://www.powerofzero.com" target="_blank" r
S1 E244 · Wed, July 05, 2023
The Case for Contributing 30% of Your Retirement Savings to an LIRP
Your LIRP functions as the ideal volatility buffer because it grows safely and productively in a tax-free way. According to a recent study by Ernst & Young, investors that contribute 30% of their retirement savings to a LIRP will have their savings last longer than people who put 100% of their savings into investments alone. This seems to fly in the face of every financial guru who has ever opined about cash value life insurance like Dave Ramsey and Suzy Orman. It’s commonly understood that with an investment-only approach to retirement, you build up a large pile of money and take a modest distribution rate each year adjusted for inflation. If you take out higher than 4% per year, you drastically increase the odds of sending your portfolio into a death spiral during down years in the market. The most critical time is the first 10 years in retirement where you can expect two or three down years, any of which can cause your retirement portfolio survival odds to plummet. The LIRP serves as a volatility shield during those first ten years by allowing you to take tax-free loans from the policy during those first ten years of retirement. The LIRP has a few features that make it the ideal volatility shield. You can’t combat market risk with an account that is exposed to market risk. LIRPs grow safely and productively. LIRPs in the form of universal indexed life insurance have a historical track record of 5% and 7% net over fees over time, making it easy to accumulate the amount of capital you need to shield yourself from volatility. LIRPs are tax-free. If you don’t have to pay taxes during the accumulation and distribution phase, your money will grow more efficiently and you won’t have to save as much money along the way. If you can take distributions tax-free, you aren’t exposing yourself to tax rate risk and those distributions don’t count as provisional income. If your LIRP is fully funded from day 1 of retirement, you will be in a position to pay for lifestyle expenses during the years following a down year in your stock market portfolio. According to the study, if you contribute 30% of your retirement savings to an LIRP you will find that your sustainable distribution rate skyrockets to as high as 8%. The study made a statistical case that shows the LIRP can extend the life of all your other investments significantly. The most viable retirement strategy is the one that gives you the highest likelihood that your retirement savings will last through life expectancy. Mentioned in this episode: David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code <a href="https://www.davidmcknight.com" target="_blank" re
S1 E243 · Wed, June 28, 2023
Dave Ramsey Is Disastrously Wrong on Roth Conversions
The biggest issue with Dave Ramsey’s view on Roth Conversions, and most of his advice in general, is his one-size-fits-all approach which costs his listeners hundreds of thousands of dollars. Dave starts off on the right foot by recommending people pay the taxes up front for a Roth Conversion but then veers off the track pretty quick. Dave breaks down a hypothetical married couple filing in 2020 doing a Roth Conversion, but makes the mistake of conflating the 24% tax bracket as a trap of the Roth Conversion strategy. If you have more than a million dollars in your IRA, you will never convert to Roth before tax rates go up for good without taking advantage of the 24% bracket. Dave then goes on to say that you should never do a Roth Conversion unless you have money sitting in cash to pay the taxes. If Dave’s advice were taken by everyone, only 5% of people would realistically be able to take advantage of the Roth Conversion. Some scenarios require you to pay cash for your Roth Conversion, but that’s not the only choice you have. If you don’t have the cash to pay the taxes on your Roth Conversion, there is no harm in having the IRS withhold the tax from the Roth Conversion itself. It’s not optimal, but it’s far better than the alternative of leaving your money in your IRA and watching tax rates double over time. Dave identifies the Five Year Rule on the Roth Conversion, but he fails to tell people that if you are older than 59 ½, the penalty won’t apply to you. This leads people to believe the rule of thumb is everyone should avoid the Roth Conversion unless you are five years or more away from retirement. Dave Ramsey’s explanation of Roth Conversions is disastrous at every turn. All three of his recommendations are almost completely backwards. When it comes to making important decisions about your retirement plans you should avoid financial gurus like Dave Ramsey at all costs. Mentioned in this episode: David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's
S1 E242 · Wed, June 21, 2023
Roth Conversions: Avoid This Bracket at All Costs!
We know for sure that we currently have three more years of historic tax rates. The good news is that it’s fairly likely that those tax rates will be extended for another eight years, giving us a wider window of opportunity. Congress has essentially removed the limits on how much money you can convert to a Roth IRA. All you have to do is decide how much tax you want to pay. Most people assume that the 0% tax bracket is David’s favorite, but it’s actually the 24% tax bracket. For only an additional 2% in tax, you can convert an extra $170,000 to tax-free each year. The 24% tax bracket is the sweet spot in the Trump Tax Cuts. The 24% tax bracket is still lower than the future level of the 22% tax bracket. The average American is going to end up in the 40% to 45% tax bracket when everything gets settled, which will be a significant change for people in a negative way. Denmark has a 50% tax rate, but in exchange the population gets universal health care, paid sick leave, paid maternity leave, and more. When the US gets to that point, it will all go to service the national debt. David’s least favorite tax bracket is the 32%. Even if the tax cuts aren’t extended, which is unlikely, the future version of the 24% tax bracket is 28%, which is still lower than the current 32%. Don’t preemptively bump up into the 32% tax bracket because you think you’ve got all the heavy lifting done before 2026. Everybody’s situation is different so it’s very important to work with a financial advisor and go through the financial planning process to find what’s right for you. When doing a Roth conversion, the ideal method is to pay taxes from an account other than the conversion itself, preferably the taxable bucket. If you don’t have enough money in your taxable bucket, withholding is your only other real option but you have to take into account the additional tax on withholding. Mentioned in this episode: David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free To
S1 E241 · Wed, June 14, 2023
Here's Why They're Going to Extend the Trump Tax Cuts Before 2024
The Trump tax cuts went into effect at the end of 2017, but because they lacked a supermajority of approval in Congress those tax cuts had an expiration date. David has long maintained that the government won’t let those tax cuts expire. There is a broad swath of Americans that are responsible for getting the current politicians re-elected and those people have short memories. If taxes go up, they’re going to blame those same politicians. No politician wants to be responsible for raising taxes on that many Americans. There is a high likelihood that if you are in the 10%, 12%, 22%, or 24% tax brackets, those tax brackets will be extended until 2031. If you’re construed as someone who earns a higher income, you’re probably going to face higher tax brackets. Politicians seem to be focused on the 24% tax bracket and below. The implications of these tax cuts being extended are vast. In 2018, we cut taxes and raised expenses, which was exactly the opposite of what we needed to do as a country. By extending these tax cuts, we’re kicking the can down the road and the fix is going to have to be even more draconian. We are currently spending our children’s future because there is no courage in Washington. The debt ceiling is upon us once again and Congress is waiting until the very last minute to do anything about it. The debt continues to rise for a variety of reasons. We’ve had Covid relief, wars, and tax cuts that led to additional borrowing. In the near future, the debt will be going up primarily because of Social Security, MediCare, and Medicaid. It’s projected that the national debt will be around $51 trillion by 2033. Even if we stay at historical interest rates we would struggle to be able to afford to pay that. President Joe Biden wants to raise the debt ceiling so that Congress can pay for things that have already been approved. If the US defaults on its debt, most experts predict a recession, if not a depression, millions of people would lose their jobs, interest rates would go up, the country’s credit rating would plummet, and the status of the US dollar as the world’s reserve currency would be in question. Even if people got their Social Security checks in that situation, there would be so much chaos in the economy that it would hardly matter. Mentioned in this episode: David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part vi
S1 E240 · Wed, June 07, 2023
Do ALL Financial Gurus Hate Cash Value Life Insurance?
For David, financial gurus seem to hold a deep hatred for permanent life insurance – be it whole life, universal life, index universal life, or variable life. A key question to ask: with so many financial gurus against life insurance, how can we conclude that it should be integrated into a balanced, comprehensive approach to tax-free retirement? David believes that such an approach stems from the fact that these gurus address a huge homogenous audience, who’s generally drawing in debt, and that they don’t have the luxury of nuanced explanation. Everything they discuss should either be good or bad. Ed Slott, who the Wall Street Journal called ‘the best source for IRA advice’, is an expert whose approach differs from the ones mentioned above. Slott sees life insurance as an investment that’s better than your typical investment accounts for the fact that it’s tax-free. Slott goes so far as to say, “Roth IRAs and life insurance can single-handedly remove most of the taxes you or your beneficiaries will ever have to pay.” The difference in approach between Ed Slott and other financial gurus has to do with Slott’s 30 years of experience working with actual clients that has allowed him to observe the impact that cash value life insurance has on the lives of retirees and their beneficiaries. Ed Slott is not a financial guru using a one-size-fits-all strategy for the masses. He’s an educator who understands the IRS tax code and who clearly knows that tax planning and retirement require nuance, especially if you have substantial assets. Mentioned in this episode: David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com I’ll Teach You to Be Rich (book) <
S1 E239 · Wed, May 31, 2023
Should you do a Roth 401(k) or a Traditional 401(k)? (The Answer May Surprise You!)
The decision of whether to contribute to a Roth 401(k) or a Traditional 401(k) all comes down to whether you are likely to be in a higher tax bracket than you are now when you retire. The only determining factor in whether you should contribute to a Roth 401(k) is what you think your tax rate will be when you retire. David takes an example of two twin brothers and compares the difference between a Traditional 401(k) and a Roth 401(k) over the course of 30 years. The takeaway is that if tax rates remain the same, both plans are identical, but if tax rates are even just 1% higher than they are today then the Roth 401(k) will always win. If tax rates go up, the Roth 401(k) wins hands down. If tax rates stay the same, then both plans will get the same results. The only scenario where the Traditional 401(k) wins is in the unlikely event tax rates are lower in the future. Some economists have suggested that tax rates will have to double by 2030 just to keep our country solvent. In his book Comeback America, former Comptroller General David Walker predicted that average effective tax rates in the US would have to rise to 45% by 2030 to pay for unfunded obligations, Social Security, MediCare, Medicaid, and interest on the national debt. The farther out your investment horizon the more likely your tax rate in retirement will be substantially higher than it is today. With the passage of the Secure 2.0 Act, you now have the ability to direct your employer’s match to the Roth portion of your 401(k). When you retire, it is important to have some tax-deferred income in order to maximize your standard deduction. If you have all your money in your Roth 401(k) then your standard deduction will stand idle and you will have paid taxes on your contributions unnecessarily. The goal should be to allocate the lion’s share of your retirement money to your Roth 401(k) to protect you against future tax rate increases, and have the match put into the tax-deferred portion of your 401(k) so it can be offset by the standard deduction in retirement. Mentioned in this episode: David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twitter @davidcmcknight on Instagr
S1 E238 · Wed, May 24, 2023
Ramit Sethi is WRONG About Annuities and Cash Value Life Insurance
When it comes to investing, I’ll Teach You to Be Rich author Ramit Sethi sees whole life insurance, annuities, and Primerica as major red flags. David believes that, in the Netflix documentary How to Get Rich , Ramit Sethi makes sweeping insurance product condemnations with little or no evidence to support his case. If David had a chance to sit down with Ramit Sethi, there’s a series of questions he would like to ask him, including “Why are annuities bad?” Yale Professor Robert Schiller recently affirmed that bonds aren’t the best solution for managing risk in retirement. While analyzing 10-year returns for stocks, bonds, and fixed index annuities, Schiller uncovered four startling truths. For David, if you were to reach into your retirement portfolio, remove the bonds and replace them with a fixed index annuity, you would increase returns while safeguarding that portion of your portfolio against loss. The 4% Rule says that if you have a 60-40 stock-bond mix, the most you can take from your portfolio, and maintain a high likelihood of not running out of money before you die, is 4% per year (adjusted for inflation). If you have done a good job saving money, don’t take advice from financial gurus who are dispensing one-size-fits-all financial planning advice on Netflix. Mentioned in this episode: David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free 3-part video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com I’ll Teach You to Be Rich (book) How to Get Rich (Netflix series) Dave Ramsey Suze Orman <
S1 E237 · Wed, May 17, 2023
Dave Ramsey Says Don’t Do an IUL Because of Its Surrender Charges (Is He Right?)
Dave Ramsey contends that the IUL is a ripoff primarily because of two reasons: high fees and surrender charges He also recommends that if you have an IUL to surrender it immediately, thereby incurring those surrender charges immediately. The reason companies have surrender charges is to cover the costs of getting the program off the ground. They start off high and reduce gradually over the first fifteen years or so. The question is, ‘Is the surrender schedule something that should weigh on your decision to do an IUL?’ The answer in most cases is no, as long as you plan on keeping the plan until death do you part. An IUL is like getting married. You have to investigate the alternatives before choosing the one that’s right for you. If Dave Ramsey adopted the same approach with the taxes and penalties in your 401(k), he would be singing a different tune. If you were to take $100,000 out of your 401(k) at the age of 40, you’d end up paying the penalty and taxes at your current tax bracket, likely resulting in $40,000 in penalties. The penalty schedule also doesn’t reduce over time when you consider that you’re likely to bump up into higher tax brackets. The first fifteen years of your IUL, 401(k), or IRA are the years you should least want to access that money. Like traditional retirement plans, IULs are generally long-term propositions. Don’t start an IUL if your plan is to take the money out in the first ten to twenty years. If Dave Ramsey has a problem with the IUL surrender charges, he should likewise have a problem with all the taxes and penalties you will pay on your traditional retirement accounts over a much longer period of time. The IUL only really works as part of a comprehensive approach to retirement and getting to the zero-percent tax bracket. Mentioned in this episode: David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com <
S1 E236 · Wed, May 10, 2023
Now is the Best Time in History to Get to the 0% Tax Bracket
If you have the lion’s share of your wealth in a tax-deferred bucket, you have actually played your cards perfectly. You probably allocated that money at a time when tax rates were likely higher, and right now tax rates are at historic lows. This is the perfect time to move things into the tax-free bucket. The question is ‘How long will these historically low tax rates last?’ Traditional thinking says tax rates will revert to higher rates in 2026, but that seems pretty unlikely to happen. No politician wants to be the one that raises taxes on the largest voting block in America. The most likely scenario is that Congress will extend the Trump tax cuts at some point between now and 2026 for another eight years. This may be the most important eight-year window in your life, given where tax rates will have to go into 2030 and beyond. Citing out-of-control spending on Social Security, MediCare, MediCaid, and interest on the debt, former Comptroller General David Walker has predicted that tax rates will have to double in or before the year 2030. Slowly shift your tax-deferred bucket into the tax-free bucket now while there is still time. The 24% tax bracket is the greatest sweet spot of all sweet spots. It’s only 2% more than you’re likely paying right now and it allows you to shift an additional $170,000 a year to tax-free. The 24% tax bracket is better than the future version of the 22% tax bracket, which is 25%. Every year that goes by where you fail to take advantage of the 22% and 24% tax brackets is potentially a year beyond 2030 where you could be forced to pay the highest tax rates you’re likely to see in your lifetime. Take advantage of the next 8 years to preemptively pay taxes on your retirement assets so that by the time tax rates potentially double, you’ve done all the heavy lifting and can withdraw those assets tax-free. Mentioned in this episode: David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at <a href= "http://taxfreetool
S1 E235 · Wed, May 03, 2023
Does the IUL REALLY Work?
The internet is full of naysayers that are convinced the Indexed Universal Life Insurance Policy (IUL) is a ticking time bomb, but the question is “what does the evidence show?”. Over the last fifteen years we’ve seen catastrophic market declines and near-zero interest rates for a protracted period of time. This has created the perfect conditions to measure the effectiveness of the IUL. The stock market is one of two things that drives the return of the IUL, the second and more important factor is interest rates. You should expect target rates of return between 6% and 8% within your IUL, and the last 15 years have been a great laboratory to measure the effectiveness of accomplishing that goal. The first example is a company that dates back to 2006, and despite the ups and downs of the market, the IULs have managed to keep pace with that projection. The second example uses a set of historical returns back to 2006 as well, and averages them out to show a return of just over 7%. The third example is a policy that goes back to 2009, enduring the ups and downs of the market and still showing a return of 8.03% over that time frame. When you subtract the 1% in fees in the life of the program, you will be netting 5% to 7% over the life of the contract. This is why the IUL is not a replacement for the stock market portion of your portfolio, but is great as a bond replacement. Reach into your portfolio and remove the bonds. Replace it with IUL and you will increase your return, lower your risk, and lower the standard deviation of your entire portfolio, and experience a better outcome over time. Assessing the success of your IUL is a matter of tempering your expectations and making the right comparisons. They only really work if you keep them for your entire life but they do that admirably by providing a death benefit that doubles as long-term care, as well as the ability to grow tax-free wealth safely and productively. Mentioned in this episode: David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnig
S1 E234 · Wed, April 26, 2023
Dave Ramsey Is WRONG About the National Debt
In a recent video a high school senior called in to Dave Ramsey’s show where he offered some good advice but also played down the severity of the nation’s debt crisis. Dave refers to two different books on how the national debt was going to ruin the country back in the 80’s, which obviously did not come to pass. The trouble is not the level of debt a country has in general, it’s how much debt there is in relation to their gross domestic product. This is why the current situation is different. The single most important measurement is the debt-to-GDP ratio. According to the World Bank, a healthy debt-to-GDP is 77% or lower. Right now, the debt-to-GDP ratio is trending well beyond that threshold over the next 16 years. Dave claims the average American investor should not have to worry about the national debt. While that’s partly true, what they really should be worrying about is the kinds of accounts they are investing their money in. Former Comptroller General David Walker explicitly predicted that by the time 2030 rolled around the national debt would be so high and out of control that the government would have to raise effective tax rates on middle America to 45%. Given the abundance of studies highlighting the dangers of the national debt, Dave Ramsey dropped the ball on helping a huge number of listeners. Americans of all ages should be concerned about the national debt. It should spur you to consider when you want to pay taxes, either now when they are at historical lows or roll the dice and see what happens in the future. Dave Ramsey is underestimating the risk of the national debt on the fiscal outlook for the US, and he missed an important opportunity to inform more Americans. Mentioned in this episode: David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com
S1 E233 · Wed, April 19, 2023
Ernst & Young Study on Using Permanent Life Insurance for Retirement Income (Surprising Results!)
A recently published study claims that taking income from permanent life insurance and annuities in retirement can create a better outcome for investors. Ernst & Young compared five different strategies including investments only, investments and term life insurance, permanent life insurance and investments, deferred income annuities, and a combination of #3 and #4. In their comparison, Ernst & Young considered insurance products part of the fixed income allocation and bond replacements. They also used the permanent life insurance as a volatility buffer, where they access the cash value of the policy to pay for lifestyle needs during periods of market volatility, similar to the concept in the best-selling book, The Volatility Shield. They ran 1,000 Monte Carlo comparisons with the goal of measuring sustainable income, and they used ordinary income tax rates. Each income scenario sustained a minimum of 90% probability of success. In the investment-only approach, it’s only inefficient from both an income perspective and from the legacy perspective. The strategy that produced the greatest combination of income and wealth to heirs is the scenario where 30% went into a permanent life insurance policy, 30% into a deferred income annuity, and the balance into investments. They recast the numbers for couples in different age brackets, but the results were essentially the same. The permanent life insurance policy used in this study was whole life insurance, which meant that the loans taken in retirement had to ultimately be repaid out of the investment portfolio. Had they instead used indexed, universal life insurance in the comparison, they could have shown a higher rate of return over time and guaranteed a zero-percent loan provision for the volatility buffer concept. In other words, they could have taken tax-free and cost-free distributions from their life insurance, saving money on interest payments and avoiding the phantom tax bill from the IRS. The conclusion of the study is accurate, but, by switching out the permanent life insurance for indexed universal life insurance, they would have improved their outcome even further. If they ran a scenario where tax rates doubled over time, the scenario would have pulled even further ahead than the investment-only scenario. Mentioned in this episode: David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com
S1 E232 · Wed, April 12, 2023
Max Loan Challenge: Whole Life vs IUL in a Fixed Account
IUL and whole-life policies both have their place. Whole-life advocates prefer it because your cash value is guaranteed to increase each and every year as the IUL has growth that is tied to the upward movement of a stock market index. The downside to the IUL is that down years do happen, and in those years you get credited a zero but still have the expenses associated with the IUL. David goes through a scenario where all premiums within a LIRP go to the IUL’s fixed account. By allocating money in this way, you will net a consistent rate of return that is not linked to the upward movement of a stock market index, even during a down year. By allocating your premiums to your IUL’s fixed account, you can recreate all the attributes of the whole-life policy inside the IUL, only on a supercharged basis. To discover the companies that David used to model this scenario, email him at info@powerofzero.com The scenario takes a 40-year-old male contributing $20,000 per year until the age of 65. In either model, the factors were averaged out to make the comparison as fair as possible. Starting with the whole-life policy, at age 66 it produced a loan of $42,675 every year until the age of 100. That is cumulative distributions of $1,493,625. The IUL is able to produce a loan of $48,084 every year until the age of 100, with cumulative distributions of $1,683,940. If you are just comparing maximum loans on the backend, the IUL comes out on top. Whole-life policies do not have guaranteed zero-percent loan provisions which is one of the reasons that policy lags behind. With that being said, you wouldn’t want to use an IUL for its fixed account. Using a slightly different model, the benefit of the IUL races ahead considerably. At 7% growth, the loan value jumps to $100,100 and the cumulative distributions go to $3,503,500. By allocating your premiums to the fixed account inside of a maximum funded IUL, you can generate more income than you would inside a maximum funded whole-life policy. By taking a little more risk in your IUL and tying the growth of your cash-value to the growth of a stock market index up to a cap, you can more than double your annual tax-free distributions. Mentioned in this episode: David's books : Power of Zero, Look Before You LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free video series)
S1 E231 · Wed, April 05, 2023
"That’s a Lie!” Angry Senator Confronts Janet Yellen Over Social Security Bankruptcy
Janet Yellen appeared in front of a Senate Finance Committee in March where explosive testimony erupted when a senator from Louisiana asked a line of questions regarding the impending insolvency of Social Security. The Social Security Trust Fund is due to go broke in nine years, at which point recipients will receive 24% fewer benefits when that happens. Of the $4.5 trillion in taxes proposed by President Joe Biden, none of those tax increases are earmarked for shoring up Social Security. A bipartisan group of senators has made repeated requests to meet with the president regarding the plan for Social Security, all of which have been ignored. President Biden has proposed increasing the taxes on individuals making over $400,000 to address these issues. The challenge with that is, in order to put the nation on a sustainable path, tax rates would have to rise to absurdly impractical levels. Doubling the debt-to-GDP ratio would be devastating for the economy, which is essentially the situation if the president doesn’t take action. The scenarios are: we do nothing and all Social Security recipients receive a 24% cut in benefits, keep borrowing money and double the debt in the short-term, or try to put a sustainable plan into place. The third option has mostly been ignored up until this point. There are honest politicians on both sides of the aisle. Unfortunately, many are not willing to make tough decisions for fear of alienating a portion of the electorate. This exchange indicates that President Biden is opting for a delay strategy, which is bad news for Americans with the majority of their money in tax-deferred accounts. Mentioned in this episode: David's books : Power of Zero, Look Before Your LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com
S1 E230 · Wed, March 29, 2023
The 5 Biggest IUL Mistakes (And How to Avoid Them)
David breaks down the 5 biggest IUL mistakes people make and how to avoid them. He starts the conversation by explaining the impact IULs can have on tax-free retirement when used correctly. Mistake #1 - Getting an IUL through the wrong company. David highlights what to look out for before settling on an IUL provider. Mistake #2 - Getting the wrong IUL product. You could have the best carrier in the world, but if you choose the wrong product, it's all for nothing. Mistake #3 - The right advisor. You need an advisor who understands what it means to build a balanced, comprehensive approach to tax-free retirement - and, most importantly, will be in business for the long run. Mistake #4 - Improper funding. David explains that IULs work best when you fund them religiously and keep them until death. Mistake #5 - Making an IUL the only component of your tax-free retirement strategy. According to David, your goal is to make IULs one of four to six streams of tax-free retirement income. Mentioned in this episode: David's books : Power of Zero, Look Before Your LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com PowerOfZero.com (free video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com
S1 E229 · Wed, March 22, 2023
How to Avoid Over-Converting Your Roth IRA
David sits down with certified financial planner Mark Byelich to discuss how to avoid over-converting your Roth IRA. They start the conversation by describing how over-converting your Roth IRA could sink your retirement plan. According to David, you should execute a Roth conversion if your tax bracket is going to be higher during retirement than it is right now. For stress-free retirement, David believes retirees should constantly think about future tax rates and ways to get to the zero percent tax bracket. David and Mark predict that the Trump tax cuts will likely be extended, but they won't be extended forever. David reveals why the 24% tax bracket is his favorite of all tax brackets. The Social Security Trust fund is projected to run out of money by 2032. David explains how social security benefits would be immediately cut by about 23%. Mark and David break down the Backdoor Roth IRA and instances it makes sense to use it. Mark is convinced the future of Roth IRAs is bright, but people must be careful when converting their money. David explains why life insurance is a great retirement planning vehicle but only when kept for life and used appropriately. LIRPs are a safe and productive way to grow a portion of your money, but they should never replace the stock portion of your portfolio. According to David, the most outstanding part of LIRPs is the death benefit and long-term care coverage. No matter how much money you have in your tax-deferred bucket, the good news is you still have eight or nine years to move your money to tax-free. Mark and David agree that the Roth IRA is the only thing that both the government and everyday Americans love. Mentioned in this episode: David's books : Power of Zero, Look Before Your LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com PowerOfZero.com (free video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com Comeback America: Turning the Country Around and Restoring Fisc
S1 E228 · Wed, March 15, 2023
Why the Middle Class Could Soon Be Paying 45% Effective Tax Rates
David sits down with certified financial planner Mark Byelich to discuss why the middle class could soon be paying 45% effective tax rates. When asked what investors should pay attention to in 2023, David says it's now do or die for those looking to take advantage of the Trump tax cuts that are set to expire in December 2025. According to David, the most important thing you can do to help your money last longer in retirement is to pay taxes now at historically low rates. David believes taxes have to double by 2030, or the country might go bankrupt - gone are the days when people could get away with 10 and 12% tax rates. Will the Trump tax cuts be extended past the 2025 deadline? David thinks they will, but there are no guarantees in life. Mark echoes David's comments and says that the Trump tax cuts will be extended no matter who's in office. Mark feels extending the tax cuts is a terrible economic move but a smart political move for those looking to stay or take power. David predicts that when taxes go up, we might end up with 1960-like tax rates where the lowest marginal tax bracket was 22% and the highest was 88%. Mark and David agree that the middle class could soon be paying 45% effective tax rates when tax rates go up. David dissects what eight financial experts are saying about rising tax rates. If you're an investor looking to plan for retirement, David believes your best move right now would be to have at least six streams of diversified tax-free income. Your goal for 2023 and beyond should be to take advantage of everything in the IRS tax code and focus on getting to the zero percent tax bracket. Mentioned in this episode: David's books : Power of Zero, Look Before Your LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com PowerOfZero.com (free video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com Mark Byelich's LinkedIn
S1 E227 · Wed, March 08, 2023
How to Dramatically Lower the Tax Bill on Your Roth Conversion
David sits down with financial advisor Daniel Rondberg to discuss how to dramatically lower the tax bill on your Roth conversion. They start the conversation by describing why the Power of Zero message is crucial to tax-free retirement. According to David, stress-free retirement often comes down to only worrying about the things you can control. David and Daniel talk about the Power of Zero movie and what gave it great legitimacy. David explains how interest rates can affect your retirement. David reveals why he moved to Puerto Rico and the tax benefits he gets from living in a foreign country. Daniel and David discuss whether it makes sense to pay taxes on Roth conversions using LIRP loans. Thoughts on reverse mortgages and why only 1% of children want to inherit their parents' home. David shares why he is a big fan of IULs and what you can do to get the most out of them. David reveals that 70% of the time, people are motivated to take on LIRPs because they promise to pay for long-term care in advance of a person's death. Daniel and David discuss what happens to unused long-term care insurance benefits if a person never needs the care. Will the family get the money back? Did you know that you could get your social security tax-free for the rest of your retirement if you got yourself to the zero percent tax bracket? Mentioned in this episode: David's books : Power of Zero, Look Before Your LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com PowerOfZero.com (free video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com Comeback America: Turning the Country Around and Restoring Fiscal Responsibility by David M. Walker
S1 E226 · Wed, March 01, 2023
The Top 2 Reasons to Have Indexed Universal Life
David starts the conversation by describing why it makes sense to have indexed universal life insurance. Did you know that any taxes you pay in your taxable brackets are, ironically enough, optional? David reveals that the ideal amount of money you should have in your taxable bracket is six months of living expenses. Once you've maxed out your IRA, David believes an IUL becomes a great avenue to reposition surplus money into a tax-free investment bucket. David explains that IULs are great because they have no income limitations and no contribution limits. According to David, IULs don't require you to take market risks, so they can serve as a suitable bond alternative with lower risks and higher returns over time. If you're married and over age 60, an IUL makes it possible to get your death benefit in advance of your death for the purpose of long-term care. David highlights the 3 main reasons people hate traditional long-term care insurance: It's getting more and more expensive with time. It's hard to qualify. Something like a bad back can mean you never get accepted. If you pay and die peacefully in your bed, the benefits pay for somebody else's care. Mentioned in this episode: David's books : Power of Zero, Look Before Your LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com PowerOfZero.com (free video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com
S1 E225 · Wed, February 22, 2023
Indexed Universal Life--How to Find the Right Carrier, Product and Advisor
David starts the conversation by describing the three most important things you should look for in an IUL. All good IULs are sponsored by financially stable insurance companies - but not all financially stable insurance companies offer good IULs. David talks about the four main companies that rank life insurance companies. David explains what a Comdex ranking is and why you should consider it when choosing a life insurance carrier. According to David, the 5 essential attributes of a good IUL are: A guaranteed zero percent loan provision. Interest in areas. Conducts a daily sweep. Has an Overloan Protection rider. Availability of a chronic illness rider. David goes through the three things to look out for when looking for an IUL advisor. If an IUL advisor claims that your IUL can beat the stock market or cannot lose money, run for your life. Mentioned in this episode: David's books : Power of Zero, Look Before Your LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com PowerOfZero.com (free video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David’s Tax-free Tool Kit at taxfreetoolkit.com
S1 E224 · Wed, February 15, 2023
The Difference Between a Social Security Tax and a Penalty (And How to Avoid Them Both)
David starts the conversation by describing the difference between a Social Security tax and a Social Security penalty - and whether it's possible to avoid them both. David explains that although some people use them interchangeably, a Social Security tax is different than a penalty. The first step to protecting your Social Security is understanding the main drivers behind taxes and penalties. The Social Security penalty arises when you begin drawing from your account before your full retirement age while also earning above the minimum allowed threshold. David shares how the Social Security penalty works and how the damages can affect your retirement. David breaks down the minimum allowed income threshold and what the IRS counts as earnings. According to David, understanding the IRS's views on provisional income is the best way to learn how Social Security taxation works. David highlights the unexpected income streams the IRS counts as provisional income - some of which might shock you. David highlights situations where up to 85% of your Social Security can become taxable at your highest marginal tax bracket. Even if you reach full retirement, you can continue to pay taxes on your Social Security in perpetuity if you don't keep your provisional income in check. Mentioned in this episode: David's books : Power of Zero, Look Before Your LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com PowerOfZero.com (free video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube
S1 E223 · Wed, February 08, 2023
Three Claims Pro-IUL TikTokkers Make About IUL (And Why They're Wrong)
David debunks the top 3 unsubstantiated claims that pro-life insurance agents on social media make about IULs. David starts the conversation by explaining why we need to be clear on what an IUL is and what it's not. David is a big fan of IULs because he believes they form a crucial part of a balanced and comprehensive approach to tax-free retirement. Claim #1 - An IUL can beat the stock market - a TikTokker even went as far as to claim that there's an IUL that averaged a 15.3% rate of return over a 20-30 year period. David highlights that IULs were not designed to replace the stock portion of your portfolio - plus, there is no way an IUL can average a 15.3% rate of return. A good IUL with a dependable carrier should average somewhere between 6 to 8% over a 20 to 30-year time frame. Claim #2 - You cannot lose money in an IUL. David explains that although you will never be credited less than a zero in an IUL, there is always the risk that your policy could take a hit during a flat year. Claim #3 - The IUL is a silver bullet. No investment path is a true silver bullet. All an IUL does is give you the upsides of the stock market up to a cap with protection on the downside. David reveals that IULs cannot match stock market returns or a 100% guarantee against loss - but they are a fantastic alternative to bonds. According to David, an ideal tax-free retirement approach should have between four and six streams of tax-free income. Mentioned in this episode: David's books : Power of Zero, Look Before Your LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com PowerOfZero.com (free video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube
S1 E222 · Wed, February 01, 2023
How to Transform a $1 Million Inheritance into a Tax-Free Juggernaut
David goes through five unique strategies to transform a $1 million inheritance into a tax-free asset. Although a non-qualified inheritance is tax-free, the step-up in the basis rule will lead to a huge tax problem as your asset grows over time. Strategy #1 - Pay the taxes on your Roth conversions. Remember, the worst way to pay taxes on a Roth conversion is on the IRA itself. Strategy #2 - Max out your Roth 401K for you and your spouse. Use your earnings to max out the $60,000 limit for both you and your spouse, and use the inheritance to fund your lifestyle. Strategy #3 - Fully fund your Roth IRA. Not a year should go by when you and your spouse are not fully funding your Roth IRAs. Strategy #4 - Use the inheritance to fund your retirement. If you're already retired, it may make sense to use the inheritance to support your lifestyle instead of going after your IRA. Strategy #5 - Contribute money to a life insurance retirement plan. If you still have some money left after implementing the above four strategies, consider taking advantage of the flexible contribution limits of a LIRP. David explains how you can productively grow your money in a LIRP tax-free. According to David, if you inherit $1 million and leave the money in a taxable bucket, you will be paying taxes over the balance of your lifetime. Mentioned in this episode: David's books : Power of Zero, Look Before Your LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com PowerOfZero.com (free video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube
S1 E221 · Wed, January 25, 2023
Indexed Universal Life is Too Expensive! (Dave Ramsey Debunked)
Dave Ramsey and other financial gurus claim that indexed universal life insurance(IUL) is expensive and a ripoff. Are they right? Suzie Orman even says you should never work with an advisor that recommends IULs as a possible investment option. According to David, when someone tells you that IULs are expensive, the first question you should ask them is, compared to what? David compares the fees you would likely pay in a traditional tax-free investment versus a lifetime IUL. David explains that judging IUL fees only makes sense if you calculate the expenses over the product's lifetime and not the first 5 years when the fees are the highest. In today's example, David uses a 40-year-old man investing $20,000 a year into an IUL and compares the fees if the same man followed Dave Ramsey's investment advice. In the first year, the man will pay $3502 for the IUL compared to $300 on Dave Ramsey's SmartVestor Pro program - maybe Dave Ramsey was right, after all. However, by the 10th year, IUL expenses will have gone down to $2702, while the SmartVestor Pro will have risen dramatically to $3962. David reveals that it gets worse for the SmartVestor Pro by the 40th year - while IUL fees remain low at $2964, SmartVestor Pro fees will have gone to an astronomical amount of $31,263. This just proves that the expenses of an IUL are higher as a percentage of the balance in the earlier years but are much lower as a dollar amount in the later years. In contrast, David explains that the SmartVestor Pro fees are much lower as a percentage in the earlier years but become much higher as a dollar amount in the later years of the plan. David points out that IULs are meant to replace bonds and not the stock portion of your portfolio, as Dave Ramsey claims. Mentioned in this episode: David's books : Power of Zero, Look Before Your LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com PowerOfZero.com (free video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube
S1 E220 · Wed, January 18, 2023
Dave McKnight versus Chris Kirkpatrick (Debunking Anti-IUL Claims)
What are some of the most outrageous anti-IUL claims on the internet today? David debunks some shockingly misleading claims presented by social media influencer Chris Kirkpatrick. Claim #1: Indexed universal life insurance (IULs) were born from insurance companies wanting to scale down on whole life insurance policies because they could no longer pay guaranteed dividends and needed a new profit center just to break even. This is just false because IULs were a result of the stock market crash of the early 2000's. Insurance agencies created a product that allowed investors to link the growth of their cash value to the upward movement of the stock market index. Claim #2: Insurance companies lure you in with artificially high cap rates, only to reduce them once they've sucked you in. According to David, cap rates change from company to company. However, the one he uses averaged a 7.09% rate of return since 2006 - this is quite impressive considering all the chaos witnessed in the markets during that period. Claim #3: IULs are 100% guaranteed to perform worse than initially promised. This claim is just laughable considering David saw an averaged 7.09 rate of return in the IULs he currently uses. Claim #4: Insurance companies drop cap rates early in the surrender period when the sting of cashing out is the greatest. Yes, surrender charges are harsh in the first 5 years of the policy. However, what Kirkpatrick fails to mention is that this is also the period when it least makes sense to cash out because average rates of return are usually higher - over 7.5%. David admits that IULs are not perfect, but neither are whole life insurances. Kirkpatrick is just a creative agent whose main agenda is to sell you whole life insurance at the expense of an IUL. According to David, when you choose an IUL, you sacrifice guarantees for higher rates of return. In contrast, when you choose whole life insurance, you sacrifice higher rates of returns for guarantees. Mentioned in this episode: David's books : Power of Zero, Look Before Your LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com PowerOfZero.com (free video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube
S1 E219 · Wed, January 11, 2023
Dave Ramsey vs Indexed Universal Life--5 Claims Debunked
What are Dave Ramsey's thoughts on Indexed Universal Life Insurance (IUL)? David debunks the 5 myths presented in Dave Ramsey's article on why you should run away from IULs. Myth #1: IULs never perform to their full capacity because the cash portion of the portfolio gets eaten up by the super-high fees. Yes, the fees will be higher at the start of the program but will reduce dramatically the longer you keep the policy. In fact, when you average the fees over the entire program, the costs translate to less than 1% of your balance per year. Myth #2: IULs contain numerous fees ranging from surrender charges, administrative charges, premium expenses, etc. David explains that IULs only work if you keep them for life - so fees should only be calculated after the contract expires, which often translates to 1% per year. Myth #3: When you cancel your insurance policy, you give up your death benefit and almost all the cash value you've managed to build. For David, this is by far the most ridiculous of all Dave Ramsey's claims on IULs. Not only is it misleading, but it is actually opposite to how cash-value life insurances work. Myth #4: Excessive fees keep returns relatively low, so your IUL will never beat inflation. This claim is just ridiculous, considering IULs were never designed to be a substitute for the stock market portion of your portfolio. Myth #5: Market performance will affect your premiums - the higher the rates, the more likely you are to lose your policy. According to David, this is a careless and poorly researched claim. Here, Dave Ramsey's primary goal is to lead you to strategically positioned links inviting you to buy term life insurance from him. David believes the only reason Dave Ramsey is against IULs is that he wants you to drop your IULs in favor of his term life insurance policy, with no regard to the losses you might incur or where you are in the surrender period. Mentioned in this episode: David's books : Power of Zero, Look Before Your LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com PowerOfZero.com (free video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube
S1 E218 · Wed, January 04, 2023
Is Artificial Intelligence the Future of Retirement Planning? (I put ChatGPT to the Test)
What is ChatGPT? David starts the conversation by explaining what ChatGPT is and the things that make it so revolutionary. ChatGPT is so advanced it has Google worried about its search engine's future. Will the advanced AI chatbot ever replace retirement advisors? David tests the chatbot by asking it a series of questions designed to stretch its basic retirement planning capabilities. When David asks ChatGPT whether tax rates will go up in future, the chatbot replies that it's tough to predict what future tax rates will be - a response David feels is rather "diplomatic." David tries to push the chatbot further by asking it what a life insurance retirement plan is. He is impressed with its answer, which is much more specific and descriptive than what you'd normally find online. After playing around with ChatGPT for over an hour, David believes the AI is not auditioning to replace financial advisors. The even more impressive thing about the chatbot is that its answers are much more balanced and devoid of emotions. Although the technology is not a replacement for financial advisors in the near future, David feels you can still use it to learn more about retirement planning. Mentioned in this episode: David's books : Power of Zero, Look Before Your LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com PowerOfZero.com (free video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube
S1 E217 · Wed, December 28, 2022
The 12 Rules of Tax-Free Investing (Updated and Revised)
Rule #1: Tax rates will go up by 2030. The Fed needs huge sums of money to pay for unfunded obligations, so taxes will have to go up; otherwise, the country will go bankrupt. Rule #2: In a rising tax environment, there is a mathematically perfect amount of money to have in your taxable and tax-deferred brackets. David explains how you can calculate it. Rule #3: Anything above and beyond the ideal balance mentioned above should be systematically positioned to tax-free. Preferably you don't do it all at once, but quick enough to get all the heavy lifting done by 2026. Rule #4: The type of retirement account you contribute to should be determined by comparing your current tax bracket to your future tax bracket. Rule #5: Roth retirement accounts are your best friend. These vehicles allow you to shift nearly unlimited money from tax-deferred to tax-free. Rule #6: It would be best if you did most, if not all, of your heavy lifting before 2026. You have four years before the tax cuts end, and every year you wait to take advantage of these low tax rates is another year you will have to pay more than you need to. Rule #7: The 32% tax bracket is your enemy. Remember, the 32% tax bracket is 33% more than the 22% tax bracket. So try as hard as possible to avoid it when shifting your money to tax-free. Rule #8: Leave some money in your tax-deferred accounts. David explains that if you shift everything to tax-free, you won't have any taxable income left - which means you will needlessly pay taxes on money that you have received tax-free. Rule #9: Make sure your tax-free retirement plan keeps you below the provisional income threshold that can cause social security taxation. In many cases, your money will run out five to seven years faster if your social security is taxed. Rule #10: Never annuitize your retirement in the tax-deferred bucket. Annuities in your tax-deferred bucket will count as provisional income and cause you all sorts of problems. Rule #11: Not all Life Insurance Plans (LIRP) are created equal. And it only makes sense to get an LIRP if you plan to keep it till death. Rule #12: You will need more than one stream of tax-free income in retirement. There is always the risk that the IRS will legislate one of your tax-free streams of income out of existence. Mentioned in this episode: David's books : Power of Zero, Look Before Your LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com PowerOfZero.com (free video series) @mcknightandco
S1 E216 · Wed, December 21, 2022
Which LIRP is Best For You?
David kicks off the conversation by laying out the 3 basic Life Insurance Retirement Plans (LIRP) and how you can find the best one for your particular situation. For David, an LIRP is like marriage - it's a long-term commitment that you only ever consider if you're willing to keep it until death. If you are looking for absolute guarantees, David explains that no product compares to whole life insurance. The promise to pay a death benefit if the premium has been paid, plus the option of a very stable and safe savings plan, make it attractive for most investors. David points out that the potential to borrow money from a policy is one of the reasons some people buy whole life insurance. However, whole life insurance has its drawbacks. For example, David reveals that unmonitored policy loans can derail your retirement plans or leave you with a significant income tax gain. In the case of Variable Universal Life Insurance (VUL), David explains how the policy has investment subaccounts that allow the insurer to invest the cash value of a policy. Although you may enjoy better-than-average returns with a VUL, your cash value can be significantly reduced due to poor performance of your investment options. The thing that makes Indexed Universal Life Insurance (IUL) attractive is its ability to generate greater upside potential, flexibility, and tax-free gains. However, David explains that the IUL is not designed to be a stock market replacement, nor can you experience the type of return you could get from a VUL. When it comes to ILRPs, David is convinced there is no one perfect solution because all three have distinct attributes. Your job is to find the best one for your situation while protecting yourself against potential downsides. Mentioned in this episode: David's books : Power of Zero, Look Before Your LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com PowerOfZero.com (free video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube
S1 E215 · Wed, December 14, 2022
The Roth Conversion Mistake That Could Sink Your Retirement
David kicks off the conversation by revealing that tax rates will revert to where they were in 2017 - you have only four years to take advantage of the historically low tax rates and do a Roth conversion. David explains that most people will try to accelerate their Roth conversion efforts before the 2026 deadline. The problem with this is that trying to accelerate your conversions could bump you into the dreaded 32% tax bracket. You don't have to be a mathematician to realize that the 32% tax bracket is a 33% increase over the 24% - and an unnecessary expense to your Roth conversion strategy. According to David, the 24% tax bracket is the sweet spot in Trump's tax cuts because for an additional 2% on the margin, you can convert an extra $160,000. David points out that the people who accelerate their Roth conversions and end up in the 32% tax bracket will be paying more to the IRS than is absolutely necessary. David explains why the 32% tax bracket is the riskiest region of our current tax laws. David believes the easiest way to get ahead of the 2026 deadline is to extend your Roth conversions past 2026 to 2028 - the three more years will guarantee that you stay in the 22 and 24% tax brackets. Although taxes are going up in 2026, David believes you don't need to move heaven and earth to complete your Roth conversions. As long as you remain in the future versions of the 22 and 24% tax brackets, you will be safe. Regardless of who takes office in 2024, David maintains that Trump's tax cuts will likely be extended, and the taxes for the American middle class will likely stay the same. David explains why the year you should be worried about is 2030 and not 2026 when it comes to the risk of rising taxes. Mentioned in this episode: David's books : Power of Zero, Look Before Your LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com PowerOfZero.com (free video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube
S1 E214 · Wed, December 07, 2022
The Top 5 Ways to Protect Yourself from Higher Taxes
David starts the conversation by pointing out that more and more financial experts are convinced that tax rates will rise dramatically to pay for unfunded obligations in the future. One way to protect yourself against rising tax rates is to do a Roth Conversion. Taxes will be on sale for another 4 years before they go back to the 2017 highs. If you are serious about retirement planning, David believes you would be wise to take advantage of what he calls "The Tax Sale of a Lifetime." The second way would be to contribute to your Roth 401K. It may make sense for you to stop contributing to your 401K and direct those contributions to a Roth 401K because now is arguably the best time in the history of the US to be making contributions to tax-free accounts. The third point would be to max out on your Roth IRA. As of 2022, you are allowed to contribute $20,500 per year to a Roth IRA and an additional $6500 for catchup if you are above age 50. Point number four is taking advantage of a Health Saving Account. A Health Savings Account allows you to set aside pre-tax dollars to pay for qualified healthcare expenses. Contributions are tax-deductible, grow tax-deferred, and can be distributed tax-free. Last but not least is making contributions to a cash-value life insurance. David explains that Dave Ramsey and Suze Orman may preach against permanent life insurance, but the more experienced financial experts are all for it. A great example is America's IRA Expert, Ed Slott, CPA, who went on live television to declare permanent life insurance as the single most valuable benefit in the IRS tax code. David agrees with Ed Slott that making money from investments is harder than it ever was. The last thing you'd want to do is share your hard-earned gains with the government. Mentioned in this episode: David's books : Power of Zero, Look Before Your LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com PowerOfZero.com (free video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube
S1 E213 · Wed, November 30, 2022
What's the Latest Update for Secure Act 2.0?
David starts the conversation by describing the changes you can expect from SECURE Act 2.0 and what these changes will mean for your retirement plans. According to David, too many workers retire without enough savings to comfortably live. However, SECURE Act 2.0 may change all of that by expanding coverage, increasing amounts on savings, and simplifying the current retirement system. David explains why SECURE Act 2.0 enjoys broad bi-partisan support. Although SECURE Act 2.0 still has a long way to go before being passed into law, the Senior Vice President of NAIFA, Diane Boyle, said she is "optimistic" the bill will be passed into law in 2022. David highlights how one of the more notable changes in the proposed bill will move the date for required minimum distribution from 70 and ½ to 75. Under current law, if you fail to take the right amount in a required minimum distribution, you will be forced to pay a 50% exercise tax. However, with the SECURE Act 2.0, the penalty gets reduced to 25% and down to 10% if you get everything corrected. David believes, if passed into law, SECURE Act 2.0 will encourage more retirement participation. For the workers still paying their student loans, David reveals how the bill will allow employers to match the amount employees pay towards student loans. Several politicians have expressed the desire to get the bill passed before the end of the year. David believes now is the ideal time to get your affairs in order because some changes will come into effect as early as 2023. Mentioned in this episode: David's books : Power of Zero, Look Before Your LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com PowerOfZero.com (free video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube
S1 E212 · Wed, November 23, 2022
Why Does Dave Ramsey Hate Permanent Life Insurance?
David starts the conversation by explaining why financial gurus like Dave Ramsey and Suzzie Orman hate permanent life insurance. With all the financial information floating around on the internet, who do you follow for advice on where to invest your money? David believes everybody's situation is different, but the best people to follow are the ones who are consistent with their messaging. David calls out The White Coat Investor for misleading people that interest rates won't go up, only for him to change his mind when Biden's tax proposals threatened to raise taxes. According to David, there are two sides to every investment advice on the internet. Instead of stubbornly following one narrative and muting everything else, your job as an investor is to listen to both sides of the story and decide based on your current situation. When meeting with an investment advisor, David believes the least you can do is ask as many questions as possible. There is so much controversy around permanent life insurance because gurus like Dave Ramsey and Suzzie Orman have continuously peddled lies that life insurance doesn't compare well to the stock market and that the expenses are too high - both of which are false. For David, permanent life insurance is like marriage; you should only invest in one if you plan to keep it till you die. Although most financial advisors agree that interest rates will go up, David feels they need to take more action. Believing is one thing, but taking action to mitigate the risk of higher tax rates is a whole different story. When asked what advice he would give to people approaching retirement, David explains they only need to plan for two things - higher taxes and outliving their money. For the younger people who are not that close to retirement, David notes that tax rates will undoubtedly be higher in the future. So now would be a good time to take advantage of all the tax-free savings tools at their disposal. Mentioned in this episode: David's books : Power of Zero, Look Before Your LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com PowerOfZero.com (free video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube <a href= "https://www.amazon.com/Comeback-America-David-M-Walker-audiobo
S1 E211 · Wed, November 16, 2022
How Do I Protect My Pension From Rising Taxes?
In this episode of The Power of Zero Show , David McKnight talks about what you can do to protect your pension in the current rising tax environment. David explains that tax rates will rise dramatically within the next 10 years due to massively unfunded obligations like Social Security and Medicare. According to former Comptroller General of the United States, David Walker, tax rates will likely double by 2030 to keep the country from bankruptcy. Given the impending doom, David believes it's time we all start to think about protecting our taxable income streams. David highlights that the pre-tax amount on your pension might be guaranteed, but your after-tax amount is not. If you'd like to protect your pension from higher tax rates, David explains the first step would be to consider a lump sum pension distribution option. If this option is available for you, it would be advisable to move as much money into a Roth IRA to shield your dollars from the impact of higher taxes. However, when moving pension dollars into an IRA, David reveals you must move slowly enough so you don't move into a tax bracket that gives you heartburn, and fast enough that you don't get caught up with higher tax rates. David discusses the role of tax-deferred retirement accounts when combating the impacts of rising tax rates. Mentioned in this episode: David's books : Power of Zero, Look Before Your LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com PowerOfZero.com (free video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube
S1 E210 · Wed, November 09, 2022
Will There Be a Great Depression in 2030?
In this episode of The Power of Zero Show , David McKnight shares evidence that unless there is immediate and dramatic fiscal realignment by the Federal Government, the U.S. will be mired down in a Great Depression by 2030. Citing Brian Beaulieu, David discusses the role Baby Boomers play when it comes to Beaulieu's prediction of the U.S. undergoing a Great Depression beginning in 2030. David shares that Maya MacGuineas’ recent study showed that, just to prevent the debt from growing at a rate in excess of $1trillion per year by 2025, the Government would have to raise taxes on any dollar earned above 400,00 to 102%. David brings David Walker's words into the conversation. According to Walker, on average, Americans pay about 21% of their income to federal taxes, and another 10% to state and local governments. By 2030, to pay the rising bills, that amount could be at least 45%, even higher that the average 42% that most Europeans pay. David talks about a couple of points Brian Beaulieu, David Walker, and Maya MacGuineas seem to be in agreement on: that tax rates will have to go up dramatically by 2030 and that politicians are likely to kick the can down the road. David touches upon what you can do to best prepare for the Great Depression of 2030. Mentioned in this episode: David's books : Power of Zero, Look Before Your LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com PowerOfZero.com (free video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube POZ Video: How High Will Biden Have to Raise Your Taxes? Comeback America by David M. Walker Brian Beaulieu David M. Walker Maya MacGuineas
S1 E209 · Wed, November 02, 2022
A Massive Increase to 401(k) Contribution Limits and Other IRS Thresholds
This episode of The Power of Zero Show addresses the recently-released new contribution limits for the 401(k) in 2023, as well as additional increases in other IRS thresholds. David shares that the IRS just released all their inflation-adjusted numbers for 2023. The biggest surprise is a 9.7% increase in the limits for the 401(k) contributions, which went from $20,500 this year to $22,500 next year. In addition to the contribution limits for the 401(k), the IRS has also increased the catch-up contributions for people over 50. According to David, the Roth 401(k) has become one of the real juggernauts for those looking to build huge amounts of tax-free retirement wealth. David goes over some of the additional changes and increases, as well as their repercussions on single people, married couples, and people over 50. David reiterates the fact that the 24% tax bracket is the single biggest sweet spot in the Trump tax cuts, and goes over what will happen if you aren’t going to take advantage of it. Mentioned in this episode: David's books : Power of Zero, Look Before Your LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com PowerOfZero.com (free video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube
S1 E208 · Wed, October 26, 2022
Should You Convert Your IRA While the Market Is Down?
Today’s episode of The Power of Zero Show is a segment of an interview David did with financial advisor, Ron DeLegge. They discuss, among other things, whether it’s a good idea to convert your Roth IRA while the stock market is down. David shares that there’s no such thing as a 0% tax bracket in the U.S. tax tables. Zero describes the condition of someone in retirement who isn’t paying tax. Being in the 0% tax bracket doesn’t happen by accident, says David. It’s the result of planning and proactively trying to have a series of tax-free financial streams that include Roth IRA, Roth Conversions, and some form of Life Insurance Retirement Plan. Dave and Ron discuss the true cost of waiting when it comes to tax rates, and whether it makes financial sense to use the market decline to execute Roth IRA conversions to limit taxes. Having too much risk inside their investment portfolio is one of the big mistakes made by retirees – David explains why that should be a concern for those approaching retirement. Mentioned in this episode: David's books : Power of Zero, Look Before Your LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com PowerOfZero.com (free video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube ETF Guide Video: The Math Behind Roth Conversion Procrastination ProPublica article Lord of the Roths: How Tech Mogul Peter Thiel Turned a Retirement Account for the Middle Class Into a $5 Billion Tax-Free Piggy Bank
S1 E207 · Wed, October 19, 2022
Should the Federal Government Get Rid of the Roth IRA?
Today’s episode of The Power of Zero Show addresses the question ‘Should the Federal Government get rid of the Roth IRA?’ In a recent MarketWatch article, Alicia Munnell, founder of Boston College’s Center for Retirement Research, opined that it’s time to start thinking about getting rid of the Roth 401(k) and the Roth IRA – and gave three reasons why. Firstly, Munnell believes that Roth IRAs can be hijacked by Congress to pay for expensive partisan legislation. Secondly, she thinks that Roth IRAs should be eliminated because they can turn into tax dodges for high rollers like Peter Thiel. And thirdly, Alicia Munnell makes the case for Roths being an obstacle to fairer tax incentives. According to David, Munnell’s points seem to overlook the fact that tax-free retirement instruments like the Roth IRA and Roth 401(k) are some of the only tools Americans have to shield themselves from the impact of higher taxes down the road. Mentioned in this episode: David's books : Power of Zero, Look Before Your LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com PowerOfZero.com (free video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Alicia Munnell’s MarketWatch article - Roth IRA and Roth 401(k): the World Would Be a Better Place Without Them Boston College’s Center for Retirement Research ProPublica article Lord of the Roths: How Tech Mogul Peter Thiel Turned a Retirement Account for the Middle Class Into a $5 Billion Tax-Free Piggy Bank David Walker
S1 E206 · Wed, October 12, 2022
The Truth about Suze Orman
In this episode, David tells the truth about Suze Orman, who’s been giving financial advice for the last 25 years and has some pretty black and white positions on most financial subjects. Suze Orman doesn’t seem to be a fan of cash value life insurances because of its perceived high expenses. The problem of her approach, according to David, is the fact that it looks at the annual expenses in the early years of the life insurance contract and projects those out over the life of the policy. However, that isn’t how things typically work. In real life, the longer you keep your policy, the lower the average internal expenses go. For David, whoever is dealing with a financial advisor recommending that their clients roll their entire IRA into life insurance policies should run the other way. The fundamental issue David sees is the one-size-fits-all financial planning advice dispensed by some mainstream financial gurus. The problem lies in wealthy people not wanting to have a generic financial plan, rather a customized, comprehensive and balanced approach to retirement planning. David calls out mainstream financial gurus like Dave Ramsey, Clark Howard, and Suze Orman for being generalists, instead of experts on specific facets of financial planning. Mentioned in this episode: David's books : Power of Zero, Look Before Your LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com PowerOfZero.com (free video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Suze Orman
S1 E205 · Wed, October 05, 2022
How to Supercharge Your Roth Conversion with a Reverse Mortgage
David had been skeptical about reverse mortgages and now considers himself a “late convert.” Don Graves sees reverse mortgages as a financial planning tool cleverly disguised as a mortgage. Using a football analogy, think of a reverse mortgage as the 11th player on the team (along with income, pension, social security, etc.), which will increase the chances of you winning. Don explains why reverse mortgages should be considered a tax-free stream of income, right along with Roth IRAs, Roth 401ks, Roth conversions, LARPs, and so forth. The idea is that, when you take income by way of a reverse mortgage, it’s a true tax-free stream of income. This income does not count as provisional income, thus not counting as a threshold that causes Social Security taxation. Don shares a couple of examples of how reverse mortgages can lead to great outcomes. Don describes the profile of the typical person for whom the reverse mortgage strategy may apply. Mentioned in this episode: David's books : Power of Zero, Look Before Your LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com PowerOfZero.com (free video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube HousingWealth.net AskDonGraves@gmail.com Ed Slott
S1 E204 · Wed, September 28, 2022
Is the Federal Government Going to Tax Your Roth IRA?
David suggests avoiding the shift of everything out of your IRA or 401k into the tax-free bucket because, by doing so, you would then have a standard deduction in retirement that sort of sits idle. $25,900/year is the standard deduction for a married couple. According to David, what you want to do is to be very careful about not converting too much money from the tax-deferred bucket. Most retirement savings are in tax-deferred vehicles, says David. Roth IRAs are the one thing that both consumers and the Federal Government like because they lead to you using after-tax dollars and it gives more revenue to the Federal Government – and it does so today, not in 20 years. For David, the Federal Government has several tools to deal with inflation. Raising interest rates as a possible solution can create a scenario where both interest rates and the cost of servicing the national debt go up. Mentioned in this episode: David's books : Power of Zero, Look Before Your LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com PowerOfZero.com (free video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube The Wealth & Freedom Nexus Podcast David Walker Stephanie Kelton
S1 E203 · Wed, September 21, 2022
How to Take Money Out of Your 401(k) or IRA 100% Tax-Free
David’s latest book, the 75,000-word novel The Infinity Code , is set to be released on September 27th. David says that the U.S. is facing a math problem of gigantic proportions: they have promised way more than they can afford to deliver in regards to Social Security, Medicare, and Medicaid. The issue is caused by a democratic glitch in the sense that the Baby Boomer generation has far fewer children than their parents had – leading to fewer people putting money into the government programs than those taking that money out. According to several experts, David discusses, tax rates will have to double sooner or later to keep the system working. The problem is that most Americans who are putting money into 401k and IRAs are living in the old paradigm of “putting money into these types of tax-deferred programs to get a tax deduction today, and postpone the payment of those taxes to tomorrow”. When people “obsess” over wanting to convert every last dollar in their 401k or IRA to a Roth 401k or Roth IRA, they run into the risk of not having any income left in retirement, would they pay taxes on all those dollars. A standard deduction of $25,900 is all a married couple in the scenario described above may be left with in retirement. David talks about the fact that most people don’t realize that their Social Security can be taxed. When they find out, they’re mad because it feels like a double tax. David debunks a sort of myth: it isn’t true that the same limitations that apply to a normal Roth IRA apply to Roth 401ks and Roth conversions. Mentioned in this episode: David's books : Power of Zero, Look Before Your LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com PowerOfZero.com (free video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube
S1 E202 · Wed, September 14, 2022
"Financial Advisors Are a Rip-off!"
Today’s episode addresses claims by the likes of Suze Orman, The White Coat Investor, and Clark Howard that financial advisors are a rip-off. After 25 years in the industry, David can say without a doubt that not all financial advisors are created equal. A good financial advisor will increase the likelihood that your retirement savings will last through life expectancy. According to a Vanguard study, tapping into the services of a financial advisor could help you improve your results by as much as 3% points annually. They can do so through three things: 1) By helping you stick to your plan and avoid making emotion-driven investments. 2) By setting you up with a sensible asset allocation that incorporates quarterly rebalancing. 3) Help you keep fees low by guiding you to low-fee alternatives. David talks about the fact that most Americans don’t have a CPA and use software like TurboTax or services such as H&R Block to do their taxes. The problem with this is that these types of services are not paid or motivated to advise you on taxes you might pay on retirement distributions 20 or 30 years down the road. CPAs themselves are not very motivated to save your taxes on your 401k IRA distributions, as their main goal is often to help you save on taxes today. David shares three key things a good financial advisor can help you with: 1) to increase the rate of return on your investments. 2) to help you save on taxes at a time when you can least afford to pay them, like retirement. 3) to completely purge longevity risk from your retirement picture. For David, a qualified financial advisor, through sophisticated retirement planning software, can help you anticipate what your tax burden might be years down the road and set up a plan that helps you maximize your after-tax cash flow in retirement. David discusses the Longevity Risk, a situation in which investors go at it alone, seeking to neutralize longevity risk by attempting to follow the 4% Rule. The 4% Rule states that if you never take out more than 4% of your retirement savings in a given year, you have a reasonably high chance that your nest egg will last through life expectancy. The 4% Rule has recently been downgraded to the 3% Rule because some experts believed that the 4% Rule was built around overly optimistic and outdated variables. For David, things aren’t as easy as they may appear because of what he calls the “Illusion of Liquidity.” Having money sitting around – as per the 3% Rule – can often lead to it being seen as an emergency fund or even a slush fund. Mentioned in this episode: Suze Orman The White Coat Investor Clark Howard <a href="https:
S1 E201 · Wed, September 07, 2022
Hastening the Debt Apocalypse – Student Loan Forgiveness
Today’s episode focuses on the impact of Joe Biden’s student loan forgiveness program on the fiscal trajectory of the U.S.. David shares that Biden’s plan has only one stipulation: your annual income must be less than $125,000 as a single person (or $250,000 for a married couple). The program only concerns federal student loans. and you can have up to $20,000 in student loans forgiven if you received a Pell Grant. Otherwise the limit is $10,000. David questions whether Biden could do what he has planned, something that seems to be suggested by David Walker – former Comptroller General of the Federal Government – as well. David quotes Dr. Larry Kotlikoff who touches upon the fact that up to three million Americans over 60 are still paying off their student loans. For the non-partisan Penn Wharton, President Biden’s plan includes three major components. They estimated that the debt cancellation alone will cost up to $519 billion, while the loan forbearance will cost another $16 billion, and the new income-driven repayment IDR program would cost another $70 billion. According to Maya McGinnis, President of the bipartisan Committee for a Responsible Federal Budget, Biden’s plan will do nothing to actually make education more affordable – meaning that it will likely drive up tuition costs, all while raising prices on a variety of other goods and services for ordinary Americans. Even the Washington Post concedes that the Biden plan will cause tuition to increase more rapidly, primarily due to its income driven repayment IDR provisions. David illustrates how the approach of Biden’s plan will encourage students to take out more debt and colleges to charge more in tuition, and how this will impact you as you’re trying to get to the 0% tax bracket. Mentioned in this episode: Will the Inflation Reduction Act Raise Your Taxes? This Could Increase Inflation David's books : Power of Zero, Look Before Your LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com PowerOfZero.com (free video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube
S1 E200 · Wed, August 31, 2022
The Truth About Ken Fisher (Are Annuities Bad?)
Ken Fisher dislikes annuities. He is not shy about it and became controversially famous with his 'I Hate Annuities' campaign. But is his hatred justified? First, Fisher's claims that annuities have 'nosebleed' fees is just wrong. Most of them don't have any fees. The only exception is variable annuities, but the investor gets a guaranteed lifetime stream of income in exchange. Do annuities keep the promise they make to investors? Ken doesn't believe they do. But as David explains, annuities ensure a retiree never runs out of money, which is the one thing retirees fear more than death. When it comes to withdrawing money during retirement, the 3% Rule is one of the most effective strategies you can use today. According to David, Fisher's claims that annuities always mean more taxes is completely false. You can essentially solve all your tax problems by implementing what David calls the Piecemeal Internal Roth Conversion. Fisher argues that annuities do not have a liquidity option. Yes, annuities do have surrender fees, but as David explains, most people don't need liquidity because their investments already guarantee they won't outlive their money. Another of Fisher's issues with annuities is the abnormally huge size of annuity contracts. David counters that claim by saying he's seen dozens of contracts, and they are not as complicated as Fisher paints them to be. Can annuities provide any real value to the average investor? Fisher thinks they can't. David, however, highlights that annuities offer value in ways no other investment vehicle can - your living expenses are taken care of regardless of the market environment, forever. Fisher also maintains that financial advisors are the only people who gain anything from annuities. That's a little disingenuous coming from a person who built a $7 billion business from financial advising. If anything, Ken Fisher is consistent - consistently wrong on all his criticisms of annuities. David further adds that his advice is dangerously misleading and primarily aimed at getting you to transfer your assets over to Fisher Investments. Mentioned in this episode: Financial Fast Lane on YouTube David's books : Power of Zero, Look Before Your LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com PowerOfZero.com (free video series) @mcknightandco on Twitter <a href="https://www.instagram.com/davidcmcknight" target= "_blank"
S1 E199 · Wed, August 24, 2022
When Should You Use an LIRP?
Lane Martinsen from Financial Fast Lane interviews David McKnight on why you should use LIRP and the benefits of getting to the zero percent tax bracket. David explains the motivation behind his book The Power of Zero. David reveals why he is convinced that future tax rates will be significantly higher and why it makes sense to be in the zero percent tax bracket in retirement. If you are in or approaching retirement, David recommends taking advantage of the historically low tax rates before the current tax code expires in 2026. According to David, the most effective retirement planning technique combines all available tax-free strategies. Does the 0% tax bracket really exist? David explains how Americans can get into the zero percent tax bracket without trying to game the IRS. David goes through the strategies that can shield you against the risk of a higher tax bracket - and the main components of a comprehensive approach to tax-free retirement. David breaks down what Life Insurance Retirement Plan (LIRP) is and why it's so effective when it comes to tax-free retirement. David reveals the holy grail of retirement planning and what it entails. Numerous studies have shown that the number one concern for retirees is not the risk of paying higher taxes, but the fear of outliving their money. David talks about his second book, Tax-Free Income For Life, and how it can potentially help retirees mitigate longevity and tax rate risk through sane financial planning. David's advice to retirees and people nearing retirement: Rising taxes are inevitable. Don't let a year go by without taking advantage of the historically low tax rates. Mentioned in this episode: Financial Fast Lane YouTube Channel David's books : Power of Zero, Look Before Your LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com PowerOfZero.com (free video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube
S1 E198 · Wed, August 17, 2022
Did Joe Biden Just Solve the National Debt Crisis?
Did Joe Biden just solve the national debt crisis? Here’s why you shouldn't be celebrating just yet. David explains why most people believe passing the Inflation Reduction Act might be the first step to taming inflation and curbing the national debt crisis. According to Maya MacGuineas, the President of the Committee for a Responsible Federal Budget, this legislation represents an essential first step toward fixing the debt crisis by enacting several policies related to energy, climate, health care, and the tax code. David points out that Maya is brilliant at what she does, but she might be wrong on this one because the data actually paints a totally different picture. The numbers according to statista.com reveal the national debt is projected to be over 30.6 trillion by the end of 2022 and 43.3 trillion by the end of 2031. David explains that since the Inflation Reduction Act will only save $313 billion over the next 9 years, it does nothing to reduce the current debt. It only slows the growth of the debt by a measly 2.5%. As far as fixing the national debt crisis is concerned, David is convinced that the only way to drive change is to increase revenue and reduce spending. The Inflation Reduction Act will introduce numerous impactful activities that might reduce government spending and solve inflation, but David feels it's not a serious attempt to fix the national debt. As David explains, with the national debt crisis growing into an intractable problem, being in the zero percent tax bracket is now more important than ever. Mentioned in this episode: David's books : Power of Zero, Look Before Your LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com PowerOfZero.com (free video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube
S1 E197 · Wed, August 10, 2022
The Inflation Reduction Act of 2022--Will It Raise Your Taxes?
David breaks down the Inflation Reduction Act of 2022 and how the bill will potentially curb inflation by reducing the deficit, investing in domestic energy production, and promoting clean energy solutions. As far as Biden's Build Back Better Initiative is concerned, imposing more taxes on individuals and couples who make $400k and $450k per year, respectively, is one of the major factors that contributed to the bill not going through. David analyzes whether the inflation Reduction Act will increase taxes for all Americans. David reveals the glaring errors in the proposed inflation act and whether changes to the bill will mean an end to Trump's tax cuts. David explains how Biden's Build Back Better plan would have created an inflationary environment. David demonstrates how the new tax laws are comparable to kings from the past imposing taxes on individuals based on crop yield in a matter that's unfavorable to the farmer. David breaks down the key components of the Inflation Reduction Act of 2022 and how, if passed, might cure the inflation symptoms we're seeing right now. The Inflation Reduction Act will introduce numerous government spending activities. Where will all this money come from? David believes these projects will be funded by more taxes. As David explains, the passage of the bill will, directly and indirectly, affect all Americans, especially since higher taxes for businesses translates to higher costs for the concerned products or services. Mentioned in this episode: David's books : Power of Zero, Look Before Your LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com PowerOfZero.com (free video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube
S1 E196 · Wed, August 03, 2022
Whole Life vs. Indexed Universal Life and More…
David is asked about the pros and cons of the Indexed Universal Life – or LIRP – and what to look for when researching it. As far as LIRPs are concerned, David suggests looking for contracts that are both tax- and cost-free. David discusses some mistakes that some experts such as Dave Ramsey make when talking about ‘buy term, invest the difference’. David explains that running out of money before running out of life is one the biggest risks retirees are facing today – and goes over two ways to prevent that from happening. David is asked for his predictions on how the current fiscal trajectory is going to affect housing prices, your bottom line and wallet. David recommends that young people try to be more inclined to contribute to tax-free today due to the fact that taxes are likely going to be higher when they’re in retirement compared to what they are at the moment. Mentioned in this episode: David's books : Power of Zero, Look Before Your LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com PowerOfZero.com (free video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube
S1 E195 · Wed, July 27, 2022
How to Mitigate Long-term Care Risk…Without the Heartburn
David shares that he got into the industry during the “calm before the storm.” It was 1997 and, during the State of the Union, President Bill Clinton announced that the national deficit was simply zero. Today, less than 25 years later, the national debt is $30 trillion. By 2010, however, David Walker – former Comptroller General of the Federal Government and a personal hero of David’s – appeared on 60 Minutes saying that tax rates would have to double in order to keep the country solvent. 2010 also saw David McKnight starting to go around the country trying to warn and help people, and that’s when he developed a presentation, which then turned into his 2014 book The Power of Zero. David explains that there are three basic types of accounts within which you can invest money for retirement and that the first two – the taxable bucket with yearly payments and the one with payments only at the end – are problematic given the rising tax environment. David’s focus over the years has been on teaching people how to reposition their money from taxable and tax-deferred to tax-free so that all heavy lifting will be done by the time tax rates increase. All of the experts David interviewed during his documentary shared the same message: “If we don’t change the course as a country, tax rates within the next 10 years will have to increase dramatically”. Some experts even went further than that, claiming that the U.S. will go broke as a country unless tax rates are doubled. David’s main goal is “to put 100,000 people on the road to the 0% tax bracket in the next 10 years”. David illustrates the fiscal gap accounting concept and point of view of Boston University’s Doctor Larry Kotlikoff, who was featured in the documentary as well. His point of view seems to paint a much more dramatic picture with the national debt standing at $239 trillion. David shares the story of The White Coat Investor, a doctor out of Salt Lake City who believes that David’s advice in his book The Power of Zero isn’t good advice because “tax-free Roth Conversions are the devil”. Despite this, he eventually came around to David’s suggestions. For David, the country is facing a completely politically-neutral issue: the maths problem of the U.S.’ fiscal problems. David discusses why everyone should look at LIRPs as a valuable tax-free income stream. Mentioned in this episode: David's books : Power of Zero, Look Before Your LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com PowerOfZero.com (free video series) <a href="https://twitter.com/McKnigh
S1 E194 · Wed, July 20, 2022
Can You Retire on Life Insurance Alone?
There's this belief among financial experts that life insurance is the financial silver bullet. However, as David explains, that's not 100% accurate. Yes, life insurance can mitigate every retirement risk and solve all forms of retirement problems, but it's never a safe bet when implemented all on its own. A Life Insurance Retirement Plan (LIRP) should not be the only cog in your retirement machine because retirement is all about squeezing as much juice as possible from all available tax-free accounts. David demonstrates how no two tax-free retirement plans are created equal. The people that enjoy stress-free retirement are the ones that strategically take advantage of more than one tax-free retirement account. The first reason you shouldn't go all-in with life insurance is the wisdom of not putting all your eggs in one basket. The sequence of returns risk is the other major reason why it doesn't make sense to retire on LIRP alone. This essentially means a phase when you're forced to take money out of your retirement plan in a down market. David describes how the timing of withdrawals from a retirement account can influence how long an investor's money lasts during retirement. Low returns early in retirement can deplete a retiree's portfolio faster than initially anticipated. Going bankrupt during retirement is detrimental because, if you don't have at least a dollar in cash value to your name, the IRS makes you pay all the foregone taxes up to that point in your life, all in one year. LIRP is not a substitute for the stock part of your portfolio. Its growth is not sufficient enough to stretch your retirement dollars through life expectancy. David explains that if you retire at 65, your money must last for at least another 30 years. The stock market is well suited to such a scenario if structured efficiently. David recommends doing one thing to safeguard your retirement: diversify as much as possible. Mentioned in this episode: David's books : Power of Zero, Look Before Your LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com PowerOfZero.com (free video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube
S1 E193 · Wed, July 13, 2022
The Bombshell in the 2022 Social Security Trustees Report
David shares that the 2022 Trustees Report raises a sharp warning cry about the catastrophic short- and long-term trajectories of the Social Security program. The surplus that had built up over the years as Baby Boomers plowed money into the Social Security program is beginning to draw down as the same Baby Boomers are moving out of the workforce at the tune of 10,000 per day. David talks about the fact that, at the current pace, the trust fund will run out in 2035, and the incoming revenue based on the current levels of taxation would only be enough to pay 80% of scheduled benefits. Historically, Social Security has provided the average retiree with roughly 38% of their average income during their working years – that number should go down to 27% by 2035. This means that Social Security will be playing a smaller and smaller role and that you’ll have to save even more of your paycheck in order to compensate. For Social Security to remain fully solved throughout the next 75-year project (ending in 2096) there are three possibilities. David raises a key concern that’s brought into the conversation by Social Security Trustees: if Congress acts now, the pain of fixing this program can be spread among Baby Boomers, Gen X’ers, Millennials, etc. However, for each year that goes by without a permanent fix for the Social Security program, the pain will get concentrated on fewer and fewer generations. This means that the longer Congress waits, the higher the taxes these younger generations can expect and the lower their Social Security benefits. David recommends doing two things from a retirement perspective: save money today to be less reliant on Social Security during your retirement, and invest tax-free. Mentioned in this episode: David’s books : Power of Zero, Look Before Your LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com PowerOfZero.com (free video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube
S1 E192 · Wed, July 06, 2022
The Anatomy of a Debt Apocalypse
One of David’s jobs as the host of the Power of Zero Show is to constantly remind listeners of the horrifying fiscal outlook the U.S. is facing. This episode looks at components that are contributing to this “fiscal apocalypse”. David Walker, former Comptroller General of the Federal Government, sees the Debt-to-GDP ratio as something worth focusing on. Currently, it’s about 108% – about the same percentage as in the immediate wake of World War II. However, it’s projected that it could increase up to 185% by 2052. Not being able to find a way to live within our means seems to be the root cause of this issue. By 2052, Federal spending will equal 30% of GDP, while actual revenue will remain at about 18% (based on current tax rates). David discusses the cost of servicing the U.S.’ burgeoning national debt – which currently sits at about 1.5% of the country’s GDP but that number is projected to reach 7.2%. The fact that the Fed has begun increasing interest rates in a historic way has been evident. On June 15th, for instance, they raised the Federal rate ¾ of a point, the largest increase since 1994. And most economists predict an additional ¾ of a point in July. David talks about non-discretionary spending, the spending over which we have absolutely no control. We’re either required to pay by law, like in the case of Social Security, Medicare, and Medicaid, or by the U.S. Constitutions – like in the case of interest on national debt. David shares that, as we head toward 2052, non-discretionary spending tends to level off. However, the cost of Social Security, Medicare and Medicaid, as well as the interest on national debt, begins to shoot through the roof. The main issue isn’t discretionary spending, but rather non-discretionary spending, and that’s what will eventually either bankrupt the U.S. or force your taxes to double. According to David, the aging of America is the main driver of all this debt. It’s estimated that the cost of healthcare will rise to 20% of the entire economy. Additionally, by 2030, an astounding 70 million Americans will be age 65 or older and will qualify for Medicare, Medicaid, and Social Security. And if that wasn’t enough, it’s estimated that the number of Americans contributing to Social Security for every one person that takes money out will drop from the current 2.8 to 2.2 by 2042. David shares that in order to fully fund Social Security between now and 2035, the U.S. would have to have $2.9 trillion, but the country currently has no funds. With Social Security trust funds likely to be depleted by 2035, Social Security will have to be funded purely off of incoming revenue. There are three scenarios that you could potentially face: a cut in your Social Security, a tax increase, or some combination of the two. When it comes to consequences for individual families, David predicts a paycheck decrease: a four-person family wil
S1 E191 · Wed, June 29, 2022
The Five Things Your LIRP Must Have
Life insurance retirement plans or LIRPs are long-term propositions. They only really work if you think of them like a marriage, meaning they work best if it's until death do you part. Don't start an LIRP unless you're planning on dying while it's enforced, even if that means you have to keep it for 40 or 50 years. Your LIRP needs to be a 0% loan. One of the things that makes the LIRP so appealing is that you can take the money out tax free, and you do that by way of a loan.. An LIRP may be tax free, but it’s not cost free. For starters, you aren't actually taking a loan from your own policy. You're taking the loan from the life insurance company and you're using your policy's cash value as collateral for that loan. I will explain how it works in this episode. Some companies say that their current practice is to charge you 3%, but they reserve the right to charge you four, five or eight percent at their leisure, sometime down the road. And the longer you give them to decide, the more detrimental. Your loan provision is the single most important provision in the entire contract. You absolutely have to make sure that you understand your loan provision and its implications before you ever sign on the dotted line. The second thing your LIRP absolutely must have is interest charge in arrears (vs charge you interest in advance). If you give it to them at the beginning of the year, as opposed to the end of the year, you'll lose out on what that money could have earned for you. The third thing you must insist that your LIRP have is daily sweeps. Some companies are so small that they have to wait anywhere from three to six months to pull up enough assets to where it's cost effective enough to purchase the options required to make those assets grow. In other words, it’s not going into your growth account and making you money right away. Make sure your LIRP has an overloan protection rider. This means that when your cash value drops to a certain point, the insurance company will give you the option of having them essentially take over the policy. They will reduce your policy's death benefit to the point where the remaining cash value essentially pays the policy up. What if you die before the policy is up? Don’t worry - you won’t have paid something and never get it back. Someone's still getting a death benefit, probably your kids or your grandkids. So there isn't really that sensation of having paid for something you hope you never have to use. Mentioned in this episode: David’s books : Power of Zero, Look Before Your LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com <a href="https://www.powerofzero.com" targe
S1 E190 · Wed, June 22, 2022
Catch 22: Inflation or Recession?
Today’s episode addresses the question ‘Do we continue to let inflation run roughshod over our purchasing power, or do we raise interest rates and risk plunging our country into a recession?’ David states that Federal Reserve Chair Jerome Powell is fast approaching a grim crossroad in which he may have to raise interest rates in order to rein in out-of-control inflation. David explains how Venezuela recently had inflation approaching 40%, and its government decided to raise interest rates to 42% – and he feels that, soon, Jerome Powell may have to decide whether to take similar action. In other words, Powell seems to be destined to push the U.S. economy into a recession in order to rein in inflation. David cites Bloomberg Economics’ chief U.S. economist Anna Wang, who put the chance of recession in 2022 at 1 in 4, while a year from now it will go up all the way to 3 and 4. She sees a downturn this year as an unlikely event and says that a recession in 2023 will be tough to avoid. Mentioned in this episode: David’s books : Power of Zero, Look Before Your LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com PowerOfZero.com (free video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube
S1 E189 · Wed, June 15, 2022
The Dave Ramsey Buy Term and Invest the Difference Fallacy
This episode focuses on the unsettling math behind Dave Ramsey’s recommendation to buy term and invest the difference. David shares the definition of the ‘Buy Term and Invest the Difference’ approach, and talks about Ramsey’s claim that permanent life insurance is a rip-off. For David, Dave Ramsey makes a big mistake for the fact that his analysis doesn’t include two major expenses: the cost of term life insurance and the expense ratio inside Roth accounts. David feels that Dave Ramsey omits key details about permanent life insurance over time, in an attempt to justify his claim that permanent life insurance is a rip-off. David suggests making your permanent life insurance the bond portion of your overall investment portfolio. His advice is to reach into your current investment portfolio, take out your bond allocation, and replace it with permanent life insurance. David discloses that he isn’t trying to make the case that you should put all of your money into the LIRP – what Dave Ramsey calls permanent life insurance. He suggests that Ramsey has taken a disingenuous approach in his claim that ‘Buy Term and Invest the Difference’ is the only way to go. Mentioned in this episode: David’s books : Power of Zero, Look Before Your LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com PowerOfZero.com (free video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube
S1 E188 · Wed, June 08, 2022
Could Inflation Lead to Higher Taxes?
David shares a stat from the US Labor Department: as of May 11th, inflation over the last 12 months through April of 2022 has been 8.3%. David explains that the general belief is that inflation doesn’t necessarily translate to more taxes because the IRS has been historically good at indexing tax brackets to keep up with inflation. However, he says, there are a few thresholds in the IRS tax code that aren’t indexed to keep up with inflation – and could result in you paying higher taxes. Social Security, for instance, counts as provisional income. This represents a problem because as your Social Security rises to keep up with inflation, you get pushed closer to the provisional income thresholds. This may not seem like a big deal if inflation increases at the historical rate of 3%, but initial projections show that, in 2023, Social Security could go up to 8%. Selling your primary residence is another area where inflation could cause you to pay more taxes. David explains that profits up to $250,000 – or $500,000 if you’re married – from a sale of your primary residence are tax-free. However, since this number hasn’t been adjusted to keep up with inflation since 1997, you run into the risk of your profit being subjected to capital gains tax if your home value increased as a result of inflation. The Obamacare surcharge is another area where inflation can “hammer you”, says David. David discloses that inflation could force you to pay a double tax on the sale of a home. The Salt Tax, a $10,000 limit on the Federal tax deduction, hasn’t been changed since 2018. This means that if your income goes up, your state and local taxes rise commensurately – and a smaller and smaller percentage of that ends up being deductible on your Federal tax. A “tax bracket creep” is when tax brackets fail to adjust for changes in consumer purchasing power due to inflation. Some experts, David shares, think that the adoption of the Modern Monetary Theory in the form of printing tons and tons of money would also cause a dramatic rise in taxes. David believes that getting to the 0% tax bracket in retirement is the best way to shield yourself against all the taxes impacted by inflation. Mentioned in this episode: TaxFoundation.org David’s books : Power of Zero, Look Before Your LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com PowerOfZero.com (free video series) @mcknightandco on Twitt
S1 E187 · Wed, June 01, 2022
The Biggest Objection to a Tax-Free Retirement
“I don’t want to pay the taxes on my Roth Conversion” is the single greatest objection David sees every week. David believes that whoever makes that argument is basically saying that they don’t want to pre-emptively pay a tax before the IRS absolutely requires it of them and that they think their tax rate down the road will be lower than it is today. He sees the latter point as the greater concern. For David, if you’re in the 22% or 24% tax brackets – meaning that your taxable income is between $83,550 and $340,100 – but are pushing the payment of taxes on your Roth Conversion down the road, you’re actually missing out on a good deal. Ten years from now, he argues, when the country’s tax rates will have risen dramatically, you’re going to end up realizing that you missed out on a deal of historic proportions. David sees not being convinced that tax rates in the future are likely going to be higher than they are today and being reluctant to pay the cost of admission to the tax-free bucket as the greatest roadblock in getting you to the 0% tax bracket in retirement. In case you feel as if you’re in the situation described above, David suggests educating yourself on what independent, third-party, experts have to say about the future of tax rates – and he recommends reading chapter 1 of his book Power of Zero and watching the documentary The Power of Zero: The Tax Train Is Coming . David shares that, historically, tax rates have been substantially higher than they are today. Marginal tax rates post WWII were 94%, and marginal tax rates in the ‘70s were 70%. The highest marginal rate today is 37%. These rates have nowhere to go but up. All the experts that were interviewed for The Power of Zero documentary said the same thing: if we don’t change course immediately, ten years from now tax rates will have to rise dramatically or we’ll go broke as a country. Some of them even said that tax rates will have to double or we’ll go broke as a nation. David touches upon quotes from a MarketWatch article of his that featured insights from Ray Dalio, Leon Cooperman, Ed Slott, Larry Kotlikoff, and Larry Swedroe regarding the future of tax rates in the next ten years. David brings up a key question you should ask yourself: wouldn’t you rather pay taxes today, on your terms, than postpone the payment of those taxes until the IRS forces you to pay them on their terms? Mentioned in this episode: David McKnight vs Financial Guru (Part 1): powerofzero.com/blog/Power-of-Zero-vs-White-Coat-Investor-David-McKnight-Response David McKnight vs Financial Guru (Part 2): <a href= "https://www.powerofzero.com/blog/the-white-coat-investor-responds-and-i-rebut-his-response" target="_blank" rel= "noopene
S1 E186 · Wed, May 25, 2022
The Truth About Municipal Bonds
Today’s podcast explains why it might be a massive mistake to invest in municipal bonds. The reason why this is such an important topic is our unusual fixation with municipal bonds when trying to set up a tax-free retirement. Interest from municipal bonds counts as provisional income. That means that it counts against the thresholds that cause Social Security taxation. So, while you may be looking for a stable, predictable, tax-free income stream, you could unwittingly lose a portion of your Social Security along the way. Municipal bonds are usually very attractive for retirees and would-be retirees because they promise low-risk and tax-free income. However, David has noticed five glaring issues about municipal bonds and explains why you should be extremely cautious about investing in them. Municipal bonds are not always entirely tax-free. Yes, they are free from federal tax, but they are often taxed at the state level if it’s not a bond issued by your resident state. Currently, 43 of the 50 states charge state tax on out-of-state municipal bond interest. So, as state taxes rise over time, you could, unfortunately, fall prey to tax rate risk. According to David, the whole point of a tax-free municipal bond is to get a superior rate of return when compared to a corporate bond equivalent. The problem is, even though municipal bonds are tax-free, they offer returns that are often far less than their taxable corporate bond equivalents. One of the biggest problems with municipal bonds is the purchasing power risk. For example, in the high-inflation environment we’re currently in, you’re actually losing spending power by locking into even the most productive municipal bonds. Your returns will lag inflation and massively reduce your spending power over time. If you’re trying to get consistent, predictable tax-free income in retirement, one of your best bets is owning an annuity inside a Roth IRA. Annuity companies have massive economies of scale and can get rates of return in their bond portfolios that far exceed what you can get on your own. Mentioned in this episode: David’s books : Power of Zero, Look Before Your LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com PowerOfZero.com (free video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on
S1 E185 · Wed, May 18, 2022
The Tax Freight Train Bearing Down on Your Retirement Plan
For David, the problem is that the U.S. has promised its people way more than it can afford to pay. The debt clock says $30 trillion, which is a mind-boggling figure. According to other experts, however, the real number is actually higher than that. It is close to the $125 trillion mark. Citing Dr. Larry Kotlikoff from Boston University, David reveals that, according to a fiscal gap accounting, the projection over the next 75 years isn’t $30 trillion, nor $125 trillion… it sees true national debt in the U.S. sitting much closer to $239 trillion. One of the key questions David brings up is: for a retiring generation of Baby Boomers who saved the lion’s share of their retirement savings and tax-deferred vehicles like 401ks, what rate are their postponed tax payments going to be taxed at? David shares that, with the exception of a small period in the early ‘90s, taxes haven’t been as historically low as they are today in 80 years. He advises to do all the heavy lifting now by preemptively paying taxes on IRAs and 401ks before tax rates go up on January 1st 2026. David talks about the fact that after January 1st 2026, tax rates are going to revert back to what they were in 2017. This means that each day that goes by where we fail to take advantage of historically low tax rates is potentially a year beyond 2026 where we could be forced to pay the highest tax rates we are likely to see in our lifetime. David shares his insights about how retirees and retirees-to-be can transition these assets before January 1st 2026 arrives. David advises those who have too much money in their 401k or IRA to start repositioning that money systematically to the tax free bucket by way of a Roth conversion. The Roth conversion has no income limitation. Social Security, Medicare, Medicaid, is just borrowing money that they don't have. Every year that Congress doesn't fix the problem means new consequences. (aka higher tax rates). Mentioned in this episode: David’s books : Power of Zero, Look Before Your LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com PowerOfZero.com (free video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube
S1 E184 · Wed, May 11, 2022
The Truth About Dave Ramsey
In this episode, David wants to share the truth about Dave Ramsey, look at the two pillars of his financial worldview, and deconstruct those beliefs. David believes that if Dave Ramsey’s audience followed his advice on paying off high-interest credit card debt, the U.S. would be a much healthier place from a financial perspective. In David’s assessment, Ramsey’s audience is made of lower to middle-income America, people who are making $50,000 per year but who are spending $60,000. With his approach, Ramsey seems to be dispensing one-size-fits-all financial planning advice in an attempt to appeal to the masses. David notes that Ramsey’s audience isn’t the Power of Zero audience. Power of Zero audience members have generally done a good job of saving money, and they are in tax-deferred buckets. They’re trying to figure out how to distribute their retirement savings in the most tax-efficient way possible. It’s the person who's making $50,000 per year, but spending 60,000 it's lower to middle income America, who are struggling to pay their bills, so he's dispensing one size fits all financial planning advice in an attempt to appeal to the masses. The first Dave Ramsey principle that runs afoul of Power of Zero thinking has to do with his recommendations of going back into the tax-deferred bucket with all of the unintended consequences that go along with it. What Power of Zero thinking suggests in these cases is for you to make contributions to the LIRP in an effort to enjoy the benefits of getting to the 0% tax bracket in retirement. For David, Dave Ramsey doesn't seem to understand or appreciate the role that a properly structured LIRP can play in helping you get into the zero percent tax bracket and retirement, particularly in a rising tax rate environment. David believes that financial gurus like Dave Ramsey often find themselves on the outside of the tax-free paradigm looking in trying to interpret what they're seeing through the lens of their tax deferral worldview. While their intentions are often knowable, he says, their recommendations – if accepted at face value – can lead to a cascade of financial consequences, many of which could actually prevent you from ever getting to the 0% tax bracket in retirement. The second pillar of Ramsey’s David has an issue with his lack of understanding of how the fees and the LIRP are structured. David sees Ramsey as someone who fixates on what the LIRP fees are in the first few years and extrapolates those fees out over the life of the program. The problem is that by fixating on the fees of the LIRP in the first few years without considering the broader picture, Ramsey perpetuates the myth that all LIRPs are too expensive. David explains how LIRPs work. Their fees are higher in the early years and much lower in the later years. However, when you average it out over the life of the program, it's going to cost you between 1-1.5% of your bucket per ye
S1 E183 · Wed, May 04, 2022
What is the Obamacare Surtax (And Should You Worry About It)?
David explains how Obamacare surtax, which was introduced back in 2013 when Obamacare passed, works and who it affects. The 3.8% of Obamacare surtax only applies to the investment income that reaches above and beyond specific thresholds: $200,000 for an individual person and $250,000 for a married couple filing jointly. David addresses the question of how this could affect you if you’re planning on doing a Roth conversion at some point in the next 10 years. According to David, not many people pay the Obamacare surtax and he reminds us that any distributions from Roth IRA, from Roth 401k, from Roth conversions or loans from cash value, and LIRPs don’t count towards that $200,000 or $250,000 threshold the Obamacare surtax applies to. David considers the Obamacare surtax a pesky little tax that will affect the top 1% of Americans fairly consistently and middle-income America only occasionally, particularly in the years where they have only a one-time windfall event. David cautions against postponing the payment of a capital gain tax or a Roth conversion to some point much further down the road to avoid paying this 3.8% Obamacare surtax because you may end up being surprised with a much higher tax on your ordinary income or on your capital gains. Mentioned in this episode: David’s books : Power of Zero, Look Before Your LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com PowerOfZero.com (free video series) @mcknightandco on Twitter @davidcmcknight on Instagram
S1 E182 · Wed, April 27, 2022
When Should You Draw Social Security in a Rising Tax Rate Environment?
This episode revolves around when you should draw social security in a rising tax environment. David believes that if you have taken stock of the fiscal landscape of the U.S., it seems fairly obvious that tax rates will have to rise dramatically in the next 10 years to keep the country solvent. This should have a bearing on when you elect to receive your social security. As David explains, each year you delay taking social security past age 62, your benefit will increase. The amount of the increase you’ll experience varies from person to person. On average, it’s going to be about 7.4% per year. David discusses another scenario, one in which you postpone taking your social security until your full retirement age of 67. In this case, because you postponed taking your benefit for five years, you’d experience an average growth of 7.4% on your benefit over a shorter period of time as compared to the scenario in which you’d take social security at age 62. The third scenario is one in which you’d take social security at age 70. This is the age at which delaying social security no longer makes sense because you're no longer going to be getting that 7.4% increase. Mathematically and financially speaking, it just doesn't make sense to delay any longer. If you’d like to reach your break-even point, you should create an Excel spreadsheet, create 3 columns, and add up the cumulative benefits you’d receive. David shares a couple of ways to get an estimate on how long you’re going to be living for. On the one hand, there’s the website you can use to get an estimate: Blueprintincome.com. This will give you an imprecise – unofficial – ballpark life expectancy prediction. One the other hand, there’s a much more precise way to find out how long you’re going to be living for: going through the life insurance underwriting process. David perceives life insurance underwriters are sort of like oddsmakers in Vegas. Depending on the method you use to get a ballpark life expectancy prediction, it may make more sense to get all of the money out of the account(s) as soon as possible, when you reach the age of 62. David goes over a couple options in terms of what would happen if you were to do a Roth conversion. Mentioned in this episode: blueprintincome.com David’s books : Power of Zero, Look Before Your LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com PowerOfZero.com (free video series) <a href="https://twitter.com/McKnightAndCo" target="_blank" rel= "noopene
S1 E181 · Wed, April 20, 2022
Should High Income Earners Do Roth Conversions?
This episode focuses on a question David recently got from a couple – they made $650,000 per year and wanted to know whether they should consider doing a Roth conversion. Some details about the California-based couple who asked David their question: they’re both age 50, with $1.5M in their old IRAs and 401k. They had a lifestyle need of approximately $100,000 after tax, and had about $1M in liquid savings in their taxable bucket. And, lastly, they were contributing $100,000 per year to that bucket and were growing it in plain taxable mutual funds. The couple, which represents the case-study for this episode, are in the highest marginal tax bracket (at 37%). In addition to that, they would have to pay another 11.3% in California State tax. This means that, were they to do a Roth conversion, they would be paying tax on top of all their other income, and they would be paying tax at 48.3%. In other words, they would be giving away nearly half of whatever portion of their IRAs or 401k they converted back to the IRS. Having all of the information above, the question becomes: does it make sense for a couple of 50 year olds to undertake a Roth conversion? For David, if they believed that the rates at which they’d be forced to pay in the future are going to be higher than today’s rates, then the answer is yes. Then, they should pay the tax today before the IRS absolutely requires it somewhere down the road, at higher rates… However, if they don’t believe that taxes down the road are going to be higher than they are today, then they shouldn’t do a Roth conversion. David discusses the fact that, sometimes, we get so caught up in the idea of getting to the 0% tax bracket at all costs that we fail to do the math along the way to see whether the cost of doing so actually makes sense. For David, Roth conversions tend to make sense for people who will be in a similar income range in retirement – particularly if they’re currently in the 22 or 24% tax brackets. David warns against allowing ourselves to become so consumed by the fear of higher tax rates that we make irrational decisions about the timing of our payments. We have to be patient, thoughtful and methodical. David shares the fact that the situation this podcast episode revolves around is a classic case where it may make sense to utilize the tax-free qualities of the LIRP (Life Insurance Retirement Plan). With the LIRP, we’re getting as little death benefit as the IRS requires, and we’re stuffing as much money into it as the IRS allows, in an attempt to mimic all of the tax-free benefits of the Roth IRA without any of the limitations of a Roth IRA. Mentioned in this episode: David’s books : Power of Zero, Look Before Your LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code</e
S1 E180 · Wed, April 13, 2022
A Huge Surprise in the Secure Act 2.0
In May 2021, David recorded a podcast that focused on the Secure Act 2.0, the follow-up to the Secure Act that completely killed the stretch IRA and the stretch Roth IRA. Today’s episode looks at the big surprise that has surfaced in the latest updated iteration of the Secure Act 2.0 that’s currently gaining steam in Congress. In last year’s podcast episode, David outlined six major changes to retirement planning that this law is proposing. According to David, the one thing that the previous version of the Secure Act 2.0 did not address was what happens if a beneficiary inherits a retirement account where the original account holder had already begun to receive required minimum distribution. This is something that wasn’t sitting well with the financial planning community. David explains how things are different with the latest piece of legislation, as it spells it all out perfectly the two crucial criteria that are connected to how and whether the 10-year rule of the Secure Act 2.0 applies or not. The first crucial criteria is whether or not the original IRA account holder died before their required beginning day. The second is whether they had begun receiving minimum distributions, and secondly, whether the beneficiary is eligible. There are different people who could potentially qualify as an eligible designated beneficiary (or EDB): a surviving spouse, a minor child, a disabled person, a chronically-ill person, and a person not more than 10 years younger than the account holder. David discusses the fact that, if you’re an eligible designated beneficiary of an IRA, the 10-year distribution rule doesn’t apply to you. You get to continue to receive RMDs from the account based on your life expectancy. There are a couple of possibilities if you happen not to be an EDB and you inherit an IRA. In the case of a beneficiary who inherited an IRA from someone who had not yet reached the required beginning date for that person, the 10-year rule applies. You’ll have to withdraw 100% of that IRA within 10 years from the death of the account holder. If you’re not an EDB and the person from whom you inherited the IRA had already begun to take their RMDs, then you would have to take RMDs based on your life expectancy and completely withdraw all the money within that 10-year period. Then, there’s the scenario in which you aren’t an EDB and you inherit a Roth IRA - Roth IRA owners aren’t subject to RMDs and, therefore, they’re always considered to have died before their required beginning date. This means that, if you inherit a Roth IRA, you’ll never have to take required minimum distributions, regardless of whether you’re an EDB or not. When it comes to POZ planning, all of this serves as motivation for you to get your money shifted to the tax-free bucket, shifted to the Roth IRA – pay taxes that are at these historically low tax rates so that your beneficiaries won’t have to pay the taxes at
S1 E179 · Wed, April 06, 2022
When is the True Fiscal Day of Reckoning for Our Country?
In this episode, David focuses on the true fiscal day of reckoning for the U.S., and how it should inform important retirement decisions when it comes to the Power of Zero paradigm. For David, asking yourself ‘Over what time frame should I be shifting my tax-deferred retirement assets to tax-free?’ is one of the most important variables to consider when executing your Power of Zero strategy. David’s view is to consider shifting money slowly enough so that you don’t rise into a tax bracket that gives you heartburn, but quickly enough that you get all the heavy lifting done before tax rates go up for good. The problem, however, lies in the fact that if Congress were to do nothing between now and 2026, the Tax Cuts and Jobs Act will expire – leading to an increase in tax rates. When it comes to executing strategies, David recommends having an approach that isn’t either too alarmist or heavy-handed. It’s important to ask yourself what the Government is likely to do to tax rates, over what time frame, and act accordingly. Over at DavidMcKnight.com, you can find a “magic number” calculator in the upper right-hand corner of the webpage. The calculator shows you how much money you should be shifting to get to your IRA balance over a given time frame. David asks a key question: ‘ What if 2026 is not really the deadline we should be concerned with?’ Perhaps, he says, 2026 may be regarded merely as the year in which tax rates return to historically normal levels. David refers back to the 2021 interview with Brian Beaulieu , an economist who has been working with Fortune 500 companies for the last four decades to predict what the economy is going to do in the future – and he has done so with an almost 95% success rate. According to Brian Beaulieu, the deadline we should really be concerned with is 2030, the year in which he predicts the U.S. will go into a Great Depression. The reason for this prediction is the trajectory of national debt and the increasingly high number of Baby Boomers reliant on Social Security, Medicare, Medicaid, and interest on the national debt. If Beaulieu’s prediction were to be correct, it would mean that you shouldn’t really be fixating on shifting your dollars from tax-deferred to tax-free over four years, especially if you have large amounts of money in your tax-deferred bucket. In this scenario, you would have the opportunity to spread your tax obligation out over a longer period of time, which would keep you in a much lower tax bracket along the way. For David, 2024 is going to be a key year for the fact that, if Republicans were to take the House, the Senate, or the Presidency, then there’s a good chance that the Tax Cuts and Jobs Act would be extended for another eight years. As a result, the c
S1 E178 · Wed, March 30, 2022
The LIRP vs Stock Market Investing
The idea behind today’s episode comes from a conversation David had with someone at a recent event he spoke at. He praised the LIRP as the “perfect Swiss Army knife-type of investment,” and couldn’t understand why more people didn’t make it their only investment tool. David isn’t a fan of conversations that position the LIRP as a “Holy Grail” of financial planning. David shares examples of questions and conversations of the arguments that may be made by someone who’s a big believer in the LIRP in these terms. David discusses potential scenarios and conversations you may find yourself having. The Power of Zero strategy calls for multiple streams of tax-free income, none of which show up on the IRS’ radar but all of which contribute to you being in the 0% tax bracket. There are four streams of tax income: the Roth IRA, the Roth 401k, the Roth conversion, and the RMD that’s up to standard deduction limits out of your IRA. David discusses how they’re being invested in, and how some licensed life insurance agents persuade people against investing in the stock market. As David illustrates, there are some shortcomings in the approach similar to the event attendee he was chatting with, as the approach doesn’t appreciate the broader role that the stock market plays, in a balanced approach to tax-free retirement planning. The LIRP, especially that in the form of a puppy and in the form of the IUL Index Universal, can generate up to 5-7% annual rate of return. “The LIRP is not designed to be the primary source of retirement”, says David. “Savings are designed to be a supplemental source of retirement savings”. David goes over the type of life insurance agents you want to stay away from, and why you may want to embrace a stock market-type approach to investing. When it comes to the LIRP coming into play, the focus should be on an approach that involves both stock market and LIRP – as they both play an indispensable role in a comprehensive, and well-balanced, path to retirement planning. Mentioned in this episode: David’s books : Power of Zero, Look Before Your LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com PowerOfZero.com (free video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube
S1 E177 · Wed, March 23, 2022
Effective Tax Rate vs Marginal Tax Rate in POZ Planning Decisions
Today’s episode focuses on the difference between your effective and marginal tax rate and which one is relevant in different financial planning contexts. For David, the American tax system works exactly like a graduated cylinder: your money flows in and it goes all the way down to the bottom. Some of it gets taxed at 10%, some at 12, 24, 32, 35 or 37% – even Bill Gates briefly has some of his earned tax income tax at 10% before it goes all the way to 37%. David explains that the marginal tax rate is the rate at which you pay tax on the last dollar in your tax cylinder, while effective tax rate is your tax as a percentage of your table income. As a “rule of thumb”, remember that your effective tax rate is always lower than your marginal tax rate. David shares that the single greatest decision on whether to undertake a Roth conversion is whether your tax rate will be higher now or in the future. He discusses a scenario in which you should use your marginal tax rate, and not your effective tax rate. Evaluating the benefits of certain deductions and calculating short-term capital gains are two additional scenarios in which you should use marginal tax rate. As a general rule, David recommends remembering that the higher your federal marginal tax rate, the more it makes sense to invest in a Roth IRA instead of in a taxable investment or brokerage account. ‘Want to calculate what your effective tax rate is? Take your marginal tax rate and subtract 7,’ says David. When it comes to mistakes, a common one people make is on deciding between the effective and the marginal rate – and this usually happens with a Roth conversion. Mentioned in this episode: David’s books : Power of Zero, Look Before Your LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com PowerOfZero.com (free video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube
S1 E176 · Wed, March 16, 2022
How to Avoid Sequence of Return Risk in Your LIRP
David explains how, normally, we think of the sequence of return risk as the risk associated with the order in which you experience investment returns in your stock market portfolio in retirement. There are a couple of different ways you can safeguard yourself against sequence of return risk. The first one is to allocate money to an annuity that provides for your income during those early years of retirement so that you aren’t forced to take money out of the stock market. The second option is to build up cash value as long as you start with enough time before you retire. You can build up cash value inside your LIRP, and you can use that to pay for lifestyle expenses during the down years in the first 10 years of retirement. Lastly, you can shift money out of your stock market portfolio into what David refers to as time-segmented portfolios – short-term debt instruments designed to mature when you need the money. Segmented portfolios are a safe and productive way to mitigate sequence of return risk in the first 10 years of retirement. In Power of Zero , David describes 3 basic types of LIRP: the growth in your cash account being linked to investment bonds in the insurance companies of the general portfolio, the Interest Rate Sensitive Universal Life, and the so-called Variable Universal Life (VUL). For those of you who have VUL, it isn’t necessarily time to panic, says Nelson. Mentioned in this episode: David’s books : Power of Zero, Look Before Your LIRP , The Volatility Shield , Tax-Free Income for Life and The Infinity Code DavidMcKnight.com PowerOfZero.com (free video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube
S1 E175 · Wed, March 09, 2022
Two Ways to Use the LIRP to Get to Tax-Free
There are dozens of contexts in which life insurance gets used, but 95% of the time, and from a Power of Zero planning standpoint, it gets used in two different ways. David explains how having a certain amount in your taxable bucket may sound great because it’s liquid and you can access it, but by taking the inefficiencies in the taxable bucket, you amortize them out over the balance of your lifetime – and this may end up costing you hundreds and thousands of dollars. There are different ways you can skinny down your taxable bucket. The first one is utilizing your least valuable asset – your taxable bucket – and use that to pay for your lifestyle. Maximizing your 401k or, even better, your Roth 401k at work is a second way to skinny down your taxable bucket. The third way is to simply contribute to the Roth IRA. David suggests never letting a year go by where you don’t contribute to the Roth IRA. The fourth way to skinny down a bloated taxable bucket, on the other hand, is by using those dollars to pay for the taxes on your Roth conversion. As David notes, if you’re younger than 59 and a half, the only way to do a Roth conversion is if you have money sitting in your taxable bucket that you can earmark for the tax on that Roth conversion. And in case you try to have the IRS withholding tax from your Roth conversion when you’re younger than 59 and a half, you’ll get a 10% penalty even though you may be taking that money out and giving it back to the IRS in the form of taxes. If you’re younger than 59 and a half, you can have taxes withheld directly from the Roth conversion itself, even though David doesn’t recommend doing it. The last way you can spend down on a taxable bucket that has a balance that’s far too high is by way of the LIRP. David explains that the LIRP is not designed to compete with your stock market investments, rather to serve as a bond replacement. Reaching into your investment portfolio, ‘pulling out the bonds’ and replacing them with the LIRP will get you a greater return, lower risk, and a lower standard deviation. It’s just a more effective way to grow your money as a bond replacement. David sees growing your money between 5 and 7% without taking any more risk than what you’re taking in your savings account as a safe and productive way to grow at least a portion of your retirement savings. David goes over how the LIRP can be much more efficient than simply growing dollars in the tax-free bucket.
S1 E174 · Wed, March 02, 2022
Can Mitt Romney Save America?
David discusses how Mitt Romney is at the forefront of trying to save Social Security, Medicare, Medicaid, solve the national debt problem, all while simultaneously trying to save the country. In a recent interview with former Power of Zero Show guest Maya MacGuineas, Mitt Romney discusses something that should resonate with you if you care about national debt and the future of the country. David believes that if Romney were to get through the Trust Act he has proposed, he could very well save the Republic. And he appreciates the fact that while some may avoid saying things that could get them voted out of office, Romney isn’t afraid to speak his mind – something that David sees as a sign of integrity. In his interview with MacGuineas, Senator Romney talks about the frightening issue of the additional debt and the already existing debt, and points to the fact that over $400 billion was spent on the interest alone in 2021. David sees raising interest rates as the only way to combat inflation. Argentina, which has its inflation at 50%, recently raised their interest rates 250 basis points, from 40 to 42.5. For Senator Romney, at some point, the U.S. is going to be spending more on the interest than they are on their military (currently $700 billion). He isn’t sure as to how you can be the leader of the free world if you’re having to pay hundreds of billions of dollars in interest and can’t even keep up with your military, education, support your health care system, and so forth. David Walker, author of America in 2040: Still a Superpower? A Pathway to Success, shared a similar feeling on the Power of Zero Show about a year ago – saying that a country can’t remain a superpower for long if it can’t get a handle on its finances. In the interview with Maya MacGuineas, Mitt Romney also touched upon the importance of taking action before trusts such as Social Security, Medicare, and Medicaid run out of money. His words seem to indicate that dramatically cutting these programs for baby boomers isn’t really in the cards, which leaves higher tax rates as the solution. An additional point Senator Romney made during his interview with MacGuineas is the fact that continuing to add debt at a time like this is threatening our future, as well as the future of our kinds and grandkids. Seniors need to be protected with Medicare and Social Security, as well as Medicaid and keep America strong. As history of great civilizations has taught us, a characteristic of their failures is the beginning of massive spending that was greater than the money that was taken in. For David McKnight, these possible solutions might be too little, too late, but he still admires Romney’s willingness to discuss such a polarizing issue. In the interview, Senator Romney shares what he considers a possible solution to the issue at hand. And that is dividing the different trust funds and establishing a
S1 E173 · Wed, February 23, 2022
How to Best Position the LIRP in Your POZ Strategy
Mark Byelich doesn’t know when taxes are ever going to be lower than they are right now. David sees Medicare, not Social Security, as the main issue because Medicare is five times more expensive and it’s what’s really going to be driving debt over time. David thinks that Social Security can easily be fixed by moving the age of retirement or by adding means testing like it happens in other countries. In his opinion, the challenge is how to renegotiate Medicare. It’s what is increasing by 6% each year, on average. This, without taking into consideration that there are 10,000 baby boomers who are exiting the workforce. Mark confirms a question that was asked; the amount you can put in a Roth IRA annually, in 2022, is going to be limited. David believes that the direction capital gains are heading toward depends on who’s in office. If you have Democrats at the Presidency, they’re most certainly trying to raise them. Republicans tend to think that high capital gains affect the growth of the economy. If one leaves politics aside and looks at the math of it all, capital gains are going to have to rise precipitously – along with individual tax rates – or the U.S. is going to go broke as a country. David is a fan of extending the Roth IRA conversion period beyond 2026. In replying to a question that was asked, he discusses how he would prefer paying the 22-24% bracket up until 2026 rather than preventively paying the 32% bracket. He thinks that there is going to be a “perfect storm” in 2030; demographic, debt, and unfunded obligations – so you want to get things in order before then. There are a couple of things that have hit a nerve with David; bouncing into the 32% tax bracket and people wincing over IRMA. There’s a trade-off, though; one can pay an increased IRMA in the short term to spare IRAs and Social Security from higher taxation over the long-term. If a person can get to 0% tax bracket in retirement by shifting most of their assets to tax-free, they would put themselves in a position where they wouldn’t have to pay IRMA anymore, they wouldn’t have to pay Social Security taxes anymore, and they would shield themselves from the impact of high tax rates down the road. David provides an overview of his books Power of Zero, Look Before Your LIRP , The Volatility Shield , Tax-Free Income for Life, and his upcoming one, the 75,000 word-long, The Infinity Code . David shares what is the greatest risk according to retirees; running out of money before you run out of life.
S1 E172 · Wed, February 16, 2022
The POZ Moves You Should Be Making Right Now
Normally, it takes a year to add $1 trillion to the national debt. With Covid-19, we have added $6 trillion to the debt. Something that usually happens in 6 years took place in 3 months. David believes that instead of cutting the various programs, the government is going to raise more taxes. Mark discusses main turning points of his career: being part of Ed Slott’s mastermind group since 2011, seeing one of David’s presentations, and getting a copy of The Power of Zero at a conference in San Diego back in 2015. Some of the studies Mark Byelich has done show that the average middle-class American will be in the 40 to 45% effective tax rate – within the next 10 years. David talks about the fact that some believe that rich people don’t have the money for all that the government is offering. David answers a question related to what people should be doing. David wouldn’t tell people ‘Ok, we only have 4 years, now I’m going to bump up into the 32%.’ David suggests people take advantage of these historically low taxes but don’t succumb to the temptation to bump up into 32%. David discusses the fact that if Republicans were to get control of everything in 2024, they could extend the Trump tax cuts for another 8 years. For David, one of the tools they have to fight inflation is to raise interest rates. The problem is that the reason why the country is able to sustain this debt for a long period of time, is because the country has had historically low interest rates for so long. David shares something in the Constitution that says that the Federal Government is required to pay – simple work pensions, interest on the national debt, etc. Mark talks about the one item that’s currently concerning him when it comes to the health of financial plans, and investing.
S1 E171 · Wed, February 09, 2022
Why Your LIRP MUST Have Interest in Arrears and Daily Sweeps
In a previous episode of the Power of Zero Show, David discussed the importance of having a guaranteed 0% loan provision in your LIRP. Beware: even if an insurance company has a guaranteed 0% loan provision, there's still another way that they can get you. There are two ways in which they can configure these loans: they can either charge you interest in advance or they can charge you interest in arrears. In the case of interest charged in advance, the insurance company charges you the interest rate at the beginning of the year in which you request a loan. If they were charging you 3% on a $100,000 loan, you would owe them $3000 at the beginning of the year. This means that since you need to pay out the interest at the beginning of the year – instead of at the end of the year – you lose out on the interest that money could have earned you had you been able to keep it inside your growth account and compounded it over the course of a year. With interest charged in arrears, on the other hand, you get charged the interest at the end of the year. This means the situation is very different, as you will have on hand the interest that they credited to your loan collateral account – and it pays for the cost of that loan. David shares that there’s an insurance company out there that does charge interest in advance but goes about it differently. They credit your loan collateral account at an interest rate that’s greater than the amount they charge you in advance – to compensate for the opportunity costs you lost out over the course of a year. In case you have a LIRP and would like to know whether your insurance company has interest in advance or arrears and what implications that might have, David recommends heading over to DavidMcKnight.com. You’ll be connected to an elite member of the POZ advisory group. The Index Universal Life is the policy David prefers and recommends. The insurance company doesn’t treat the premium the way a normal investment would get treated. There’s a problem you may face, the problem of opportunity costs. As David explains, ”if I give you a dollar that I didn't really need to give you, not only do I lose that dollar, but I lose what that dollar could've earned for me, had I been able to keep it and invest it over the balance of my life.” According to David, the ideal scenario is working with a company that charges interests in arrears, offers a guaranteed 0% loan, and sweeps your money out of that on a daily or weekly basis.
S1 E170 · Wed, February 02, 2022
Can Long-Term Capital Gains Push You Into a Higher Tax Bracket for Roth Conversions?
Today’s episode focuses on outlining the basic differences between long-term capital gains and ordinary income taxes, and showing how they interact with each other from a taxation perspective. The idea for the topic actually came from a question one of David’s POZ advisors had received ahead of a recent webinar David hosted. Long-term capital gains typically get added to your Adjusted Gross Income (AGI), which is important, because your AGI determines whether you can contribute to Roth IRAs, or when you get phased out of certain deductions. Despite this, it's important to keep in mind that long-term capital gains get taxed in a completely different tax cylinder when compared to ordinary income. Long-term capital gains are completely different from short-term capital gains, in that they have their own tax cylinder that includes only three tax rates: 0, 15, and 20. The rate at which long-term capital gains get taxed depends on what your ordinary income tax rate is in a particular year. As David explains, it’s important to remember that the amount of ordinary income you have – the actual amount of net taxable income – informs the taxes you pay on your long-term capital gains. For David, once you understand the difference between the two taxes, there are several interesting strategies you can implement. It’s paramount to remember that ordinary income on the Roth conversion gets taxed first, while the long-term capital gains calculation takes place after that.
S1 E169 · Wed, January 26, 2022
Why Your LIRP MUST Have a Guaranteed 0% Loan Provision
David’s upcoming book, The Infinity Code, is a novel that talks about important financial concepts and themes, and that will keep you on the edge of your seat through the entirety of the read. The book will be available on Amazon and other stores soon. In David’s opinion, starting a LIRP is a bit like getting married, so it’s important to be meticulous in your research. When it comes to LIRPs, the IRS allows you to take a loan – the way these loans work is that instead of taking a loan from your cash value itself, you’re taking it from a life insurance company. A zero cost loan, also known as a wash loan, is when, for example, you were charged 3% by the life insurance company. In order to make it an arms’ length transaction, the amount they charge you and the sum they credit you is always the same. David warns against going for loans that don’t have a guaranteed 0%. In an ideal-case scenario, you’d have tax-free and cost-free distributions. One of the issues that may raise has to do with the fact that for the IRS, if a person doesn’t have at least $1 in their cash value when they die, then all of the tax-free loans they got along the way need to have their taxes paid back, all in the same year. David strongly believes that 0% spread loans are one of the stipulations that you must insist upon, when it comes to a LIRP. The cash value of a life insurance company might sound great, but it really is inconsequential when compared to what David sees as the most important provision: your loan provision. If you decide not to opt for a 0% spread that’s guaranteed, then you run into the risk of having life insurance companies adjusting that in order to hit their quarterly forecast. Hence, it’s paramount that you ask for a guaranteed 0% loan. For David, a good loan provision charges no net interest to the client, and it’s also worded in a clear and unambiguous way. A band loan provision, on the other hand, not only has net interest, but it’s also worded using nebulous terms, and has convenient escape clauses (convenient for the life insurance company, that is). David isn’t convinced that most of the financial services industry understands the implications of these types of loans. Therefore, he recommends that, before you go down the road with a financial advisor talking about an LIRP, you insist upfront that they tell you all of the details of the loan provision of that particular contract. You should be familiar with your loan provisions because, otherwise, they will come back to bite you. The loan interest will accumulate, it will compound over time, and it will force you to go bankrupt years in advance than when you ever thought possible.
S1 E168 · Wed, January 19, 2022
Is Joe Manchin Coming Back to the Table on Build Back Better?
Episode 165 of the Power of Zero show covered how Joe Manchin gave a firm ‘No’ to Joe Biden's signature legislation, the Build Back Better plan, in its current form. This topic is of crucial interest in regards to Power of Zero planning, because had he gotten that legislation through, it would have required the changing of the U.S. tax code to pull it off – this would have extended the Trump tax cuts for middle America by another 8 years. Democrats managed to get Manchin back to the negotiating table but this came with a twist: they hadn’t anticipated that he was prepared to bring forth a revised bill of his own. The $1.8 trillion compromise bill proposed by Manchin addressed the parts about climate change and childcare provision with the intention of changing them. According to anonymous sources, President Biden and Manchin were close to reaching a deal. Had they succeeded, the Trump tax cuts would have been extended for another 8 years. This would have been good news from a power of zero retirement planning strategy point of view but bad news for the fiscal condition of America. What transpired from a couple of articles published in The Washington Post and Yahoo.com was that the compromise proposal had been taken off the table – something that was later confirmed by an impatient-sounding Manchin himself. The likely outcome of all of this is the expiration of Trump tax cuts in 2025. As this appears to be the end of the Build Back Better plan, it’s important to start looking at potentially stretching tax obligations out for more than 4 years. Also, the closer you get to 2026, the less sense it makes to try to get all of the heavy lifting done between now and then. David would warn against letting your shift plan go too long and get too close to 2030 and beyond, for the fact that the closer your shifting plans get to that year, the more likely the government will be to raise taxes to pay the interest on the national debt (which, as you may remember, is approaching $30 trillion). An economist David had recently listened to discussed how he had seen 3-4 interest rates happening over the course of the next 12 months. Paying the interest to service the national debt is likely to skyrocket, and it will consume more and more of the federal budget too. Year after year, every little uptick in interest rates increases the chances of tax rates rising dramatically between now and 2030 – otherwise, the U.S. could go broke as a country. These exploding interest rates may actually constrain the federal government to raise taxes. David suggests making sure that you get all of your asset shifting done before 2030. Unless Republicans gain control of the House and Senate, and the Presidency, in 2024, it looks like Trump tax cuts will expire in 2026. This will probably lead to many people not being able to get their shifting schedule completed before tax rates will go up fo
S1 E167 · Wed, January 12, 2022
My Interview with Rebecca Walser, Author of Wealth Unbroken, Part 2
As David explains, there are two ways of controlling our budget: raising revenue or reducing spending (or some combination of the two), just like an American household. Rebecca Walser thinks that Modern Monetary Theory (MMT) could be decimated by Covid-19. And there are a few key issues that have surfaced: the U.S. Government printing $8 trillion and the equity market going up over 40% (pre-Covid) with no economic fundamentals to support it, 10 million job openings, supply chain issues, as well as interest rates that are outrageous and inflation way too high year over year. Rebecca defines MMT as the theory that states that ‘we can print money indefinitely and to perpetuity as long as we can service the debt.’ However, MMT sort of requires that you don’t believe in inflation any longer, for the fact that if MMT is true, then inflation will never occur. For Rebecca, the law of economics is just too big and too right to bow to the theory of MMT. As a result of that, we have a hard inflation that, despite manipulation by the U.S. Government by taking out food and energy, still leads to massive price increases year over year – increases that are not transitory. As Rebecca shares, from a perspective of tax law, life insurance is the only asset class that can have both tax-free income, a tax-free estate, and that can still be accessed during our lifetime. It’s a combination of four different tax law provisions, no other asset class that has so many tax provisions specifically arranged around it. After seeing the impact of Corona – and the $8 trillion being spent – Rebecca has given up on rates normalizing over the next 20 years. She sees life insurance as the planning tool that can be leveraged from both an estate tax perspective, and what she refers to as a ‘parallel wealth track’. The retirement of baby boomers represents the largest demographic shift in the history of America. 65 million more people coming out of the workforce and going on to social security and Medicare will lead the U.S. to have their back against the wall. According to Rebecca, the retirement of baby boomers is something that has been anticipated since the ‘70s but nothing has been done about it. As a result of this phenomenon, she predicts America will transition to a European taxation model. Rebecca doesn’t consider herself a huge fan of leveraging income annuities, because she sees it as the equivalent of taking a pile of cash and creating a lifetime income stream. There’s an exception to this last point, though: if Rebecca has a client she feels is going to really struggle to maintain their income for the rest of their life, then that is a perfect use for that particular vehicle. To Rebecca, it appears that people don’t seem to realize that financial asset classes change over time. The downside is what makes retirees run out of money and it’s something people don’t plan for. However, it’
S1 E166 · Wed, January 05, 2022
My Interview with Rebecca Walser, Author of Wealth Unbroken, Part 1
Rebecca Walser thinks that the 401(k) is a failed experiment. In her opinion, the Revenue Act of 1978 was nothing more than a corporate tax dodge for highly compensated executives, and not a state retirement vehicle. While working as a benefits consultant, Rebecca was looking for a way to administer an alternative savings plan for a client as opposed to just a cash bonus savings plan. She came upon the 401(k) provision and noticed it was a “tax dodge” that could be leveraged. One of the main conditions for this to happen was to ask the IRS if they could allow for the provision to not be taxable – otherwise, Rebecca’s client would have “phantom income.” They needed the IRS to confirm that the money wouldn’t be taxed until it was accessed. At that time, corporations were severely underfunding their pensions. On the benefits side, they were responsible for putting money away and investing the funds, as well as for having enough to honor those pensions and meeting those obligations. When the 401(k) provision came to be, it shifted the burden to individuals to elect to make the contribution – and all of this happened without any testing. In the late ‘70s and early ‘80s, it was a stockbroker’s world. People had to call their stockbroker to invest in the market. Private banking and stock brokerages weren’t something mainstream America had access to, and suddenly Wall Street had massive million-dollar-cost averaging and it was a way Wall Street had exploded. When it comes to longitudinal, long-term investments – and when you look at various indexes – Americans don’t make the minimum averages of any index. There’s one piece of advice that Rebecca considers to be absolutely right every single time, and that you can take to the bank: ‘Buy Low, Sell High’. When you look at behavioral finance, you realize people have a fear of missing out when the market is high. Even though some people may have had their portfolio 40% higher pre-Corona, they’re still thinking that there’s space for it to grow, so they don’t want to sell out. When some investors start to see a stock coming down, they keep their position of waiting for it to get to “one dollar higher.” What happens in these cases is that the stock declines and reaches a low at which point the investor says, ‘I can’t afford to lose anymore’ – and ends up selling when the stock is at the bottom. By nature, when we’re managing our money, we do the opposite of what we’re supposed to do. The DALBAR Statistics show that the average investor has done so much worse than the average and indexes themselves. Wall Street attached itself to pre-tax wealth-building. When pre-tax paying came about organically, people were intrigued by the idea of putting their money in a “silo,” where they could save up and have to pay taxes on it only when they retired – and since they would eventually be in a lower tax bracket, they could pay less taxes. <
S1 E165 · Wed, December 29, 2021
Joe Manchin Kills the BBB; What this Means for POZ Strategy
David has been tracking Joe Biden’s Build Back Better plan for the last 6 months – and the sticking points have been Joe Manchin and Kyrsten Sinema. Joe Manchin, in particular, has always been the one senator having issues with Biden’s signature bill. He has had issues with the size of the bill, and whether it was going to have an effect on inflation which is something that has already been ruled by many economists as no longer transitory. Jerome Powell, the Chair of the Federal Reserve, has indeed confirmed that inflation is here to stay. There’s been big news out of Washington: Joe Manchin has finally weighed in on whether or not he’ll vote for the Build Back Better plan. After months of speculation on whether Manchin would fall in line with his fellow democrats or not, he has made it known that he won’t back the BBB. One of the things Senator Manchin did was check what the Congressional Budget Office had to share in regards to the impact on inflation and other facets of the economy. Even though Jeff Levine (@CPAplanner on Twitter) seems to think that democrats could circle back after the New Year and could bring Manchin back on board, David finds that unlikely. Senate Minority Leader of the Republicans, Mitch McConnell, said that if Manchin became a Republican he would welcome him among the Republicans — this could cause a debate on whether Manchin is a Democrat at the end of the day. The Trump tax cuts will expire in 2025, and we’ll see the same tax rates we saw in 2017. The 12% tax bracket will become 15%, the 22% will become 25%, and the 24% tax bracket will become 28%. Starting in January 2022, you’ll now have 4 years (2022-2025) to be able to reposition to take advantage of these historically low tax rates – instead of having the 8 years that were thought to be possible under Joe Biden’s BBB tax change legislation. According to David, this isn’t great news for those trying to get to the 0% tax bracket. The goal is to stretch the tax allocation out over as many years as possible before tax rates go back up for good. As of today, it looks like that’s going to be in 2026. If your listeners would like to get all the heavy lifting done, there’s a greater likelihood that they would rise into a tax bracket that would give them “buyer’s remorse” (as opposed to being able to stretch out those tax allocations over 8 years). Those who like government restraints would find significant the fact that, despite being paid for under its current iteration, the BBB would add $3 trillion of debt over a 10-year timeframe, were they to extend a lot of the spending initiatives that expired a couple of years into the program. This isn’t good news for those who were hoping to stretch the tax obligation out over a longer period of time. David’s gut tells him that Biden’s signature legislation, his legacy as it were, has one chance to leave his footprint on Amer
S1 E164 · Wed, December 22, 2021
Why the National Debt Has Hamstrung the Fed and Legislative Update
David’s latest book, the Infinity Code, is centered around the story of a shadowy cabal bent on transforming the US monetary policy and has recently been finished. The Fed is currently wrestling with raising interest rates in an effort to combat inflation, but they are facing an obstacle in the form of the national debt. If interest rates are raised, which is the way the Federal Reserve usually responds to inflation, the cost to service the national debt will rise dramatically and could force the US government to raise taxes on nearly all Americans to simply avoid defaulting on the debt. Defaulting on the debt would precipitate a global depression that would cause the stock market to tank. The debt has become so big that the main tool of the Federal Reserve has been taken away. One of the unintended consequences of such a large amount of debt is that the debt starts to call the shots and limits your options. The current state of the Build Back Better Plan is delayed. The legislation has been kicked down the road until 2022, and generally, legislation that wallows in Congress for too long becomes very unattractive. The Democrats have put a deadline on the legislation of Dec 28, 2021 but even Chuck Schumer admits that it would be very ambitious to accomplish that. Joe Manchin is in no hurry, particularly with the latest report that inflation in the US is running at 6.8% annually which is the highest it’s been in over 20 years. Senator Lindsey Graham told reporters that he spoke with Manchin and and they are largely on the same page. One key issue with the plan is that programs that are set to expire over the next few years rarely do, and if that’s the case, the true cost of the bill would be an additional $3 trillion over 10 years. At this point in time, we still don’t know what will happen to tax rates over the next 10 years. If Biden does get the bill passed, he will likely extend the Trump era tax cuts until 2029. It comes down to whether you will be able to execute your tax shifting strategy over 4 years or 8 years. If you have to get all your shifting done before 2026, you will give more of your money to tax than you ever thought possible. Mentioned in this Episode: Democrats brace for Build Back Better delay into 2022 - https://www.axios.com/democrats-brace-for-build-back-better-delay-into-2022-b105d083-f716-418f-9e18-c83ec2b6f68f.html
S1 E163 · Wed, December 15, 2021
Interview with Doug Orchard, Director of The Baby Boomer Dilemma
The Baby Boomer Dilemma came about because of Doug’s work with David in the past. After a podcast crowdfunding event last January, Doug received enough funding to get things off the ground. The Baby Boomer Dilemma is based around the simple choice families face between a defined benefits plan or a defined contribution plan. During World War 2, there were price wage controls in place, and it was illegal to lure recruits away from other companies with a higher compensation. This became the basis of the corporate pension. Right now, we have the opportunity to reevaluate our assumptions about retirement. Essentially, should people go for a big pile of money with a deferred compensation plan or go for something guaranteed? Doug has conducted several thousand interviews, but the most impressive interview Doug has done is with Olivia Mitchell. Not only was she charismatic, she had an incredible depth of knowledge on both social security and economics in general. When it came to annuities, she was the one that discovered that you could draw more in retirement by incorporating an annuity than with stocks alone, up to 40% more. The film dives into pensions, both corporate and public, and the global issue of social security. The Baby Boomer Dilemma is not unique to America. Doug’s other favorite interview was with Dr. David Babel, an economist at UC Berkeley. One of the most interesting things about Dr. Babel is that his dissertation was one about inflation, and as the expert on the topic, he decided the most important place to put all of his money was in annuities. Economists disagree regularly on just about everything, but the one thing they all tend to agree on was the mathematical value of having guaranteed lifetime income in retirement. According to the father of the 401(k), the 401(k) is a disaster for the average investor. While it has done some good, there are plenty of risks involved. Nearly every top economist recommends that some portion of the plan should include some level of annuitization in the accumulation years of someone’s life. If you lose 20%-30% before retirement, it’s essentially impossible to make it up. Generally people tell you to stick to the plan of consistently accumulating dollars in your stock portfolio, and that works during the accumulation years, but that rule works against you once you start taking money out. If the stock market goes down when you have to take money out of your portfolio to fund your lifestyle in the first ten years of your retirement, you’re in big trouble. In Tax-Free Income For Life, the essential message is that when you take your lifestyle needs and subtract your pension and social security, that gap is what should be covered by a guaranteed lifetime stream of income. The Baby Boomer Dilemma is built around a narrative largely inspired by The Social Dilemma. The options were either an immense number of charts
S1 E162 · Wed, December 08, 2021
Is Inflation Here to Stay?
Inflation is here, the question is “Is it here to stay?” Consumer prices soared in October 2021 and are up 6.2% from a year earlier, the fastest increase in over three decades. We’ve grown accustomed to inflation of 2% a year, so the current level of inflation is considerably higher than economists have expected and is having some serious impacts on people’s daily lives. High inflation will likely be with us well into 2022 and beyond. The reasons prices are rising are complex. One of the variables is supply and demand and for goods ordered online, demand has far outgrown the ability of the market to produce. We have grown accustomed to ordering online and that trend is likely here to stay. Shipping container costs from China have increased, in some cases up to 15 fold, and those prices have to be passed on to consumers in order for the supply chain to still function. The same is true with labor, and those increased costs are the unintended costs of the increase in demand. Increased demand and reduced supply is the perfect formula for increased inflation over time. Supply chain conditions continue to be stressed which is only exacerbating the problem of disruption and increased prices. There are over 500,000 shipping containers in Southern California alone waiting to be offloaded and processed. From shoes to hot tubs, there is no industry that is unaffected by the supply chain disruption. These challenges are going to continue for the next year at least. We should be getting used to higher prices as the new normal. Paul Tudor Jones says inflation is here to stay, and it poses a major threat to the US economy. Maya MacGuineas feels the same way. Inflation is not just a supply and demand issue, it’s also being driven by the money printing that has happened over the past decade and which has recently exploded during the pandemic. We have a tremendous amount of money that has been injected into the economy, and when you have more dollars chasing fewer goods, that drives prices up. In a rising-inflation environment, you don’t want to invest in a fixed-income vehicle. Stocks and equities are better options. From the Power of Zero perspective, the number one threat to your retirement is longevity risk. If you have guaranteed lifetime income, it must be indexed to inflation. If your pension and/or Social Security are not enough to cover your living expenses in retirement, the shortfall should be covered by an annuity, but to protect against inflation, the annuity needs to be a particular type. If your annuity is not adjusted for inflation, a high-inflation environment can kill your retirement portfolio. A fixed indexed annuity that’s linked to the growth of the stock market protects you from that risk. For the rest of your stock market portfolio, you need those dollars to compound in a fairly aggressive way to keep pace with inflation. <p
S1 E161 · Wed, December 01, 2021
What I Would Do If I Were President
As a financial advisor, David came up with the concept of the three buckets and a quick five-minute presentation to convey the idea to clients. This developed into an hour-long presentation which eventually became the seed of the Power of Zero book. It took David just three days to write the book because the core of the material was already in place. He just had to commit to putting it onto the page. The book was republished in 2018 with new content by Penguin Random House. David is currently writing a fictional story centered around a financial theme that has a lot of real-world applications right now. The plot basically revolves around the very real threat of Modern Monetary Theory. Modern Monetary Theory is the idea that the government isn’t constrained by the same restrictions as the average American family and can essentially print as much money as they want without repercussions. All of the economists that David has interviewed for his podcast essentially agree on the fact that implementing MMT would lead to hyperinflation. However, this doesn’t stop MMT proponents from espousing the theory though. If you start accumulating debt in the belief that it won’t affect anything, reality will prove you wrong. The cost of servicing the level of debt the US government currently has is taking up a large portion of the federal budget. By 2040, it would consume the entirety of the federal budget if interest rates simply went back to where they were at in 2003. David believes the moment of reckoning for the US is going to be 2030. Brian Beaulieu has predicted the major economic trends with 90% accuracy over the past 40 years, and he believes that 2030 will be a confluence of events that will result in a global depression. As rough as the dollar is, it’s still one of the most stable currencies in the world. It’s relatively unlikely to be usurped. The real issue is that Social Security and Medicaid are tied to inflation, so if we print more money, the cost of the programs also rises and you will never really get ahead. The US is facing down a fiscal gap of $239 trillion just to be able to deliver on the promises already made. The Biden tax legislation has pros and cons for many Americans, but the bottom line is that he’s not addressing the underlying problem. It doesn’t arrest the slide into fiscal solvency. Politicians are generally reluctant to push anything through right before midterms. If the legislation doesn’t get passed before the end of the year, it may never happen. If David were the president of the United States, he would take a page out of Larry Kotlikoff and basically guarantee that Biden wouldn’t be elected for a second term. The big focus would be to reform the social programs that are driving the debt, in particular MediCare. Without this kind of action, the national debt will grow by definition. Maya MacGuineas did a study to find what the gover
S1 E160 · Wed, November 24, 2021
My Upcoming Book, Legislative Update and Thoughts on Hyperinflation
The situation with the Biden infrastructure plan continues to evolve. Senators Joe Manchin and Krysten Sinema have continued to be obstacles in the Democrats' way from getting the bill passed. The Democrat caucus has been in disarray and seems to be pulling in different directions. Biden was hoping the bill would pass by having everyone vote before the legislation was written prior to him landing in Rome. Right now, it looks like things are dead in the water including raising tax rates on the rich. The big question is whether the Trump tax code will remain in place until 2026. Joe Biden has expressed his desire to raise taxes on the rich, and the easiest way for him to do that is to simply let them expire. For most Americans, this means that if you want to shift your money from tax-deferred to tax-free, you have just five years left. The fewer years you have to shift your money, the more likely you are to rise into a tax bracket that is going to give you heartburn. Whatever happens in the next week is going to determine how people plan for retirement in a significant way and is going to determine the legacy of the Joe Biden presidency. Will Congress simply change the laws regarding Roth accounts? Not likely. To do so at this point would cause political and economic chaos. The Roth IRA is also one of the accounts that both the federal government and the average American likes. If anything, the government will try to make the Roth IRA even more attractive in order to raise more tax revenue now. David is currently writing a new novel based on the very real threat of the Modern Monetary Theory to America. There is a massive fiscal gap in the US of $239 trillion dollars which is going to have to be dealt with eventually, but the Modern Monetary Theory has been saying the debt is nothing to worry about. Modern Monetary Theory is becoming more in vogue recently with many politicians advocating it as a solution to our economic woes. Inflation is already here. We feel it at the grocery store and in our everyday expenses, but we are just at the tip of the iceberg. There is no question that inflation is coming, but whenever MMT proponents are asked about it, it’s never their fault. We have been practicing MMT for decades at this point, and eventually we will get to the point where interest rates begin to rise toward historical averages. When that happens the interest on the debt will consume the federal budget. Social Security, Medicare, and MediCaid are tied by law to inflation, so when money is printed to pay for those programs their cost goes up commensurately. It’s not possible to print enough money to solve the issue. Longevity risk is a major concern for all retirees, and one of the ways to mitigate it is with the 4% Rule, or what some economists now call the 3% Rule. The trouble is the rule is a very expensive way to mitigate the risk. The alternative is with a guarantee
S1 E159 · Wed, November 17, 2021
Updated Tax Thresholds for 2022 AND Is the Biden Tax Plan Really Cost Neutral?
Joe Biden has talked about how his tax plan is cost neutral, where the increases in taxes on the wealthiest Americans will offset the costs. Maya MacGuineas recently took a look at the numbers to find out if that’s true. The Build Back Better Act is set to cost $2.1 trillion as it’s currently written. It relies on a number of sunsets and expirations to keep the costs down. If the plan’s temporary policies were made permanent, the costs would increase by an additional $2.2 trillion. When the federal government is trying to make a bill seem cost neutral, they often build expiry dates into the legislation, knowing full well that Americans will get hooked on those programs and then demand they be renewed. This makes the cost of the program appear lower and much more palatable on the front end. The Build Back Better Act has several such gimmicks built into it including extending the child tax increase, the earned income tax credit, and setting universal Pre-K and childcare to expire after six years. These are things that are likely to be around for the long term. The most expensive provision would cost roughly $1 trillion to make permanent. Universal Pre-K and childcare subsidies would cost over $400 billion a year when combined if extended beyond their expiration dates. As written, the Build Back Better Act will increase the deficit by $800 billion over the first five years and then taper off from there for a net additional cost of $2.2 trillion. If the legislation were made permanent without additional taxation, it would add nearly $1.5 trillion to the deficit over five years and increase the total debt by $3 trillion by 2031. The Build Back Better Act relies on short-term policies and arbitrary expiration dates to lower the cost. This allows the government to present the bill as cost neutral, although any extensions will have to be funded by debt. History serves as a model, and it’s fairly likely that those short-term programs will become permanent in time. The tax rules have recently been updated for 2022. Because of higher than usual inflation in 2021, the index for inflation has increased as well. The standard deduction has modestly increased from $25,100 to $25,900 for married couples. The personal exemption is not coming back until 2026. Under the current law, the standard deduction will be reduced when the personal exemption returns and will end up with a net neutral effect. Capital gains tax rates remain the same, but the tax brackets are changing. The federal state tax exemption for decedents dying in 2022 will increase to $12.06 million per person. The gift tax exclusion jumps from $15,000 in 2021 to $16,000 in 2022. The Roth IRA is not changing to adjust for inflation because that would require an act of congress. 401(k) contribution limits are being adjusted alongside Roth 401(k) and 403(b) plans. Roth income limits will go
Wed, November 10, 2021
How to Access Your 401(k) Prior to 59 1/2 without Penalty
There is a little-known part of the IRS tax code that allows you to access your 401(k) or 403(b) prior to 59 and a half without penalty. Traditionally, the penalty is 10%, but the Rule of 55 gives you access without paying a penalty, but it comes with certain requirements. If you leave your job in the calendar year you turn 55 or older for any reason and your employer has stipulated that you have the ability to tap into your plan, you can do so without penalty. Some plans may require you to withdraw your entire balance as one lump sum, which would most certainly be a bad deal. To maximize the Rule of 55, there are a number of roll-over strategies you can use. For example, if you have an old 401(k) or IRA, you can roll those balances into your employer’s plans, and then when you separate you will have unfettered access to the total amount between age 55 and 59 and a half. If you have specific circumstances or know that you’ll have heavy cash flow needs between those ages, this is a solid, penalty-free option. You have to get all the shifting done before you leave your employer. You won’t be able to roll over a balance after you are no longer employed. There are some caveats. You can only withdraw funds from your most recent employer, and you can’t make penalty-free withdrawals from your IRA. The Rule of 55 is very specific and only applies to narrow circumstances. People are retiring at younger and younger ages, and if that’s the case for you in that period between age 55 and 59 and a half, the Rule of 55 is a great option. You will want to apply Power of Zero principles during those years because if you don’t you may bump into a higher tax bracket than you expect or accidentally suffer a 10% penalty. Another reason you may want to take money out of your 401(k) using the Rule of 55 is to take advantage of historically low taxes. You can use the money to fund your lifestyle as well as your Roth IRAs and LIRPs. A 72T is another viable option for some people, but it comes with artificially low limits that may be an obstacle. The 72T works for a lot of people, it just doesn’t work for everybody, particularly those that want to retire early.
Wed, November 03, 2021
Can a Billionaire's Tax Save Joe Biden's Signature Legislation
The Joe Biden legislature is currently dead in the water. Congress people are looking for ways to pay for the package, but even if they could there may not be a package to pay for. Every Senator wields considerable power and a couple in particular have been vocal opponents of the proposed bill. Joe Manchin and Krysten Sinema have voiced concerns about the package and the price tag. Other members of the Democrat party have lambasted Joe Manchin on social media and on the floor, and he has not taken the criticism lightly. He’s gone from proposing a $1.5 trillion dollar limit to $0, and Krysten Sinema has made it clear that she’s not interested in any sort of tax increases at all. Congress has now turned its attention to a different sort of tax. They’ve proposed a wealth tax, also described as taxing the unrealized capital gains on the liquid assets of anybody who has $1 billion or more in assets or anyone reporting more than $100 million in income for three consecutive years. This would affect only the 700 richest people in the country, and will generate $200 billion in revenue over the next decade. The reasoning is that raising the tax rate isn’t going to directly affect the highest earners because so much of their net worth is tied up in the value of their stock ownership. Democrats are not calling this a wealth tax because it’s not being levied against the entire net wealth of a wealthy person. Elizabeth Warren proposed a wealth tax in her presidential run and it is considered to have sunk her campaign. Jeff Bezos doesn’t liquidate his stock to fund his lifestyle. He borrows money and uses his stock holdings as collateral. This allows him to fund his lifestyle while still maintaining a controlling interest in Amazon. Democrats have asked Krysten Sinema to weigh in on the proposal, but she’s not likely to vote for it since she’s opposed to similar measures already being proposed. This would leave the Democrats below the threshold of a simple majority. Critics of the plan say that it will force billionaires out of the stock market and into more opaque markets like art and real estate. The real issue is that, even if passed, this tax only raises $200 billion in revenue. Even if the Democrats managed to pass the bill, there is still no clear plan to pay for it. The real question with this package hanging from a thread is what will happen to individual tax rates? Joe Biden’s proposed tax increases are tied to the bill so right now we have a choice. We can either assume the tax rates will expire in 2026 and this bill will not pass. The trouble with this is compressing the amount of shifting you need to do over five years and possibly bumping into a higher tax bracket along the way, only to realize after the fact that you had nine years all along. The reverse is also troublesome. You don’t want to plan for nine years when you only have five and end up in the
S1 E156 · Wed, October 27, 2021
The Importance of Multiple Streams of Tax-Free Income
David gets variations of one question pretty frequently whenever he gives one of his presentations, whether that’s in front of financial advisors or members of the general public. At the end of the workshop, there are five takeaways. The first is that tax rates are likely to be dramatically higher in the future than they are today. Mathematically speaking, we are past the point of no return. The second is that the only way to truly insulate yourself from the impact of higher taxes is to get to the zero percent tax bracket. The third is that it is nearly impossible to get to the zero percent tax bracket with only one stream of income. This is where most people stumble. Invariably at the end of the presentation, someone will come up and ask what the other streams of tax-free income are despite having just gone over six different streams during the presentation. People tend to fixate on the LIRP and forget about the rest. The LIRP is great, but it has a narrow focus and doesn’t do enough to generate a stream of tax-free income on its own. Typically, David recommends diversifying your tax-free streams of income because each one is unique and accomplishes different parts of the strategy. Getting to the zero percent tax bracket is like fitting pieces of a puzzle together. Only when you fit them all together does the zero percent tax bracket come into play for you. The first stream is the Roth IRA. If you’re younger than 50, you can contribute $6000. If you’re older than 50, you can contribute $7000. The thing that makes the Roth IRA unique besides being tax-free is that when you put money in, you can take money out right away. It’s the only tax-free stream of income with that feature. The Roth 401(k) is unique because it’s part of a company plan and they will often have inducements that go with it. The Secure Retirement Act 2.0 that is working its way through Congress will also allow you to direct that match to your tax-free bucket. This company match is free money and that’s something you should always take advantage of. The Roth conversion is unique because it can be the workhorse for your retirement planning. It allows you to convert as much as you want to tax-free because there are no limits at the moment. If you have a lot of money in your IRA ($10 million+), it probably makes sense to convert all of that money before tax rates go up next year. Required Minimum Distributions are interesting in that they come from your tax-deferred bucket. The idea is that the balance in your IRA is low enough that your RMDs at age 72 are equal to your standard deduction and don’t cause Social Security taxation. RMDs are the only strategy where you get a deduction on the front end, the money grows tax-deferred, and you can take it out tax-free, also known as the holy grail of financial planning. The LIRP has a lot of things going for it, but one thing that really stands ou
S1 E155 · Wed, October 20, 2021
Is Biden's Tax Plan Going Up in Smoke?
It looks like Joe Biden’s landmark legislation is running into some challenges in Congress. Joe Manchin, one of the most powerful men in Congress right now, has pushed back on the $3.5 trillion bill and counter-offered with a more narrow $1.5 trillion plan. Progressive Democrats in the house are saying that it’s too small to make their priorities a reality. Both sides of the aisle are pulling in opposite directions and don’t seem to be able to come to a compromise. Joe Biden is making tax reform a major aspect of the Human Infrastructure plan. The increase of tax rates on those making more than $400,000 per year are the means for paying for part of the plan. If the bill fails to pass, the current tax law expires in 2026. If it does pass, the Trump tax cuts will still be in effect for another 8 years. The time difference could be the determining factor in shifting your money to tax-free without bumping into a higher tax bracket. Joe Biden is on the clock. If he can’t get this bill passed relatively soon, he’s going to convey the impression that his party is in disarray and they aren’t going into the midterm elections in a unified way. Typically, the party in power needs to get their priorities done in the first two years. The stalemate in Congress runs the risk of pushing the legislation so far out into the future that nothing happens. The bill will end up somewhere between the two extremes. There are other Senators and Congress people saying that the $3.5 trillion is too small while others are saying $1.5 trillion is the maximum. Nancy Pelosi has recently abandoned the effort to tie the Infrastructure bill and Human Infrastructure bill together. The longer this bill takes to pass or fail, the more likely failure becomes as congresspeople won’t want their name attached to it. This means that every day that goes by where this bill doesn’t pass, the likelihood is that the current tax rates are going to expire in 2026. Mentioned in this Episode: A top House progressive says $1.5 trillion is not enough to pass social spending plan - npr.org/2021/10/03/1042862107/a-top-house-progressive-says-1-5-trillion-is-not-enough-to-pass-social-spending-?t=1633978400218&t=1634060208587
S1 E154 · Wed, October 13, 2021
The Bi-Partisan Debt Extravaganza
The increase on taxes on the rich with the Human Infrastructure plan is rumored to cost the average American nothing, but that’s not quite the full story. The long-term implications of the cost of the plan say differently. Fiscal insanity has been a bi-partisan venture, and it has been for at least the last 20 years. Debt goes up under Republican administrations just as much as Democrats. Under Donald Trump’s administration, the debt rose by an average of $2 trillion per year. Historically, the debt rose by $1 trillion driven primarily by Social Security, Medicare, and Medicaid as Baby Boomers begin to retire. Broken down, this means that there is an extra $23,500 in federal debt for every person in the country. Only two other presidents have come close to spending as much, George W. Bush and Abraham Lincoln, both of whom oversaw extraordinary circumstances during their presidencies. One of the things that drove up the debt was the Covid-19 crisis, but the debt had already soared to grave levels prior to the pandemic. Trump cut taxes but didn’t do anything to cut spending, and this caused debt to soar to unprecedented levels. The national debt is now at the point where it’s higher than it was at the conclusion of World War 2. The difference is that we could demobilize after WW2 but we can’t avoid the primary expenses looming over the nation now. A common myth that many people believe is that we can grow our way out of the national debt. The debt is growing at an extraordinary rate and there is no way for revenue to grow in comparison. The tariffs Trump introduced were believed to help eliminate the budget deficit and pay down the national debt, but that was not the case. The Trump tax cuts were primary drivers of increasing the debt, when combined with a lack of cuts to spending. The tariffs also had a minimal impact on the debt once it had been allocated. The fiscal gap and the national debt are so large that the idea of taxing the rich pales in comparison. Taxing the rich, even at 100% levels, it’s only enough to pay the interest on the debt and fund a couple of programs for a few weeks. There are huge fiscal unsustainabilities in the scope of the federal government’s budget. By early 2019, Trump was telling the American public that the national debt was a grave threat to economic and societal prosperity. Other officials began sounding the alarm as well. Historically, we have racked up debt but with good excuses for doing so. This time we accumulated debt when the stock market was booming. When every other country was getting their house in order, we continue to pile debt onto the national credit card. We are currently at 130% debt-to-GDP and for most economists, alarm bells are going off. The reason why now is different from WW2 when we had similar levels of debt is we are now funding social programs that are slated to grow dramatically in the near fu
S1 E153 · Wed, October 06, 2021
The POZ Worldview: David McKnight versus Dr. Larry Kotlikoff
Dr. Larry Kotlikoff is the foremost expert in the world on fiscal gap accounting and has done a great job transforming how we should be thinking about a nation’s debt. Dr. Kotlikoff recently stated during an interview that most retirement planning is wrong. According to Dr. Kotlikoff, the basic problem with financial planning is that the goal of our life is not to accumulate wealth so that people can charge us fees on our assets. It’s about having the best lifestyle we can, given our resources, so we don’t end up on the street if the market crashes or we live to be 100 years old. You don’t necessarily need to pay someone to manage your assets, but it can be worthwhile to have someone help you stick to your objectives. Most people without a financial advisor participate in emotionally driven investing, which is why the average investor’s returns suffer. Saving for retirement is a requirement in consumption smoothing, but there is an optimal amount to save. Once you know what you have, you know what you can spend. Part of the job of a good financial planner is helping you reverse engineer what you need to create the lifestyle you want in retirement. This is where the Power of Zero paradigm deviates from mainstream financial planning. You have to get the tax part of the equation right. It’s not enough to know what you should be saving, because if you execute that plan in your tax-deferred bucket and watch as tax rates rise over time, you’ll find that your financial plan only delivers about half what your lifestyle needs. You need to contribute the right amount of money into the right kinds of accounts. Dr. Kotlikoff feels the stock market is overvalued and dependent on the Federal Reserve’s support to maintain its levels. Market timing is tricky at the best of times. Statistically, it’s nearly impossible to do. Over the course of a given year, that 80% of the rise in the market occurred on 6-8 days and you have to predict exactly which days those are going to be. If you can guarantee your lifestyle expenses with your Social Security, pension, and/or a guaranteed lifetime income annuity, you can take much more risk in the market. A good rule of thumb if you need to dip into your assets during a down year is to take money out of your LIRP instead of your stock market portfolio. Dr. Kotlikoff recommends that you push off taking Social Security for as long as you can to mitigate longevity risk. The key here is predicting how long you are going to live. The worst thing that can happen to you is push it off until age 70, and then die at age 71. The best way to predict how long you are going to live is to go through the LIRP underwriting process. When an underwriter accepts you, they are basically betting that you are going to live a long, healthy life, and you can use that to push Social Security off as long as possible. Is paying off your mortgage earl
S1 E152 · Wed, September 29, 2021
7 Takeaways from the Recent House Tax Bill
Most of the changes of the two infrastructure bills working their way through Congress right now will mainly affect high-income earners, but the details may change as time goes on. There are seven major takeaways from the recent house tax bill. The first is that personal income tax rates are going up, but only for roughly 2% of households that make more than $400,000 per year. Joe Biden campaigned on not raising taxes on the middle class, and the current form of the bill seems to reflect that. Takeaway #2 is that capital gains rates are going up, but not as much as Biden originally proposed, which is primarily going to affect high-income earners. This is a retroactive bill which if it comes into effect retroactively to the date of Sept 13. If you sold anything after that date you will be affected by the higher capital gains tax rate. Takeaway #3 is that the bill brings back the marriage penalty. This bill will become somewhat punitive for married people when compared to single people. Takeaway #4 is that the Roth conversion is going away for the wealthy. Whether the Roth conversion is applied to the limit is a question right now, but if that’s the case it will be a major roadblock for any Power of Zero planning. The effective date of this provision is December 31, 2031. It’s speculated that by delaying the start date it will create a buy-now mentality. The IRA and the Roth conversion are two of the only things in the world that Americans like and the government likes. The government gets revenue today, and Americans get to insulate themselves against the impact of higher tax rates down the road. Takeaway #5 is that the backdoor Roth conversion is going away. Takeaway #6 is that there will no longer be any IRA or Roth contributions for the rich, basically anyone making more than $400,000 or anyone with more than $10 million in retirement accounts. The intent is to prevent extremely wealthy people from taking advantage of the tax code, but the end result is generally pretty minimal. Takeaway #7 will have a particularly large impact on people with large amounts of money in their Roth IRA. This is largely inspired by Peter Thiel who recently revealed that he had over $5 billion in his Roth IRA. People in the higher income bracket and who have over $10 million in their Roth IRA would be required to distribute 50% of the excess of $10 million. If your balance exceeds $20 million, you would have to distribute 100% of the excess over the $20 million mark. As it’s written right now, if you’re a married couple that earns under the $450,000 per year income amount, the rule won’t apply to you. Earn one dollar more though and you will have a massive RMD coming your way. Mentioned in this Episode: Jeff Levine, Twitter: @CPAPlanner
S1 E151 · Wed, September 22, 2021
Is the US About to Default on Its Debt?
Whether you like to talk about politics or not, the things that are happening in Congress right now will affect your retirement. All the unmitigated spending during the Covid pandemic is catching up with the US. Treasury Secretary Janet Yellin revealed further measures to avoid breaching the federal government’s borrowing limit and also announced they would be suspending reinvestments for a number of retirement funds. Debt negotiations have always been a game of chicken between the Democrats and the Republicans, but there’s more at stake right now. The Treasury uses emergency maneuvers to conserve cash so the government can keep making payments on its obligations. Once those measures run out, the Treasury could begin to miss payments which could trigger a default on US debt. A default on the debt in the US has never happened before, and if it did happen it would likely precipitate a global depression. There are only two things the federal government is Constitutionally required to pay: Civil War pensions, and interest on the national debt. Similar instances have happened in the past, like in 2011 when Standard and Poor stripped the US of its AAA rating for the first time. If we default on our debt, it could trigger a sovereign debt crisis, which will likely result in the costs of servicing the national debt to go up dramatically. The debt ceiling has been raised 98 times in the past, but it’s possible for this time around to go differently. It’s possible that the tipping point will occur mid-September and we could be seeing the consequences of this as early as October. We refinance the national debt every two years, so when interest rates go up it gets even more expensive to service the debt, and that can result is taxes being raised even earlier than we thought. The national debt is projected to increase by $3 trillion by the end of 2021. All of this is a backdrop to the Democrats trying to pass a $1 trillion infrastructure bill and a $3 trillion human infrastructure bill through Congress. The Democrats want the debt ceiling increase to be a bipartisan effort, but the Republicans are positioning themselves as opposing the increased spending and forcing the Democrats to own the bill. It seems like no one saw this spending initiative coming face-to-face with the fiscal constraints of the repercussions of unmitigated spending by both parties over time. Mitt Romney said that the Democrats would be wise to raise the debt limit in reconciliation and own the decision. Joe Biden’s tax increase initiative is part of the drama. If this debt crisis implodes, he may not get anything that he wants and the Trump tax cuts may simply expire in 2026. Mentioned in this Episode: Janet Yellen to Enact Steps to Avoid Breaching Debt Ceiling - <a href= "https://www.wsj.com/articles/janet-yellen-announces-measures-to-avoid-breachin
S1 E150 · Wed, September 15, 2021
Could Joe Manchin Sink Joe Biden's Tax Bill?
If Joe Biden can’t get his tax legislation through before midterm elections, it’s unlikely he will be able to pass it at all. The situation in Afghanistan has lost Biden approval points in polls across the nation and since the midterm elections usually involve the sitting administration losing either the Senate, the House, or both, there may be no opportunity for him to push it through later. The Senate, which is currently controlled by the Democrats, has proposed a $1 trillion infrastructure, which has bi-partisan support, and a $3.5 trillion human infrastructure bill, which has been opposed completely by the Republicans and doesn’t have universal support from the Democrats. The Democrats have imposed a September 30 deadline to vote on both bills at the same time. Joe Manchin wrote an op-ed for The Wall Street Journal showing substantial misgivings for the human infrastructure bill. This gambit of Joe Manchin not only threatens the human infrastructure bill, but also Joe Biden’s presidency. Joe hints at the implications of both borrowing more money and printing more money in the article. Joe Manchin has been echoing many of the sentiments from David Walker, Larry Kotlikoff, and Maia McGuinness. Joe Manchin warns about spending too much money when things are going well and what happens then when we have a real crisis on our hands and the coffers are empty. Manchin recommends that Congress should pause on the budget reconciliation legislation to give everyone more clarity on the situation with the pandemic and inflation. You should not push through legislation unless you have a full understanding of the implications of that legislation. If you can’t get your constituency to agree to raising the taxes needed, you shouldn’t be layering on additional unprecedented debt. According to David Walker, the death of Social Security and Medicare accelerated by three years due to the impact of COVID-19 spending. Joe Manchin has a pattern of putting up a lot of fight during the legislative process, but then almost always falls into line when it’s time to vote. Given how well the economy is humming along, there is no clear and present danger to the country and this spending bill sets a very bad precedent. The biggest issue our country is facing is our own fiscal irresponsibility. The decision to vote for the two bills in tandem means that if there is any pause, then that is going to contribute to the perception of dysfunction and chaos, which is something voters do not like to see. The danger of the pause is it could set off a cycle of failure. Delay creates the impression of chaos, making Biden and Congress less popular, in turn reducing the popularity of any bills they pass, and making Congress less likely to support them. Joe Biden’s tax proposal is part and parcel of the $3.5 trillion human infrastructure bill. If he can’t pass the bill, he doesn’t get the t
S1 E149 · Wed, September 08, 2021
How Renowned Football Coaches Are Using the LIRP
In August 2016, the University of Michigan began a trend by offering their football coach a split-dollar life insurance arrangement as an alternative to deferred compensation. Other football coaches in different schools have similar arrangements. The overarching principles of these kinds of plans can apply to you as well without having to be rich or famous to take advantage of the benefits. This is a program where the employer agrees to loan dollars to an employee, generally over a period of 7 years, that are invested in a cash accumulation life insurance policy. Unlike traditional life insurance policies where you want the highest death benefit at the lowest premium, these plans are the opposite. The plan is attempting to mimic the best aspects of the Roth IRA without any of the limitations, and there are a number of limitations of a Roth IRA that would make them unattractive to people like Jim Harbaugh. At some point, the loan will be repaid, but in the meantime policy cash flow in excess of the balance can be accessed tax-free to supplement cash flow in retirement. It’s a win/win arrangement for both parties. For the employer, they incentivize the coach to stick around and for the employee, they get to take advantage of a tax-free accumulation tool that otherwise wouldn’t be available to them. As good as the arrangement is, it can be improved upon. Interest-free is not cost-free. Every year Jim Harbaugh has to pay tax on imputed income. Since the money is broken out over 7 years, the interest rate ebbs and flows, and the cost to him is variable. Jim Harbaugh won’t know the full extent of his imputed income until the final seventh installment has been made. If they were to do this deal again, it would make more sense to make the loan all upfront and lock in the interest rate. The key to this approach is having an accumulation tool that’s going to grow the money to the point where it far exceeds what the repayment of the loan has to be. Without that tool, you won’t have the ability to grow. Rumour has it that the arrangement with Jim Harbaugh involved a whole life policy, but when they compared that to an indexed universal life policy it could have been even better. This kind of arrangement has two key components: the money has to grow safely and productively (net of fees 5% to 7%), and you need to look at how you get the money out. With whole life policies, we know they can have a net cost of borrowing. The problem comes when there is an arbitrage between the rate on your collateral account and the loan rate. One of the most important provisions in the life insurance retirement plan contract is the loan provision because if you give them 30 years to make up their mind, it’s not always going to be in your favor. At its core, the purpose of the program is to promote the long-term retention of the employee in a tax-efficient manner. It works best w
S1 E148 · Wed, September 01, 2021
Could the Biden Tax Legislation be Retroactive?
Is it possible for the tax proposals moving their way through Congress to be retroactive for 2021? Biden has proposed raising the business tax from 21% to 28%, and when you add in the State corporate income tax of 7% that will put the US near the top highest corporate tax rates in the world. For individuals, Biden has proposed increasing the top income tax bracket from 37% to 39.6% for married couples making over $400,000 He has also proposed a large change to the FICA taxes. For people making $400,000 or more the FICA tax makes a comeback and when added up to all the other tax increases the baseline is 55.8%. In high tax states like California that total approaches 70%. Biden also wants to turn death into a taxable event and make the tax benefit for itemized deductions be limited for people making more than $400,000. If you’re making less than $400,000 per year you don’t have too much to worry about regarding taxes. If you make more than $400,000 you will find that the IRS’s crosshairs are aimed squarely upon you and your retirement account. Many times throughout history Congress has either raised taxes, reduced exemptions, or some combination of the two. The latter seems to be the case right now. Long term capital gains will be taxed at the ordinary income tax rate of 39.6% on anyone making more than a million dollars. In a state like California your effective capital gains tax rate will be over 50%. Estate tax exemptions will also be affected by the tax proposals, as well as the lifetime gift tax exemption, and more. Joe Biden is proposing these tax changes to finance his spending initiatives. All this money is being earmarked for future spending, not for paying down debt. According to the Wall Street Journal, the Biden administration tax increases would be retroactive to April 28th, 2021 in order to avoid giving people the ability to plan for it. There is historical precedent for this kind of increase with it happening under the Clinton administration. The question is which taxes will be retroactive and which ones will come into effect in 2022? Right now, it’s only the capital gains tax but there is precedent for it being applied to income taxes relatively late in the year as well. We don’t know if any of the tax rates will go up this year or next year. The situation in Afghanistan may have lost him some political capital and slowed him down, but maybe not. Mentioned in this Episode: Bracing For Biden - fa-mag.com/news/bracing-biden-63031.html?section=47 Biden Budget Said to Assume Capital-Gains Tax Rate Increase Started in Late April - wsj.com/articles
S1 E147 · Wed, August 25, 2021
News on the Timing of the Biden Tax Changes
Legislative hijinks are happening in Congress right now and they are going to have an impact on the timing of a potential tax increase coming down the road. The Senate has struggled for a while now to come to an agreement on a $1 trillion infrastructure package, but with some bipartisan cooperation they’ve pushed it through. Democrats in Congress have turned their attention to a $3.5 trillion budget that is going to be a much bigger challenge. Any tax increase that gets pushed through will be part of this budget because it is going through budget reconciliation, which has several implications. Everything included in this bill will expire in 8 years because of the nature of budget reconciliation. The Speaker of the House, Nancy Pelosi, has declared that they won’t vote on the $1 trillion infrastructure bill until she feels they have enough votes for the larger $3.5 trillion budget. The GOP has made it clear that they will oppose the larger bill at every turn which is why the Democrats are resorting to budget reconciliation to get the bill done. The proposal contains plans to expand healthcare coverage, universal Pre-K and free community college, ambitious federal programs to combat climate change, and a path to citizenship for qualified immigrants. There is a lot riding on this package for President Biden and the Democrats going into the 2022 midterms. There are a group of moderate Democrats that are uncomfortable with the size of the bill. Joe Manchin has spoken out against the high level of spending among other prominent Democrats. Progressives are pushing five things with the bill by recasting different political issues as economic. This is the argument for pushing the bill through the budget reconciliation process. Because of the lack of Democrat cohesion on the bill, it is unlikely to pass anytime soon. Biden needs a win going into the midterms and stalling now is not going to look good. Tied into that is the future of tax rates. Even with the increased taxes built into the bill, spending will still go up. The government will not have enough revenue to cover the cost of the bill, which means the debt will continue to rise. The tax cuts on middle America will likely be extended for another 8 years, and this means the debt is going to continue to compound and the fix in 2030 will be even more aggressive. These developments not only directly impact people making systematic shifts from tax-deferred to tax-free over the next eight years, but we need to consider the environment of fiscal instability coming down the road. Mentioned in this Episode: Here Are 5 Hurdles That Democrats Face Now For Their $3.5 Trillion Budget - npr.org/2021/08/12/1026184120/here-are-5-hurdles-that-democrats-face
S1 E146 · Wed, August 18, 2021
Do Retirees With Annuities Have More Fun?
A new report says that retirees who convert their savings into guaranteed lifetime annuities effectively double the amount they are willing to spend each year on themselves and their families. This indicates that retirees holding more of their wealth in guaranteed income are more willing to spend on luxury items and experiences because of a higher comfort level with additional spending. The report looked at retired households with more than $100,000 in savings and spending more than $25,000 each year. They were making an apples-to-apples comparison between people that had a guaranteed lifetime income and those with enough assets that they could. They were looking at the most simple form of an annuity, the Single Premium Immediate Annuity. When people get into retirement they tend to get into a protective mode where they spend defensively. Without a baseline of guaranteed income, you’re basically in fear mode throughout retirement. If these guaranteed lifetime income annuities are so great, why do so many Americans not take advantage of them? The first major hang-up for most people is the lack of liquidity. When you purchase a Single Premium Immediate Annuity those funds are gone from your balance sheet and that gives some people a lot of heartburn. Another concern is inflation. The payment may be sufficient for your basic lifestyle needs now but that may not be the case in the future. Solutions to this problem include purchasing an annuity that scales with inflation, or to buy more guaranteed income than you need, the trouble with both of those is that they end up compounding the liquidity issue. The third issue is the idea that a person’s heirs may be disinherited if they die prematurely. The Mac truck factor may play out for you and that’s a real worry for many Americans. The annuity industry is listening and has created another type of annuity called the fixed index annuity, which goes a long way to solve those problems. It solves the liquidity problem by not requiring you to take your income right away. During the deferral period you have 10% liquidity, which is often more than enough. Once you elect to take your income, the income is linked to the growth of a particular stock market index. In the case where the index declines you are protected from the loss. The last issue fixes the inheritance, where if you die prematurely your heirs will receive whatever your initial investment was plus the growth minus any distributions. One thing missing from the article is that if you do decide to do an annuity, it’s important to have the ability to do a piecemeal internal Roth conversion. A fixed index annuity in your tax-deferred bucket can result in Social Security taxation, which can force you to spend down your other assets five to seven years faster. The piecemeal internal Roth conversion also helps mitigate tax rate risk. In a rising tax rate env
S1 E145 · Wed, August 11, 2021
A Major Change to Social Security?
A Democratic representative out of California has introduced a bill to change the way that Social Security cost of living adjustments are calculated. It proposes to link the Social Security increase each year to the Consumer Price Index for the Elderly, instead of the CPI for Workers. The difference between the two indexes over the course of a 30-year period is roughly 0.2% each year, which doesn’t sound like much, but when you compound that over the 30 years, it adds up quickly. The cost of living adjustment has only passed 2% twice since 2010. If you add up all the growth in the CPIE, it would amount to an increase of 10.1%, versus the CPIW which only amounted to 8%. Switching may not necessarily be good for seniors, with gasoline prices being weighted disproportionately between the two. Inflation has been in the news a lot recently. Increasingly as time goes on, politicians are going to be tempted by the Modern Monetary Theory proponents to print more money to solve their fiscal problems, and the end result is going to be inflation. The Senior Citizen’s League is estimating that the Social Security cost of living adjustment could be as high as 6.1% in 2022, which would be the highest cost of living adjustment in a very long time. The proposed bill has yet to receive a vote, but the bill has overwhelming support from those currently on Social Security. Prior to Covid, we knew that Social Security was slated to run out of money in 2035. Because of the additional spending during the pandemic, Social Security could run out of money in 2032 with Medicare running out in 2023 instead of 2026. This means that the likelihood of higher taxes is closer than we thought. This bill would likely bankrupt the program at an even greater acceleration. A better way to increase your own Social Security is to position your assets from tax-deferred to tax-free. Anything above and beyond the ideal balance in your taxable and tax-deferred buckets should be systematically repositioned to tax-free. With the right amount of money in the first two buckets in a rising tax rate environment, and everything else positioned as tax-free, you can be perfectly positioned to insulate yourself from the impact of higher taxes, but also get your Social Security tax-free. Simply positioning your assets properly between those three buckets will add an extra five to seven years to your retirement. You can choose to rely on the government, or you can be proactive in positioning your assets.
S1 E144 · Wed, August 04, 2021
Is Joe Biden's Tax Proposal Losing Steam?
Joe Biden campaigned on the platform of raising taxes on the top 1% of earners in America, yet six months into his administration, there haven’t been any increases thus far. The main pillars of his proposal are to increase the corporate tax rate from 21% to 28% and to increase taxes on married couples earning more than $400,000 per year ($200,000 for individuals) from 37% to 39.6%. For those making $1 million or more, your long term capital gains tax rates would increase from 20% to 39.6%, effectively doubling. There are few reasons for the proposal running out of steam. The first is GOP opposition, as well as a number of economists warning that raising taxes now could jeopardize the economic recovery. Former George W. Bush Treasury official, Tony Fratto, says that the chances of big tax reforms in the near term seems reduced. There is a fear that tax reforms could squelch the growth of the economy as corporations are still trying to battle their way out of the quagmire of the Covid-19 recession. When corporate tax rates go up, those tax increases are typically passed on to consumers. We can look at major Wall Street players and how they are reacting or preparing for the proposal to get an idea of what the future may bring. Blackrock is mildly bullish on the tax rates going through with a number of senior strategists believing it to be likely but still hedging their bets. JP Morgan believes that Joe Biden will not be able to deliver on his tax proposal increases, but the discussion of increasing taxes may put a damper on market returns. Mitt Romney believes tax increases are off the table. Being able to pay for infrastructure bills with increased taxes is going to be extremely difficult to pull off. Tony Fratto says that borrowing is probably going to be how Biden will pay for all the various bills being proposed. As long as Democrats and Republicans disagree on how to pay for expenditures, borrowing is the easy solution. The US government has to refinance its loans each year, and they are directly impacted by interest rates. Interest rates may be low now, but they won’t stay that way forever. If Joe Biden is going to push through his tax proposal, he has to do it soon. As a president, when you can’t get things done in the first 100 days to one year, they tend to become lame ducks leading up to the next election. Biden is hoping to get all his initiatives done in the first year because polling indicates that Republicans will likely take back the House and the Senate. If he doesn’t push it through soon, he may not have a chance at all. In terms of the Power of Zero worldview, this means that the status quo is likely to be maintained and that the Trump tax cuts will expire Jan 1, 2026. You have 5 years to reposition your assets from tax-deferred to tax-free. This isn’t set in stone yet, we have until the end of the year before it becomes clear on what’s g
S1 E143 · Wed, July 28, 2021
The LIRP: When Does It Make Sense and How Old Is Too Old?
The 3% Rule says that if you want to have $100,000 per year in retirement, you would need $3.3 million saved up, which is not very attainable for most Americans. If you can offload longevity risk to a company that can handle it better than you can, you have to save far less. If you take a portion of your liquid investment portfolio and purchase an annuity, you can potentially achieve the same income flow at roughly half the cost. An annuity from an insurance company also mitigates withdrawal rate risk. If you have an income guaranteed in retirement by an insurance company, you won’t have to rely on your stock market portfolio to take care of your lifestyle needs. Long-term care risk is one of the most pernicious risks for most Americans. Almost, but not quite dying, is much worse than simply dying. In that case, the surviving spouse is often left with a subsistence living instead of the retirement lifestyle they planned for. People don’t love paying for long-term care insurance for a variety of reasons, but there are alternatives to traditional long-term care insurance that accomplish most of the same things. If you give an insurance company a chunk of your liquid assets, they will give you a guaranteed stream of income that will live as long as you do. Your assets get pooled with thousands of other people’s and statistical averages work everything out over time. Mathematically, the single premium immediate annuity is going to give you the most bang for your buck but there are three things that people tend not to like. The first is giving up some amount of liquidity, the second is the lack of inflation protection, and the third is the risk of dying early. The alternative is a fixed index annuity, which allows you to tie the growth of your income to a stock market index. This protects you from inflation, comes with a death benefit, and gives you a period of liquidity which addresses the three biggest concerns that people have with instruments that guarantee lifetime income. Your income in retirement can be guaranteed, but if you do that out of your tax-deferred bucket, the after-tax amount is not guaranteed. To plug that hole, most Americans dip into their stock market portfolio. This can also result in social security taxation, leading them to spend their stock market portfolio even faster. You should think very carefully before dropping a large amount of money into a single premium immediate annuity that doesn’t have the ability to do a piecemeal Roth conversion. The Life Insurance Retirement Plan comes into play in retirement when you need to pay for discretionary expenses, typically after the 10 year mark. The years where the stock market is down are the perfect time to take money out of your LIRP. The LIRP is the perfect vehicle to fund discretionary needs like plugging the hole in your roof or taking the grandkids to Disney World without withdrawing anything fr
S1 E142 · Wed, July 21, 2021
The Psychology of Guaranteed Income and How Much Money Is Enough
David’s first appearance on the podcast was one of the most downloaded episodes. Back in 2014, David wrote the Power of Zero book and since then the national debt has grown considerably. We are now at $28 trillion in debt and the primary problem is that much debt is only affordable as long as interest rates stay historically low. At some point in the near future, the US will no longer be able to borrow money at the current rate and this will result in the cost of servicing the national debt will grow and consume more and more of the national budget. Many experts are saying that tax rates will have to raise dramatically or the US will go broke as a country. Everybody has been saving the lion’s share of their money in tax-deferred accounts. In doing so they are entering into a partnership with the IRS where the IRS gets to vote on what percentage of your profits you get to keep. The best way to insulate yourself from higher taxes is to get into the zero percent tax bracket. Taxes are evolving at a rapid pace. We have to approach retirement with a sense of flexibility and be nimble enough to make changes to the strategy. Joe Biden’s tax plans are going to have major repercussions for every American, whether that is now or eight years from now. David’s belief is that Joe Biden is going to extend the tax cuts under budget reconciliation for another 8 years and if that happens the government is going to have to crank taxes up to make up for lost time. Everyday Americans need to take advantage of the current historically low tax rates, stretch out their tax obligations out over the next few years, and position as much of their money to tax-free. Historically, the highest marginal tax brackets are bellwethers for all other marginal tax rates. Maya MacGuinneas did a study that showed that the government would have to raise taxes on everyone making above $40,000 to 40% just to prevent the debt from growing each year. Even though Joe Biden has made the promise that he’s not going to raise taxes on the middle class, mathematically it’s just not tenable. If he refuses to broaden the tax base sooner rather than later, the fix on the back end is going to be much more aggressive. Raising taxes can be a catch-22, where it stifles economic growth and lowers revenue in the end. The reality is that there are not a lot of good choices to fix the situation, but the later we wait the harder the choices are going to become. Harvard Business School did a study to discover at what point do people feel comfortable with the amount of money they have saved and whether they will run out of money. Nearly everyone said they were worried. Ultimately, the study asked the question “do you need to have $15 million in your investment portfolio to feel like you won’t ever run out of money before you die, or is there another way to mitigate longevity risk?” People’s greatest fear in retirement is r
S1 E141 · Wed, July 14, 2021
Battle of the Massive Retirement Accounts: Peter Thiel vs. Mitt Romney
Roth IRA’s have been trending on Twitter recently because it was discovered that Peter Thiel accumulated over $5 billion in his Roth IRA. Peter Thiel was one of the original founders of Paypal in 1999 when the Roth IRA was still in its infancy. At that time, his salary qualified him to contribute to his Roth IRA and he placed 1.7 million shares of Paypal into his account. The shares started off at the value of one-tenth of one penny ($1700), and after Paypal went public, those same shares rose to over $50 each. With all this wealth in his Roth IRA, Peter Thiel used it as a slush fund for his other investments. In 2004, Mark Zuckerberg solicited a $500,000 investment from Peter, made within his Roth IRA, and that went on to grow considerably. By the end of 2012, Peter Thiel’s Roth IRA was valued at roughly $1.7 billion. Mitt Romney did something similar, where he put undervalued shares into his own Roth IRA, which ended up creating a lot of negative press for him. By 2019, a large majority of Peter Thiel’s investments took place under the umbrella of his Roth IRA. He has over $5 billion spread across 96 different sub accounts reflecting different investments in different companies. Peter Thiel plans on living to 120 and is making investments in antiaging technologies. In that situation, by the year 2087 he would have roughly $263 billion in his Roth IRA. In 2010, Congress removed the income threshold that prevented people from converting to a Roth IRA. This led hedge fund managers and venture capitalists to convert portions of their existing IRA, but Mitt Romney did not. Mitt now has around $100 million in his traditional IRA. In a rising tax rate environment, Mitt should have adopted the Peter Thiel approach. Under Joe Biden’s tax proposals, Mitt stands to lose upwards of 70% of that money upon distribution. The best course of action for Mitt would be to bite the bullet and convert all of that money in a single year. Even with all the taxes he would pay now, it pales in comparison to what he would pay once Joe Biden’s tax reform bill comes into play. According to the Power of Zero principles, Mitt is foolish to have that much money in his IRA. He should take advantage of the tax year of 2021 because it’s never going to be a better rate than 37% for him. One thing you can draw from the Peter Thiel approach is the power of the Roth IRA. Once you put the after-tax dollars in, they grow in a tax-free way no matter what you invest them in. Contrasted with Mitt Romney, the larger his wealth grows, the larger his tax bill grows. He will probably end up paying at least 50% in taxes by the time he needs to take that money out, unlike the venture capitalists like Peter Thiel, Warren Buffet, and others that have taken advantage of the Roth Conversion.
S1 E140 · Wed, July 07, 2021
Three Possible Scenarios for Rising Tax Rates
Americans have over $30 trillion sitting in 401(k)’s and IRAs, and people are waking up to the fact that those accounts are in the crosshairs of the US government to solve their debt problems. In a recent interview with Maya MacGuineas, she said the fiscal condition of the US and what’s going to happen over the next 10 years is terrifying. The Biden administration will likely try to kick the can down the road and that’s only going to make the fix more draconian. The political class is hyper focused on the top 1% of earners right now, but everyone needs to understand that when tax rates go up, they tend to go up for everyone. In 1960, the highest marginal tax bracket was 89% with the lowest at 22%. The highest rate tends to be a harbinger of what all the other tax rates are doing. In Maya’s study, she found that the US government would have to tax the highest earners at a rate of 103% just to prevent the debt from continuing to grow. It’s not enough to tax the rich. There will come a time when everybody is going to fall under the scope of the IRS and will have to pay up. The national debt that the government references is not the true national debt. If we did our books like every other country in the world, which includes unfunded liabilities, we would have a very different number. The true national debt is around $180 trillion and 8x-9x the GDP. You can’t control your payroll tax or your sales tax, but you can control the money you have in tax-deferred accounts. The true purpose of a retirement account is not to give you a deduction, it’s to maximize your cash flow at a period of time in your life when you can least afford taxes. The way most people are planning for their retirement is backwards. Unless you can predict what tax rates are going to be in the year you take money out of your retirement account, you don’t really know how much money you have and that makes it very hard to plan. We have an aging population in the US which is creating a demographic time bomb. As the Baby Boomer generation retires, later generations have to shoulder the brunt of that increased burden on social programs like Social Security. These programs only survive when subsequent generations are larger than the previous, which has not been the case for decades. We are not having as many children as we have had in the past and that’s making those social programs more unsustainable. There will not be enough people in the future generating enough taxes to pay for everything we’ve already promised. When the programs were created, the variables were very different. People didn’t live as long and they had more children. That is not the reality of the situation now, but nothing about the programs has changed. We have three possibilities for when tax rates are going to go up. The first is when the tax cuts expire in 2026. The second is the tax cuts get extended to 2030. The third, proposed by Ed Slott, is that the government
S1 E139 · Wed, June 30, 2021
What's in Biden's New Budget Proposal?
President Joe Biden has recently proposed a $6 trillion budget designed to make the US more competitive. Spending is already on an unsustainable trajectory so we need to examine the impact this budget proposal will have on the fiscal outlook of the country. A lot of people believe a $6 trillion budget is too much, too soon and will exacerbate the debt problem in the long run. The budget proposal introduces budget deficits over the next several years, financed mainly by additional debt. This will result in over $15 trillion in additional debt by the end of the decade resulting in a national debt of roughly $42 trillion by 2030. The assumption being made is that this level of debt is sustainable because of the belief that interest rates will stay relatively low. Should that assumption not hold true, this level of debt will cause some major issues for the US economy. The stated goal of the budget is to help Americans attain a middle class lifestyle and to make the US more competitive globally. The proposal hasn’t been voted on yet. The budget focuses on infrastructure projects, as well as shoring up of social programs like affordable childcare, universal Pre-K education, and a national paid leave program. Joe Biden campaigned on the promise that middle income earners will not have to pay for this additional spending. Biden plans to raise taxes on corporations and high-income earners and expects his plan to be offset by those additional taxes over the next fifteen years. The debt continues to grow each year because of the unfunded liabilities within existing social programs like social security. The budget proposal does not address this. It’s important to note that the proposed budget allows the middle income tax cuts that Trump signed into law to expire. There are sources in the White House that say that Biden will address these tax cuts at some point in the future. By 2024, debt as a share of the economy would rise to its highest level in American history, eclipsing a World War II-era record. Another worry is that the new level of spending will become the new normal going into the future. Joe Biden believes that this additional spending can be financed by an economy that is growing by just under 2% per year. We also need to be concerned about inflation. As businesses recover from Covid, people are making money again but that money is chasing fewer goods and causing prices to rise. Additional spending by the government will further increase the money supply and accelerate the inflation. If you had any doubt that tax rates will not be dramatically higher down the road than they are today, this budget calls for it. By 2030 there will be so much debt the government will be forced to broaden the tax base. Experts are no longer talking about passing the debt onto the next generation. More of them are talking about how the current genera
S1 E138 · Wed, June 23, 2021
Higher Taxes for the Middle Class? My Interview with Maya MacGuineas (Part 2)
Politicians are in a state of mind where they are not interested in fixing the problem, which means that the fix on the backend is going to have to be more aggressive and draconian. The damage the debt does is, in many ways, invisible to the average person. We have had decades to fix the debt problems but politicians have failed to do so. If we made these changes to something like Social Security years ago, we could have fixed it without affecting anyone depending on the system, but that is not the case anymore. If you look at where we’re headed, we will continue to see lower growth in the economy going forward. Economic growth, mobility, and income growth will be slower than it otherwise would have been. One of the real major concerns has less to do with economics than it does with national security. The US will not have the economic dominance that it had in the past that secured its geopolitical place in the world and will find itself falling behind places like China. We need to begin thinking more about the long-term changes in the nature of work due to technology. We need a social contract that reflects and recognizes these changes so people can work effectively and productively with the changes that are happening more and more rapidly. As our fiscal health weakens, our ability to meet the challenges of this century is greatly diminished and we will be dangerously weak for it. Modern Monetary Theory says that you can’t default when you borrow your own currency., which is true, but just because we can’t default, that doesn't mean we have a healthy economy. MMT recommends fiscal policy to control inflation, which means basically raising taxes. The trouble with that idea is that there aren’t any politicians willing to raise taxes, let alone cut spending or both. MMT proponents don’t understand the dangers of inflation. Inflation can wipe away your entire savings and create an economic recession that is difficult to escape and painful for everyone. Borrowing during the downturn is not an example of MMT being correct. MMT is dangerous because it’s so seductive. Who doesn’t want to be able to spend as much as you want indefinitely with no consequences? But just because you want it to be true that doesn’t make it true. Economists need to be unbiased and neutral when it comes to political ideology. There are politicians in power right now that recognize the threat of the national debt, but there are also groups that are working against the effort. Many politicians are willing to do the right thing, but they can’t do it in isolation. There is no point in having people who are willing to do the right thing get destroyed politically without achieving anything. Part of the problem is that the national debt does lend itself to grassroots outrage. Ideally, there is some leadership at the top to champion the cause.There are a lot of great members in congress and there’s a real c
S1 E137 · Wed, June 16, 2021
Higher Taxes for the Middle Class? My Interview with Maya MacGuineas (Part 1)
Maya is the President of the Committee for a Responsible Federal Budget. The committee itself has been around for a couple decades at this point and came about after several members of Congress left and realized how difficult it really is to be fiscally responsible with a government budget. It’s very difficult to govern in a fiscally responsible manner in a political environment because, in many ways, those two things are completely at odds with each other. Fiscally responsible is simply the notion that you will be paying for your budgetary items yourself and not pushing the cost onto the future. Politics puts pressure on politicians to promise as much as possible and defer the cost to someone else. In terms of where we are now, the current fiscal path is dire. We have just come out of one of the times to borrow and borrow we did. The US borrowed $6 trillion in response to the pandemic and the debt-to-GDP ratio is about to reach its highest point in history. The difference between the last time the debt-to-GDP ratio was this high (after WW2) and now that demographic is working against us. We are now slated to be running budget deficits of well over $1 trillion indefinitely and the debt-to-GDP is on a trajectory to grow faster than the economy every year from now on. When your debt is growing faster than your economy is the definition of unsustainable. In order to flip that and have the economy grow faster than the debt, we need to bring our deficits and debt trajectory down. When Maya started looking at this problem she was mainly concerned with the economic risks like inflation and debt crowding out investment, and those risks still exist today, but now we are also dealing with polarization. We are so polarized now that both sides of the aisle care more about beating the other party than doing what’s good for the country. One of the easiest ways to win over the public is to give them things for free, and this tactic happens on both sides. If we don’t get a handle on the dividing mentality that runs politics right now, we are not going to be able to solve the debt problem. We have to look at the costs to taxpayers to figure out if a proposal is worth it, but when you push the cost onto the future and borrow money to pay for it the cost calculation is thrown off. The truth is that there isn’t enough money in the pockets of the wealthy if you want to expand the government. Taxing the wealthy would not bring the debt to a manageable level, and certainly not if you want to expand government programs. Universal broad-based taxes will have to be part of the picture, along with reductions in spending. Politicians need to be honest with voters about paying for the things that they want and how much they cost. We can’t stay on the path we are on because it will do too much damage to the economy and our strength, and it will hurt families in an ever growing way. M
S1 E136 · Wed, June 09, 2021
America's True National Debt – Part 2
In Prosperity in the Age of Decline, the authors are predicting that 2030 will be the opening year of the greatest depression since 1930. Dr. Kotlikoff believes that it might not wait until 2030. China is already beginning to overtake the US in terms of GDP. By the end of the century, the US will no longer be the dominant economic superpower. It’s not looking good in terms of projection. For a depression to occur, there would usually have to be an event or collapse beforehand, which is definitely possible. There are too many examples of hyperinflation over the course of history for the proposition that we can just print our way out of our problems to be true. There is still time to correct our mistakes. We need an independent party to run and expose Americans to the truth of the fiscal condition of the country. One of the problems we are dealing with right now is the marginal taxation of the poorest Americans. Roughly 25% of the poor are facing marginal taxes of .70 on the dollar. We need an incentive system that helps people instead of punishing them. There isn’t much political will to change things. Dr. Kotlikoff wrote a bill to force the CBO to do fiscal gap accounting each year and it only garnered the support of eight senators. To right the ship of state, we need to broaden the tax base. Dr. Kotlikoff suggests putting everybody into a 30% marginal tax bracket while incorporating a progressive system so that the poor are differentially helped. With a few other tax structures and some reform of the welfare programs, it would be possible to get the fiscal gap under control. Reforming healthcare should be a major focus. If we could reduce the spending on healthcare to only 14% of GDP, the US would still have a very good healthcare system and be able to reduce spending considerably. Politicians need to be honest about the fiscal condition of the country if there is ever going to be momentum to change. There are a number of ideas being floated that can help reform healthcare and other social programs, but as the years go on, the options become slimmer. Politicians need to get out of the way and let economists propose solutions that can actually help people. Economics brings an entirely different way to bring financial planning to the table when compared with the industry, which is heavily focused on selling more products. Dr. Kotlikoff has a financial planning software tool you can access at maxify.com to help ensure a smooth retirement.
S1 E135 · Wed, June 02, 2021
America's True National Debt – Part 1
The official debt-to-GDP numbers are on track to be 110% by the end of the year, which is nearly a 30% increase over the last decade. The trouble is this calculation doesn’t count unfunded obligations like Social Security. Economic theory doesn’t differentiate between official borrowing and unofficial borrowing. The government has left a number of things off the books in order to keep the public in the dark about the true costs of what they are doing. Fiscal gap accounting puts everything going in and going out on the books and looks at the difference between the two streams. Right now, the US is counting the official debt of one year worth of GDP. This leaves another seven years' worth of GDP that we are not counting which is the real problem. In terms of fiscal gap, the US is in twice as bad a shape as the worst country in the European Union. In absolute numbers, the national debt is closer to $160 trillion than the $22 trillion that is officially reported. One proposed solution from the Modern Monetary Theorists is to simply print 8 years' worth of GDP, but that’s not really an option and would likely result in immediate hyperinflation. The money printed since 2008 is already beginning to have an effect on consumer prices, and printing money is only a temporary solution. Printing money is a form of taxation. While the US needs to collect more in receipts, printing money comes with inflation and that can take on a life of its own. Once people begin to expect a period of inflation, the Federal Reserve can’t do much other than accommodate those expectations. Programs like Medicare are paid in kind. If we try to inflate our way out of our Medicare problem the cost of the program will rise commensurately. When we look at what the government has been doing as a whole, it looks like Modern Monetary Theory has already taken hold. MMT proponents don’t sound like regular economists. They’re actually closer to religious fanatics or political ideologues than economists. The idea behind MMT is that as long as the printed money results in increased economic output we won’t see inflation. In order to judge inflation, we have to look at what would have taken place had the money not been printed. The big danger is a sudden spike in either prices or just the general awareness of the US government’s true fiscal situation. Like going bankrupt, right up until the day you lose everything it can all appear to be working just fine as you continue to spend down your borrowed money. Historically, MMT has not played out well for countries that tried it. The process is like a slow-growing cancer. It may take decades to take its course but the effects will become obvious and pervasive eventually. There are no great choices. To reverse course it would require either imposing a lot of pain on a small subset of people or accepting an environment of permanently high taxes fore
S1 E134 · Wed, May 26, 2021
The Coming Depression in 2030: My Interview with Brian Beaulieu
Brian Beaulieu is in the business of predicting economic trends. He’s been forecasting trends for the past 39 years and he’s very transparent about his methods. Brian is politically agnostic and aims to be as objective as possible. He doesn’t make money if the market goes up or down, he makes money by being right. Between March 20th and 28th of 2020, his GDP retail sales forecast came out with a 98% accuracy. When it comes to long-term trends, there are only a few ways they can play out. In terms of accuracy, Brian forecasted the great depression of 2008 and 2009 at the tail end of 2003, so their clients were well prepared when the crash hit. Back in 1987, a month before the stock market experienced a short but rapid decline, Brian warned his clients to get out and saved them from heavy losses. Brian’s team has a unique methodology as well as business cycle theories which help them achieve such a high level of accuracy. By using a system of leading indicators, Brian can forecast major market trends with confidence. Business cycles don’t turn based on old age, but that does produce imbalances which accumulate eventually causing major trends. Overall, Brian and his team have had an average accuracy of 94.7%. It’s not particularly useful to read financial publications when it comes to trying to make predictions. Publications like the Wall Street Journal are in the business of selling ad space and have financial biases. They often look for data that reinforces what they already believe, and if they don’t play that game, then their subscription base dwindles. Financial publications are interested in articles that get clicks, not in predicting the future. Brian knows that he’s not immune to that, which is why he tends to be very dogmatic about his leading indicators. Humans have a tendency to think linearly. Financial behavior has a recency bias and whatever we have experienced most recently has the strongest imprint on us. This leads people to think that next month will look a lot like last month, and next year will look like this one. Most Millennials and Gen Xers have only experienced falling interest rates. Because they haven’t experienced a rising interest rate environment they can’t figure out ways to take advantage of it. If the success of stimulus spending is defined by people receiving a check and thinking fondly of the political process, then the most recent stimulus was indeed successful. Long-term, the stimulus has made the forecasts worse and someone is going to have to pay for it. People are aging, and as a population gets older they spend less and cost more. We are not going to get out from underneath those healthcare costs until 2036. Another issue is that the government has refused to fund Social Security, Medicare, and Medicaid. When interest rates start to rise again, the government is going to find itself in the position of not being able to affor
S1 E133 · Wed, May 19, 2021
The Secure Retirement Act 2.0 – 6 Things You Need to Know
There is a new bill moving through Congress right now that has bipartisan support and is fairly likely to pass in its current form. We can get a good sense of what the bill is intended to do by looking at the title page. The stated goal of the bill is to increase retirement savings, and to simplify and clarify retirement plan rules. Change #1 is that the bill enacts changes to required minimum distributions and does so according to a schedule that depends on how old you are now. This change will affect roughly 20% of IRA owners who don’t need their RMD’s to cover their lifestyle expenses and they will be able to push their RMD’s further into the future. Change #2 involves catch-up provisions for IRAs, and that includes Roth IRAs. This section of the bill indexes IRA catch-up contributions for inflation, which brings them up to par with other retirement investment accounts. Change #3 are age-sensitive changes to catch-up provisions for traditional retirement plans. This change only affects people who are currently between the ages of 62 and 64 and says that starting in 2023 your catch-up provisions for traditional plans go from $6500 to $10000. This provides a narrow window for people who are just on the threshold of retiring but need to make greater contributions. Change #4 requires all catch-up contributions to be made to Roth accounts. Roth IRA’s are so beneficial to people, especially in a rising tax rate environment, that many people believe that at some point they will be taken away, but the truth is that the government loves the Roth IRA. It provides the short-term infusions of cash that the government and politicians desperately need today rather than decades from now. Change #5 is that retirement plan employer contributions can be designated to Roth accounts. Is a rising tax rate environment, this is exactly what we want. With a 30-year time horizon, this will allow us to squeeze the most efficiency out of our retirement dollars. This will probably result in you having to pay taxes on the matched amount, but given the historically low tax rate environment that we are in that’s still a good deal. Change #6 are changes to the penalties for failure to take required minimum distributions. Instead of being penalized by 50% for failing to take your RMD by the required date, the penalty is reduced to 25%. The penalty becomes 10% if you correct that within three years. This sounds like an improvement but it may also mean the IRS is less likely to waive the penalty than they were previously. One of the biggest takeaways from these changes is that the government loves Roth IRAs. They love it because it gives them revenue immediately, during their tenure in office, and we love it because it allows us to take advantage of historically low tax rates before they go up for good. Mentioned in this Episode: H.R. 2954: <a href= "https://waysandmeans.house.gov/sites/democrats.
S1 E132 · Wed, May 12, 2021
The United States' Demographic Time Bomb
With the recent release of the US Census we are getting a picture of the upcoming demographic time bomb facing the country. The 2020 census revealed that there are 331 million US residents, which represents a 7.4% increase since 2010. This is significant since this period is the second slowest rate of growth we have experienced as a country since the Great Depression and roughly half the growth rate we experienced during the 90’s. When you combine the lower birth rate and declining immigration with a rapidly aging population, it indicates that we are entering a period of substantially lower population growth. If it stays this low, it could mean the end of American exceptionalism in this regard. The US population has always outpaced the growth of other developed countries but that’s no longer the case. This means that the US is losing one of its major competitive advantages. The question is why we are experiencing low population growth? Fewer births and more deaths reflect a reality where more people are delaying child bearing and delaying marriage, as well as a rise in drug and endemic-related deaths. The average age of Americans also continues to rise because of this trend. The current birth rate of America is 1.7, which is below the threshold for the replacement rate of 2.1. Historically, the answer to this demographic quandary has been immigration, but we haven’t seen the immigration levels we’ve had in the past. Fewer birth rates in Mexico and a generally improving economy means that the historical source of the majority of immigration is lower than usual. The growth rate of our nation is as tepid as it’s ever been at any point in our history, and we are likely to see a slowdown of economic output as a result. We have more people above the age of 80 than we do below the age of 2. There will come a time when we sell more adult diapers than baby diapers. With fewer people in the country producing fewer goods and services we will see a lower GDP over time. Other countries are facing the same issues and have begun offering incentives to young people to encourage a higher birth rate. From an economic perspective, we are going to have a hard time funding social safety nets and entitlement programs for citizens of the US. Ideally, every generation is bigger than the previous generation. It should look like a pyramid with more younger people at the bottom but the current reality is an inverted pyramid. With 78 million Baby Boomers, there are not enough younger people working to support Social Security, Medicare, and Medicaid. This means that we will need massive infusions of cash to pay for these programs. The only real solution for retirees facing this sort of demographic time bomb is to save in tax-free vehicles. If you’re one of the 95% of Americans that have the majority of their money invested in tax-deferred vehicles, it’s time to take advantage
S1 E131 · Wed, May 05, 2021
The Joe Biden Capital Gains Tax Proposal
This is an apolitical podcast. The goal is to call out fiscal irresponsibility no matter what side of the aisle it’s on. It’s less about politics and more about math. Joe Biden recently came up with a proposal to reform capital gains taxes. The increased revenue that is thought to come from this reform is earmarked to pay for childcare, universal pre-kindergarten education, and paid leave for workers. The state of capital gains taxes currently is that if you are in the 10% or 12% tax bracket you don’t pay any capital gains taxes. It currently sits at 20% for people above those brackets and for people making more than $250,000 per year there is an additional surtax of 3.8%. This puts the baseline for wealthy Americans at 23.8%. When it comes to capital gains tax, there are four different taxes that may come into play. The first is at the federal level, then there are also state capital gains taxes and local capital gains taxes in some parts of the country, and finally the Obamacare surtax. The Biden proposal basically says that anyone who makes more than a million dollars per year would see their federal capital gains tax go from 20% to 39.6%. If you lived in New York City and included the other governmental layers of capital gains taxes, this would result in a total capital gains tax of 58.2%. Residents of Portland, Oregon would be looking at a capital gains tax of 57.3%. This doubling of the federal capital gains tax rate would generate roughly $1 trillion in additional revenue. This proposal will not likely pass through the usual route and would likely have to come through budget reconciliation. In its current form, the proposal will not likely pass because there are Democrats who believe that the tax is too high. Most people see the bill as the initial salvo in the negotiation process and the end result will be somewhere in the middle. Compared to other countries, this proposal would put America at the top of the list for capital gains taxes. If you make more than a million dollars per year, this proposal will likely affect you quite a bit. If you make less than that, you won’t have to worry about it. If you’re concerned about capital gains tax rates, you need to stop accumulating huge amounts of money in your taxable bucket. Raising capital gains taxes is not going to solve our country’s problems. We need to see broad base increases in taxes across the board and dramatic reductions in spending. If you want to protect yourself from the inevitability of higher capital gains taxes, you need to stop accumulating money in your taxable bucket and take advantage of all the tax havens that are available to you. The Roth IRA and Roth 401(k) are great options and allow you to put a lot of money into tax-free vehicles. There are unlimited amounts of money that can be converted to the tax-free bucket with Roth conversions. The LIRP is the great antidote t
S1 E130 · Wed, April 28, 2021
The Case for Replacing Bonds with Annuities
If you want to maximize the amount of money you can safely spend in retirement some economists say that you should sell some of your bonds and replace them with annuities. According to Tom Hegna, there is only one mathematically ideal retirement plan and annuities are a key component. While you are working, a diversified portfolio of stocks and bonds is the most efficient way to save for retirement, but once you retire the rules of the game change and you need to start thinking about distribution. Tax rate risk is not the number one risk in retirement, longevity risk is more frequently cited by retirees as the number one risk they are most concerned about. In retirement, you should not have a lot of bonds in your portfolio. There is a simple guideline that you can use to determine how much income you need to guarantee with an annuity. Look at your lifestyle and subtract your guaranteed streams of income, like social security or rental income, and whatever is left should be guaranteed with an annuity. Everything else goes into the stock market portion of your portfolio. If you have your lifestyle expenses guaranteed, you have the luxury of watching your stock market portfolio recover after a down year. If you have money accumulated in a life insurance retirement plan, you can take tax-free loans out of that life insurance as well. The last thing you want to do is to cover discretionary expenses by taking money out of your stock market portfolio while the market is down. Annuities are a form of longevity insurance. It offloads your longevity risk to an insurance company which can manage better than you can. The alternative is relying on the 3% rule to avoid running out of money in retirement, but accumulating enough money to make that a viable choice is very difficult. Annuities will extend the life of your investments more effectively than a well-allocated balance of stocks and bonds. The bottom line is that bonds and stocks do not mitigate longevity risk and actually expose you to a number of other risks that can threaten your retirement. If you have longevity in your family or anticipate living a longer life, annuities reward you for doing so. The stock/bond approach penalizes you the longer you live. There are instances where you don’t need an annuity. If you have plenty of income to pay for essential expenses there may be no need. You need to cover your fixed expenses with income that will last the rest of your life. However, this approach can spook some investors since the only money left over with this strategy is invested in the stock market portfolio. Social security is an inflation-adjusted income annuity itself and it’s generally best to max it out by not claiming it until age 70. If you want to get an idea of how long you will live, go through the underwriting process of the life insurance retirement plan. The very best ann
S1 E129 · Wed, April 21, 2021
The Bernie Sanders Estate Tax Plan
Bernie Sanders is heading up the proposals regarding estate taxes, and his proposals are deviating to some extent from what President Biden has campaigned on. Joe Biden’s plan says that the estate tax exemption, which is currently $11.7 million as a single person, or $23.4 million as a married couple, will be reverted back to its 2009 levels. Anything above and beyond those limits would be taxed at a rate of 40% and as high as 45%. Bernie Sanders’ proposal begins at 45% and goes up as the amount being passed on increases. When Bernie Sanders ran for president he proposed a maximum estate tax of 77% at the highest tax bracket but has since toned it down. He is targeting the top .5% of all Americans with this tax and has promised that 99.5% of the American people will not see their taxes go up under the plan. The wealthy already pay a tremendous amount of taxes. The 657 billionaires that are in America will end up owing $2.7 trillion in estate tax under the current tax law, and that money has already been accounted for. Bernie Sanders’ proposal would generate an additional $430 billion in revenue and would be earmarked for additional proposals, not to pay down the existing debt. This is essentially rearranging the deck chairs on the Titanic. It doesn’t change the overall trajectory of the US and does nothing to shore up the programs that are driving all of the debt on the government’s balance sheet. It’s not about what your estate is worth now, it’s about what your estate is worth when you die. You may not have an estate that would be taxed now, but you need to project out what your estate could be worth in the future. Another question is what the estate tax exemption will be at this point. When a country is going insolvent, it looks at quarters to raise revenue to keep itself solvent and that could be the estate tax again in the future. There are ways to mitigate the risk of estate taxes but it requires a long runway and careful planning. It involves shifting money, gifting money, and even loaning money into a trust. The specter of a much lower estate tax exemption means we are going to have to start addressing ways to mitigate tax rate risk when we have 20 to 30 years of runway to be able to position into the right types of accounts.
S1 E128 · Wed, April 14, 2021
The Scourge of Modern Monetary Theory
Modern Monetary Theory (MMT) is a pernicious threat to the Republic and has become a popular theory among left-leaning economists. MMT is less an economical theory than it is a political theory. There are politicians in certain quarters that truly believe that MMT will solve all of our economic problems. They believe that the debt doesn’t matter, printing money has no consequences, and if we want something we can borrow or print as much as we need with no adverse effects. America is already in dire fiscal straits and if we adopt MMT as the prevailing economic policy, it will send the country into a tailspin from which it will probably never recover. MMT says that as long as a country’s debt is denominated in its own currency, that country can borrow as much as it wants. Such proponents also believe that you can print as much as you want with no inflationary consequences. The idea is that the additional money printing will grow the economy, and that will prevent inflation from taking hold. The loudest supporters of MMT come from the progressive wing of the Democrat party, which is the basis for such programs as the Green New Deal, Universal Basic Income, and Free College and Healthcare. The claims of MMT are not only flatly false, they are dangerous. To understand MMT’s appeal, you have to understand the three basic ways you can eliminate debt. The first is by reducing fiscal deficits by either raising taxes or cutting spending. The second is to grow our way out of the debt. Lastly, you can use central banks to print money. MMT proponents will often point to Japan as an example. Japan has a 250% debt-to-GDP ratio so it would seem like a good example of MMT working, but Japan has also taken steps to cut spending, raise taxes, and hold interest rates close to zero for decades. If interest rates ever return to historical levels, Japan, like most countries, would be in trouble. There are certain special qualities that allow the US to continue to borrow at lower rates, the main one being the reserve currency status. Eventually, interest rates will encompass the federal budget of the US government and this could cause a crisis of confidence which could threaten the reserve currency status. MMT advocates deny the existence of that limit and therefore propose to borrow to infinity. They also ignore the history of debt and inflation, with Weimar Germany being a salient example of a country trying to print its way out of a debt problem. At the end of 1923, German currency was worthless with $1 US being equivalent to 4,210,500,000,000 German Marks. Weimar Germany wasn’t the only country to experience hyperinflation. Brazil, Zimbabwe, and Venezuela have experienced extremely high levels of inflation in the recent past, with Zimbabwe’s economy essentially falling apart so completely that the US dollar had to be substituted for their currency. The real mystery is how MMT has
S1 E127 · Wed, April 07, 2021
The Latest on Joe Biden's Tax Plan
Now that Joe Biden has the pandemic relief bill behind him, he can begin to focus on his tax plan which he heavily campaigned on before the election. Joe Biden’s pledge that nobody making less than $400,000 per year will face tax increases has a small asterisk next to it. That threshold only applies to families, and if you are filing as an individual, your threshold is $200,000, which means it will come into play for a much larger number of people. He is still planning on increasing the taxes on corporations, going up from 21% to 28%. For all intents and purposes, this will be felt like a stealth tax for most people since this will likely result in prices going up. If you make more than $400,000, your tax rate will rise from 37% to 39.6%, but he also wants to cap itemized deductions at 28%. Joe Biden tends to view the current system of 401(k) deductions as unfair to people in lower tax brackets, so he’s also planning on leveling that out. This will ultimately result in getting the 401(k) deduction on the front end. That makes much less sense if you are in the 26% tax bracket or above. You are much better off taking the Roth approach and paying taxes on those dollars today so they can grow tax-free in the future. The arrival of the tax bill is still up in the air until we have more information regarding the vaccine rollout. Social Security is also a major focus for a number of reasons. Biden has discussed some major changes to the taxation scheme for the Social Security Payroll tax to try to shore up the coming shortfall. Social Security was previously projected to be insolvent by 2034 and Medicare by 2026. Those projections have been revised to 2031 and 2022. As a president, they typically try to accomplish their biggest changes in the first 100 days in office, which is why there is such a big emphasis on tax reform so early in Biden’s administration. All these changes are likely to take place this year because of the Democrats only needing a simple majority to make it happen. For those who make more than $1 million per year, he wants to make it so that capital gains are taxed at ordinary income. He has also talked about raising the estate tax rate, which could impact people looking to pass their businesses and wealth onto the next generation. There has also been discussion around eliminating the state and local taxes deduction, but that could be seen as a tax break for the wealthy, which is something that he’s trying hard to avoid. More recently, one of Joe Biden’s big initiatives is a $2 to $3 trillion infrastructure package, which may be combined with his tax legislation proposals. This indicates that any tax increases coming down the pipe are not going to be earmarked to pay down debt or shore up the things that will be driving debt going forward. There is currently nothing in the works to shore up Medicare or Social Security to any real extent or pa
S1 E126 · Wed, March 31, 2021
Busting the Annuity Myths: My Interview with Tom Hegna (Part 2)
If you have a history of premature death or cancer in your family you may still be a good candidate for an annuity. If your spouse has longevity it can still be a good option. Even if you’re not in the best health there are still annuity products with certain features that can still make sense. Some people always want to have control of their money, but they have to realize that an annuity is not giving up control, it’s about taking control over your risk. Annuities give you control over longevity risk, the risk of deflation, withdrawal and the sequence of returns risks. You’re simply taking key risks off the table. The people who buy annuities are the people that want to have control of their future. Annuities are not meant for all of everybody’s money. Most people should put 20% to 40% of their portfolio into annuities. If they did that it would solve most people’s retirement issues. Life insurance is a great bond substitute for younger people, once you’re 65 and above you can replace it with some time of income annuity. The way an income annuity functions inside a portfolio are like a triple A-rated bond with a triple C rated yield and zero standard deviation. This makes them a much better alternative to bonds. Most people don’t realize that they can lose half their money in a government bond because of the risk of interest rates rising, which is a risk that’s not present in life insurance and annuities. You aren’t getting any younger and you can’t take your money with you. This means you are supposed to spend your principal. If you have life insurance in place it allows you to spend your money guilt-free in a way where everyone wins. Annuities are ordinary income, but most people overestimate the amount of capital gains they are receiving. If you’re in a mutual fund or managed money account, a lot of the time it’s actually ordinary income because of the turnover within the fund. When it comes to the stepped-up cost basis the only area that applies is in unrealized capital gains. Most people think the stepped-up cost basis applies to their whole account but they actually paid for it in taxes for all the years they have it. It doesn’t matter whether it’s Republicans or Democrats, both parties spend like drunken sailors. Both parties are spending too much and borrowing to pay for everything. If you look at Modern Monetary Theory closely it only works as long as interest rates are low. Once interest rates start to rise they advocate for slashing spending very strictly which is the source of the problem. We are always willing to take the easy road (spending) but we’re not willing to do the hard things (cutting expenses). It’s hard to predict where the economy is headed over the next ten years because of the crazy amounts of unprecedented money printing recently. 1 out of every 5 dollars in America’s history were printed in the last 12 months. They can keep printing mon
S1 E125 · Wed, March 24, 2021
Busting the Annuity Myths: My Interview with Tom Hegna (Part 1)
Popular speakers in the financial and retirement space like Ken Fisher and Suzy Orman have made annuities rather unattractive. The major objection has to do with the supposed fees of the product, even though many of the annuity options are not actually fee-based products. Ken Fisher has high fees, just like other investment options like commodities, hedge funds, and real estate. Variable annuities have higher fees than mutual funds but they also come with guarantees, and he’s essentially convincing people to move from those guaranteed products to another high fee fund. People often say they want no fees, but if that was the case they would just put their money into a savings account. It’s not about the cost of the fees. Its about the value you’re getting in return for the cost. Life insurance and annuities are not a religion and don’t require your beliefs. They are both basically risk transfer vehicles. An annuity is essentially a guarantee that you will never run out of money as long as you live. With all the medical breakthroughs that have happened recently, people are living longer lives, which is only increasing the odds of falling prey to the number one risk in retirement. Tom believes that you should spend all your money and leave life insurance to your kids. Leaving your IRA to your kids is not a great vehicle to transfer your wealth. People have been programmed to spend their paychecks while they are working while not touching their 401(k)s and IRAs while they are working, but once they retire they have to switch their mindset. You should use your money to actually enjoy your retirement. Any money that you want for retirement is appropriate for an annuity, especially after the age of 59 and a half. Annuities are not meant for a down payment on a house or your children’s college education, but depending on your goals, annuities can be one of the best places to put your retirement money. If you’re young and want to save as much as possible without losing what you have, an annuity is a great option. It would be possible to purchase a significant stream of money by the time you’re retired and it wouldn’t be that painful if you spread it out over your working years. People need to start thinking about income, rather than accumulating a big pile of money by the time they retire. Tom owns eleven annuities but he has even more in cash-value life insurance. Tax-free income in retirement is going to be vital, and people are not prepared for how much taxes are going to go up in the near future. If taxes go up and the market crashes, there are going to be a lot of people who are going to suffer. Liquidity is not a one time event, it’s a lifetime event. When you buy additional lifetime income you are increasing your lifetime liquidity. Annuities are a long-term plan. That money is not for emergency expenses. The overall strategy is not all or nothing. You can
S1 E124 · Wed, March 17, 2021
How to Protect Yourself from Our Country's Fiscal Challenges: My Interview with Van Mueller (Part 2)
The amount of money that we’ve printed over the course of the past year and what we’ll print in 2021 is equivalent to the entire economy of Japan. Van Mueller believes that at some point in the future the US dollar will no longer be the reserve currency, and when that happens the standard of living for Americans will go down almost immediately. Every country is printing money and destroying their currency’s purchasing power, but the US is doing it on a scale that’s unheard of. If you talk with the right specialist, they can show you a strategy where you won’t be hurt by these economic shifts. Leadership is the key missing factor in solving these problems. If we had politicians that were willing to make tough decisions we could salvage our country but those are few are far between, and people need to elect the ones that show leadership. There is no end of the world situation. Eventually, the US will fix everything, either through great leadership or a great calamity. For the people that don’t strategize and plan for the upcoming changes, they will have a lower standard of living. If you want a better standard of living you need to plan now. The debt will never be paid back and we can make a number of assumptions from that. The government will do everything they can to keep interest rates low and there will likely be a ton of volatility in the markets over the next ten years. There are products and strategies that allow you to win in any circumstance, but you have to take the time to build these strategies or these forces will destroy everything you’ve worked for. Studies have shown that 93% of Americans take Social Security to their detriment instead of their benefit. If the goal is to maximize retirement income you should be maximizing your Social Security. There are all kinds of planning opportunities if you understand the right questions to ask. If you really want to know how long you’re going to live, go through the life insurance underwriting process. Almost everyone is willing to have the conversation of how to keep their wealth to their family’s benefit instead of sending it to the government, a hospital, or a nursing home. Based on the math, if you’re married and don’t do any planning, and you have two children, if you both pass away the IRS is going to be the primary beneficiary of your money and not your children. 99% of Americans don’t understand tax law and don’t realize the government’s need for revenue in the future, and if they don’t plan for that there are going to be a lot of people’s hopes and dreams decimated by that. If you’re an advisor, talk to your dry cleaner, your mechanic, and anyone that you know and ask them some simple questions because chances are they have no idea what’s coming. This is the greatest time ever to be an insurance or financial professional. This is also the greatest time ever to own cash value life insur
S1 E123 · Wed, March 10, 2021
How to Protect Yourself from Our Country's Fiscal Challenges: My Interview with Van Mueller (Part 1)
The general public should definitely be paying attention to the impact of inflation and what’s driving it. The government has gone to such ridiculous measures printing money that by the year 2029 the government will literally have to print the entire budget of the United States. Instead of inflation, we should be thinking of it in terms of a stealth tax. The M2 money supply is a good barometer for inflation statistics and by 2029 they are expecting the current M2 money supply to exceed $122 trillion, a near ten-fold increase from what’s in circulation today. This increase in the money supply reduces every single American’s purchasing power and constitutes an additional tax over and above the existing taxes. If you can reduce or eliminate your income tax liability, you are offsetting some of the damage of reduced purchasing power. It’s vital to understand that not only is the government going to increase your income tax, they are also going to dramatically increase your stealth tax by decreasing your purchasing power. There are solutions to these situations that allow you to win, not just reduce the pain. The secret is in taking action before these problems can impact you. Truthinaccounting.org was created by accountants to give people an accurate picture of the financial state of the federal and state governments. The situation is bleak with the vast majority not being able to pay their bills already. We will be about $87 trillion in debt by 2029. We are going to have to deal with a new financial world that requires some strategies that protect you from the ridiculousness of government. States and cities are unable to print money, so the only way to pay their bills is to increase taxes, reduce benefits, borrow more money, or a combination of all three. The bailout precedent has already been set, but even if they get a bailout you will still be impacted. Even if the benefit remains, they are going to increase the taxes on it and reduce your purchasing power at the same time. If you add up all the money that the US government has ever printed, you will find thatover 40% of it was printed in the year 2020. They now have an unlimited printing machine that they are going to use regardless of the damage it’s going to do to you, your children, and your grandchildren. The debt we talk about is not even the full picture because it does not include all the unfunded obligations. Most people expect to inherit their money all at the same time, regardless of the taxes they will have to pay. This usually doesn’t end well. Van helps his clients to eliminate the income tax burden completely. It makes much more sense to pay taxes at the grandparent’s historically low tax rates and reposition the money to tax-free now, instead of having to distribute the money all at the same time because of the Secure Act. Covid-19 has changed everything, but nobody knows just how much yet. The
S1 E122 · Wed, March 03, 2021
"From Forever Taxed to Never Taxed": My Interview with Ed Slott (Part 2)
Some people have a concern about the implications of the tax arbitrage they could be receiving if they just waited. This is the key to the Roth plans and Life Insurance vehicles that Ed described. The big myth is that you will be in a lower tax bracket when you retire. If you let your IRA just continue to grow, at age 72 the plan will be out of your control, and you will be forced to take the money out at the prevailing rates, whatever they are at the time, for the rest of your life. For married couples, there is another problem they don’t think about, and that’s that one spouse usually dies first. This means the surviving spouse becomes a single taxpayer again. This means they will have the same assets and income but at much higher rates. If you don’t pay the taxes now, there will always be uncertainty. If you lock them in now, you will never have to worry about taxes again. Most retirees don’t suddenly begin spending like rock stars. If your single child inherits a million dollar IRA, they are going to be forced to realize it as income over the course of 10 years when they are probably at their highest earning potential, at a period of time when they can least afford to pay the taxes. If you don’t need some of your money in retirement, doing a Roth conversion on that money is like a gift to your children and grandchildren. You can give them a tax-free account which can be coupled with a tax-free life insurance plan to maximize the benefits. We are in a period of historically low tax rates, and in a rising tax rate environment, it only makes sense to pay the taxes now and get the money moved to tax-free. Yet 90% of all retirement dollars are in tax-deferred accounts. Most people believe that tax rates are on the rise, yet still have the majority of money in tax-deferred accounts. The secret to having more later is to pay the tax now. All the good things in life you pay for upfront, but it’s the bad things that you defer that end up costing you. If you take care of the problem early, you have less to worry about. Like spending money on dental care, waiting until the very end makes the problems more painful and more expensive. Covid has led to people running to their estate planners. It has put more attention to making sure people have a plan in place in case they die or get sick. When you combine that with the additional $3 trillion dollars in debt the US government has accumulated, we are going to have to face the day of reckoning much sooner than we thought. Just like stocks, with taxes we should buy low and sell high. Right now taxes are low, and they may never be this low again in our lifetime. A good analogy is like paying off the mortgage to your house. When you finally make that last payment and own your house free and clear, it’s a great feeling. You can get that same feeling by paying the taxes now and owning your investments tax-free forever. Y
S1 E121 · Wed, February 24, 2021
"From Forever Taxed to Never Taxed": My Interview with Ed Slott (Part 1)
Ed Slott has a new book coming out called The New Retirement Savings Time Bomb. It’s the updated version of the original book written 20 years ago where the time bomb was the tax building up in your IRA account. If you didn’t know how to plan, you could be hit twice and lose up to 80% and 90%. Some of the Estate taxes have gone away since then, but there are other new threats to your retirement savings than ever before. Congress always needs money, and they will always go for the lowest hanging fruit, which is your retirement savings. It’s like a deal with the devil, getting those deductions on the front end with the hope that you will be in a lower tax bracket. This assumption is where the danger lies. The Secure Act has ironically made your retirement savings less secure. The biggest threat is the elimination of the stretch IRA and the estate implications. Every plan needs to be reviewed and revised, maybe scrapped altogether for different thinking entirely. Congress needs money, which means tax rates are going to go up and that people will have less money in retirement. What is driving the need for these huge infusions of cash? Deficits and debts are the issue. The government has been recklessly spending for decades, and now it’s only increased with the effects of Covid-19. When most people think of compound interest, they think of how Albert Einstein is the 8th wonder of the world. It’s great when it’s working for you, but awful when compounding is working against you. Compounding debt is the real issue. The math doesn’t discriminate. The math bears it out that we will never see tax rates as low as they are today. We need a more stable and secure plan for the future. The history of tax rates shows that we could return to where rates were as high as 90% for the top tax brackets. You may only have one more year to take advantage of these historically low tax rates. People have to realize that they are in control of their tax rates. Taking advantage of the current low tax rates is the best tax planning you can do. Always pay taxes when the rates are the lowest. That may mean paying some taxes now, but you have to remember that taxes are a bill that won’t go away. The concern about losing out on compounding interest when converting to a Roth IRA is a myth. If you are truly comparing apples to apples, there is no loss when using the same rates of return and taxes, but if rates go up, then everything changes. When rates go up, everything tax-free becomes more valuable. When you have money in your IRA, it is accruing to the benefit of the IRS. When you convert now, you are claiming your portion of the money, as well as the future interest. Taxes have to be paid for. It’s not if, it’s when. Why not pay them while they are on sale? Even in the worst case scenario, by converting now you lock in a zero percent tax rate for the rest of your life, which is not a
S1 E120 · Wed, February 17, 2021
An 8-Year Extension on Middle Class Tax Cuts?
Joe Biden’s tax proposal has serious implications for anyone attempting to use the Power of Zero paradigm for their retirement planning. We know that the current tax cuts enacted by President Trump will remain at their current levels for the next five years and will revert to what they were in 2017 starting January 1, 2026. This tax sale gives us a historic opportunity to take advantage of low tax rates when we are executing a shift between the tax-deferred and tax-free buckets. If you wait until 2026 to shift that money, the tax brackets will go up and it will cost you significantly more. The Democrats won the runoff elections in January which have created an opening for Joe Biden to bring about the tax initiatives that he campaigned on. Joe Biden wants to raise taxes on anyone making more than $400,000 per year. Not only that, but you will pay a FICA tax on any dollars above the $400,000 mark of 14%. Right now, Joe Biden has to go through the budget reconciliation process to effect a permanent tax cut, but he can use the same process to extend the current tax cuts. For all intents and purposes, Covid has thrust us into a recession. This means that Joe Biden will not likely raise taxes until 2022. Joe Biden could create a tax cut that would last for 8 years essentially extending the Trump tax cuts for another 3 years. For people making less than $400,000, their tax brackets would stay historically low almost until 2030. This gives you 8 years to get your shifting done and allows you to spread out the burden even more. David calculated the benefits of an additional 3 years when shifting $1.5 million to the tax-free bucket. The difference is an 11% difference in taxes that you would have to shift the money in a shorter time period. This won’t be a great deal if you make more than $400,000 or if you are planning on shifting enough money to put you above that threshold. The reality is that tax rates are likely to be much higher in 2030 and beyond. Even if the dates are pushed back, it only kicks the can further down the road. When taxes are on sale, every year counts. As of Jan 1, 2018 you are on the clock. By keeping tax rates low for middle America the day of reckoning is a bit further away, but the fix will have to be much more draconian. Joe Biden is not fixing the root of the problem. In order to balance the budget by raising the tax rates on everybody, tax rates would have to go up to 49% across the board. Simply taxing the top 1% is not enough in order to get the revenue we need to right our financial ship. The tax base has to be broadened and everyone will have to pony up eventually. David believes that Joe Biden will work through the budget reconciliation to extend the Trump tax cuts by the end of 2021, despite that it’s the opposite of what we need to do to fix our financial situation. If you’re looking to get into the zero pe
S1 E119 · Wed, February 10, 2021
Financial Planning Changes and Updates for 2021
There are some basic updates and thresholds you need to be aware of if you’re interested in implementing the Power of Zero strategy. The first change is that your standard deduction went from $24,800 to $25,100. This may not seem like a big deal but does mean that you can have a larger amount of money in your IRA by the time you’re 72. The Roth IRA rules are not being changed at all, despite other account types having their thresholds changed. There haven’t been any dramatic increases within the tax brackets yet, just the usual adjustments to keep up with inflation but there are still numbers you need to pay attention to, particularly where the 22% and 24% tax brackets start. The 24% tax bracket is still the sweet spot within the tax code. It’s only 2% more than the 22% tax bracket but allows you to convert nearly an extra $150,000. In the grand scheme of things when we are trying to protect ourselves from the impact of tax rate risk the 24% tax bracket is an important tool. The Roth income limit phase-out range has shifted slightly, this means that when you reach the top of that range your ability to contribute to a Roth IRA reduces commensurately. If you exceed that range your options include a backdoor Roth or a LIRP. As we go forward into 2021 you are likely to see changes to the deductibility of your 401(k). Joe Biden plans to level the deductibility around 26%, which means that at higher levels of income the 401(k) becomes less attractive and you should forego that deduction and put that money into your Roth 401(k). You are likely to see a change in the marginal tax rate for people making more than $400,000 per year. In an article by the Committee for a Responsible Federal Budget, they did some studies that showed that at a certain level of tax will depress economic growth. It appears that the Biden administration may have taken their cues from the study. For example, if you live in California and add up all the taxes proposed by the Biden administration (39% Federal, 13% State, 3.8% Obamacare surcharge, +14% New Biden Tax Increase) it approaches the threshold that studies show directly impacts the economy. We are also likely to see forgiveness of federal student loan debt up to $10,000. Other people are lobbying for up to $50,000 of student loan forgiveness. If you have $10,000 or less in student loans, avoid making payments on those loans until the Biden administration confirms their plans over the next 6 months or so.
S1 E118 · Wed, February 03, 2021
Changes to Section 7702 -- An LIRP Christmas Miracle
Due to low prevailing interest rates, the federal government has restricted the ability of industry experts to show the robust rates of return that LIRPs are capable of. When the Consolidated Appropriations Act was passed in the final hours of 2020 it amounted to a Christmas miracle, and it will be immensely positive for LIRPs and will position them to thrive in an environment of low-interest rates. Section 7702 is the section of the tax code that governs the tax treatment of life insurance and it hasn’t been changed in decades. The tax limitations within the section are calculated by asking a simple question. Namely, at what premium level will the policy stay in force based on the life insurance expenses and assumed interest rate? Baked into the 7702 code was the assumption that your cash value would grow at either 6% or 4%, depending on premiums. When you put money into a life insurance policy, there is a relationship between how much money you can contribute and the death benefit that you are purchasing. This is because the IRS wants to define how much tax benefit you can get, this was directly affected by the assumed interest rates. On page 4923 of the Consolidated Appropriations Act that was passed at the last moment of 2020 we find a hard coded rate of 2% for 2021 and a floating rate based on prevailing interest rates in 2022 and beyond. This essentially means that you are going to be able to put considerably more money into a life insurance policy for the same death benefit. The expenses of these life insurance policies are relatively fixed, which means you are incentivized to put in as much money as you can to maximize your return. For people between 40 and 55, the amount you can contribute has increased anywhere from 60% to 100% with triggering a modified endowment contract which would result in the distributions becoming taxable as regular income. The end result is that LIRPs are going to become more efficient going forward. Bobby Samuelson runs some calculations in his article to illustrate the differences between the past regulations and the recently passed act. Using the new 2% hard coded interest rate, the scenario illustrates that you could contribute significantly more money while still maintaining the preferential tax-free treatment, while also increasing the rate of return. This allows you to also increase the distributions over the life of the program. Because of this act, all policies will now have more efficient cash value growth, which means the LIRP will be an even more attractive alternative to those who are using it as an accumulation and distribution tool. Other countries will eventually stop loaning the US money as we experience a sovereign debt crisis, which means that interest rates won’t stay low for very long. The long and short of it is we should feel better and more optimistic about LIRPs now than we ever have. The ACLI and Fine
S1 E117 · Wed, January 27, 2021
My Interview with Former US Comptroller General David Walker (Part 2)
Things may seem bleak when you look at the numbers, but there are solutions that we can implement that could help our situation and ultimately prevent the worst outcomes when it comes to the national debt. David Walker’s book was divided into three parts: a wake up call, a call to action, and a way forward. He has a number of solutions that he’s proposed that meet six principles. Any solution would have to be: pro-growth, socially equitable, culturally acceptable, have mathematical integrity, be politically feasible, and have meaningful bipartisan support. We have to agree that the real metric to measure is debt-to-GDP and we need to get it to a sustainable level within a reasonable period of time. We also have to recognize that this can’t be done one reform at a time and needs to be addressed as a package. Medicare seems like the hardest nut to crack because it is tied to demographics and health care costs grow faster than inflation, which prevents the US government from printing their way out of the problem. Most Americans agree regarding gradually increasing the age of retirement over several years which was done in the 1980s Social Security reform package. Increasing the the taxable wage base cap and adjusting the benefits paid out (e.g., higher replacement rate for lower income and somewhat lower for higher income individuals) are reasonable solutions for Social Security. When it comes to healthcare there are a number of more complex issues to deal with. The first is that the US government has overpromised on healthcare. Government needs to determine a reasonable, affordable and sustainable level of healthcare that should be available to everyone and government needs to have a budget. Government will do more for the poor, disabled and veterans. The US is the only country on the Earth that doesn’t have a budget for healthcare, which is one of the reasons that there are so many healthcare horror stories in the US. If interest rates simply return to 2003 levels, the cost of servicing our current debt quintuples. Interest rates are not going to stay low, they are going to go up. The only question is how much and how fast. David Walker believes that we will not default on the debt because federal debt is guaranteed by the U.S. Constitution. The responsibilities of the federal government envisioned by the founders took up 97% of the budget in 1912. This has fallen to 29% of the budget, and was declining as of 2019. The higher the debt-to-GDP goes, the higher that taxes are likely to be, and the lower the level of economic growth we are likely to achieve. The longer we wait to solve the problem, the higher that taxes are likely to go as well. The biggest deficit the United States has is a leadership deficit. We have too many people living for today and not enough people focused on how to create a better tomorrow. The two party system is part of the problem. 43% of voters are u
S1 E116 · Wed, January 20, 2021
My Interview with Former US Comptroller General David Walker (Part 1)
David Walker is a certified public accountant and has spent many years in public accounting. He’s run three federal agencies, two in the executive branch and one in the legislative branch. As the Comptroller General of the United States he was the chief performance and accountability auditor of the US. More recently, David Walker has run two non-profit companies and been a distinguished visiting professor at the US Naval Academy and has been on a number of boards and advisors groups dealing with a number of issues facing the US. Historically, there have been four things that have defined a superpower and the question is whether the US will still be a world superpower by the year 2040. The four main things are global economic, diplomatic, and military power, and global cultural influence. Under these definitions, in the years after World War 2 the US was the only country to qualify as a superpower, but in modern times China is beginning to overtake the US in many of those areas. China has already passed the US in terms of GDP on a Purchasing Power Parity basis. They have more embassies around the world than the US does. China is currently the #2 military power in the world today but they are dedicated to becoming #1, and they are spending a lot of money on it. Culturally, Chinese investors own the largest movie chain in the United States as part of their effort to have a cultural impact. Economics, demographics, and foreign alliances are starting to work against us instead of for us. It’s important that we wake up, learn from history, and heed the lessons from our nation’s founders, and that we start to change course so that we can remain a superpower and make sure our future is better than our past. The reasons that we are currently having problems today is because we have strayed from the values on which the US was founded. We have also not heeded the prescient warnings of George Washington: to avoid foreign wars, not have excessive debt, to avoid regionalism and factionalism. We are actually experiencing the same challenges as the Roman Empire did before it fell. It’s important that we learn the lessons of history so that we can do what is necessary to stay great and ensure greater opportunities for future generations. We were on an unsustainable fiscal path before Covid-19, and now we are in much worse shape. Debt-to-GDP in 2020 increased by 20% which is the most important metric we need to be paying attention to. It’s clear that additional legislation will be passed now that Biden will be President and the democrats control the House and the Senate. We will defeat Covid-19 but once we do, we need to put a mechanism in place that will allow us to make the tough choices that will get the debt-to-GDP ratio to a reasonable and sustainable level over the next 10 to 20 years. Prior to Covid-19, the Social Security and Medicare trustees estimated that the trust funds were suppo
S1 E115 · Wed, January 13, 2021
How to Maximize Your Net Worth When Doing Roth Conversions & More
David has written a number of books on the Power of Zero paradigm for retirement and still does about 90 speaking engagements each year. He also runs a program with around 250 advisors that help him espouse the Power of Zero worldview. The basic premise of the Power of Zero is that due to the fiscal irresponsibility of the US, tax rates will have to rise dramatically over the next few years just to keep the country solvent. Combine that situation with a skyrocketing national debt and unfunded liabilities and there are massive implications for a generation that has the majority of their retirement money in the tax-deferred bucket. If you can situate your retirement assets such that in retirement you are in the zero percent tax bracket then you have effectively insulated yourself from the impact of higher taxes. If you’re in the zero percent tax bracket and tax rates double, two times zero is still zero. Conventional wisdom says that you will be in a lower tax bracket in retirement than during your working years, and that made sense in the 70’s but it doesn’t hold true for the current situation. What he found was that a lot of the deductions you enjoy when you’re working disappear once you retire and many people end up in a higher tax bracket instead. We know that the current tax rates expire on Jan 1, 2026 and they will return to what they were in 2017, but the real danger is what will happen to tax rates in 2028, 2030, and beyond. We are moving into a future where the debt we are taking on will be unsustainable and we will either default on the debt or raise taxes. It will be challenging but there are ways for people to insulate themselves from these dire repercussions. Most people believe that tax rates will be higher in the future, but they still have the majority of their retirement portfolio in the tax-deferred bucket. This means there is a disconnect between what people believe and how they act because of the inertia of traditional wisdom. Like the average person, the federal government has trouble delaying gratification. We do a lot of things as a country that help us scratch our itch in the short term but that has a lot of adverse repercussions over time. This is a problem that pervades every single part of government and society, but there are things we can do to forestall these eventualities. There isn’t an official zero percent tax bracket, but it is possible to not pay tax in retirement by positioning your money in the right amounts in the right accounts. David’s second favorite tax bracket is the 24% tax bracket because it doesn’t “cost” as much. If you’re in the 22% tax bracket, increasing your taxes by 2% will give you an additional $150,000 in shifting capacity to get more of your money into the tax-free bucket before tax rates go up for good. There is a right amount of money to shift each year that doesn’t push you up into a higher tax bracket but allows you to comp
S1 E114 · Wed, January 06, 2021
My Take On Financial Gurus, Tax Fear Mongering, Tax Payment Procrastination, and More
There are a lot of stigmas around retirement planning and David’s new book addresses two of the most difficult problems facing retirees right now, longevity risk and tax rate risk, and how to deal with them at the same time. Tax rate risk has always been a big problem for retirees, but it’s not their biggest concern. Most people worry more about running out of money before they run out of life. David has observed that financial advisors are stuck believing they can solve one risk or the other. 99.5% of advisors fall into this trap where they mitigate longevity risk within the tax-deferred bucket, and that unleashes a chain of unintended consequences that can bankrupt a stock market portfolio ten to twelve years faster than you thought possible. Daniel recommends to every financial professional he meets that they read the Power of Zero collection of books. You’re not relevant to the retirement space if you don’t have some part of your company’s philosophy centered in the Power of Zero message. David isn’t making big claims about a specific timeframe. His message is universal and experts have been saying we’ll need to deal with all this debt at some point in the future. It’s not a political issue, we all need to prepare for this. An object at rest stays at rest. People are averted to paying taxes to the IRS sooner than they need to, even if they believe that tax rates will be higher in the future. More people are coming over to the Power of Zero way of thinking. There is an incredible divide between the people who think that tax rates will never go up and those who think that the Power of Zero paradigm is the gospel of retirement planning. The biggest skeptics don’t believe that tax rates will rise in the future and the very thought threatens their way of living. David McKnight’s top three advisors to pay attention to include Ed Slott, Tom Hegna, and Van Miller. Each of them has something extremely valuable to add to the conversation. Many experts decry annuities unnecessarily and consumers need to be careful about overgeneralizing. Financial gurus on television and the internet have to paint with a very broad brush so that it applies to a large swath of people. Unfortunately, the people that need more customized strategies get sucked in by the one-size-fits-all idea. Would David ever consider hosting a moderated financial planning debate with the traditional gurus on one side and the Power of Zero paradigm on the one side? Just like in politics, there is an establishment in finance. David’s first book was the #2 bestselling business book in the world, but despite that, it didn’t make it onto any bestseller lists. David and Daniel are up against the invisible hand of the establishment to get the word out. What can we expect from the Joe Biden administration? Much of the answer depends on the Georgia runoffs and whether the Democrats gain control of the Senate. If that’s
S1 E113 · Wed, December 30, 2020
A Power of Zero Amazon Review Rebutted
The Power of Zero occasionally gets a negative review. Today’s episode is going to deconstruct and rebut a recent one-star review and go through the different perspectives. The first claim is the book is based on a misleading assertion regarding taxes in retirement. They are basically subscribing to the idea of tax diversification and the idea that we don’t really know what taxes will be in the future, and in that case we should hedge our bets against all possibilities. This would be a fine approach if we didn’t have any data to base a decision on. That’s not the case. The current fiscal trajectory can not sustain the current level of taxation and number of prominent experts in the financial world agree. Absent a dramatic cut in spending, tax rates will have to go up and we will go bankrupt as a country. Tax rates will have to go up or eventually the interest on the debt will consume the entire federal budget. Most people believe that tax rates will go up in the future, but they also have most of their money positioned in the tax-deferred bucket. This means there’s a massive disconnect between what people think of the future of tax rates and what people are doing about it. If you believe that tax rates will be higher in the future, tax diversification is not the right solution. There is a mathematically perfect amount of money to have in your tax-deferred bucket and it’s rarely a fifty-fifty split. The second claim had to do with the LIRP and Roth IRAs. An LIRP costs an average of 1.5% of your bucket per year over the life of the program, which is undoubtedly more expensive than an index fund. You have to remember that the LIRP and an index fund are not designed to do the same thing. If low fees were the only thing we were after we would simply put everything into a savings account. The LIRP is providing a death benefit that doubles as long term care in exchange for that 1.5%. The other thing to keep in mind is that an index fund doesn’t provide long term care or a death benefit. Dave Ramsey is guilty of this comparison by not taking all the variables into the calculation. The LIRP is not a replacement for the Roth IRA, it’s meant as a complementary strategy. It’s not a one or the other choice which is how the review frames it. There is a cost that comes with low fees as well. Vanguard did a study that found people with a financial advisor had a 3% greater return over time because the advisor is there to make sure you are following through with your investment objectives. There are insurance companies that guarantee their 0% loans. David breaks down the way this works and why the review is incorrect on how the loan process works. When the Power of Zero was written the Roth 401(k)s were not that available, but since then David has spoken and advocated for those plans. The choice is not either/or, having a Roth IRA and Roth 401(k) is a good way to create more tha
S1 E112 · Wed, December 23, 2020
Will America Be a Super Power in 2040, My Review of David Walker's New Book (Part 2)
Last week David did part 1 of the review of David Walker’s new book and talked about the reasons why the US will probably no longer be a world superpower by 2040. In this episode we’re going to cover the proposed solutions. 40% of Americans don’t pay any tax at all with 20% of Americans receiving a refundable tax credit. This has been used in lieu of raising the minimum wage. The federal government forgoes $1.4 trillion in taxes per year in allowable deductions. One solution would be to shore those deductions up. Tax cuts don’t pay for themselves unless they are accompanied by a dramatic spending cut. We can’t grow our way out of the problem with tax cuts. All exemptions, deductions, and exclusions would have to be eliminated. David Walker also proposes making income tax more inclusive and progressive so that everyone above the poverty level would pay taxes and more people would be invested in the system. It’s not enough to tax the rich. He also discussed a wealth tax of 2%-3% per year. This comes with a number of details that would need to be hammered out and should be considered alongside eliminating the estate tax. Broadening the tax base is just the beginning. David Walker had a number of recommendations for spending and the federal budget. The first is if a member of congress doesn’t submit their budget on time, they don’t get paid. In all but 4 of the last 60 years, Congress has failed to pass their appropriation bills by the end of the fiscal year. This usually results in all these bills being combined into a massive omnibus bill with a number of other pieces of legislation being added in. If the federal government can’t take their budget seriously and get it filed on time, how are they supposed to gain control of their spending? Whatever changes that will happen will happen under budget reconciliation which doesn’t require a supermajority. The state of California was having similar problems with their appropriation bills and passed a provision like the one proposed. They have not had a problem since. The second big pillar is recapturing control over the federal budget. In 1912 the government had control over 97% of their spending, now 71% of the budget is non-discretionary. We are writing a blank check for 71% of the annual budget and have no control over it. That’s primarily Social Security, MediCare, and Medicaid. The only program that David Walker was reluctant to cut was Social Security since it’s one of the most popular federal programs. We can not put a cap on the interest on the national debt, given enough time the interest will overtake 100% of the federal budget. We need to change our approach to debt limits. Most industrialized nations have a cap on the debt in relationship to GDP which is something the US should adopt. The debt on its own is not a problem, it's the debt relative to GDP that’s the problem. Given the scale of the debt, having a 90% ca
S1 E111 · Wed, December 16, 2020
Will America Be a Super Power in 2040, My Review of David Walker's New Book (Part 1)
David’s new book did quite well during the launch week, quickly becoming the 3rd most sold business book in the world. David Walker is well known for his expertise regarding the fiscal condition of the United States and is perhaps the person who most understands the potential impacts. Based on David Walker’s current projections for the US in the next 20 years things are not looking good. There is a real question about whether or not the US will still be a world superpower at that point. What does it mean to be a superpower? Being a superpower comes with four pillars: we are widely respected from an economic perspective, a diplomatic perspective, military power, and cultural influence. Currently, the US produces 50% of the global GDP but that number will be 18% by 2040 as China and India eclipse the United States’ productive ability. Workers to retirees will be reduced to a 2:1 ratio by 2040, which speaks to the insolvency of our entitlement programs. David Walker predicts higher unemployment and economic disparity between the classes. Because capitalism has been under attack for so long the US will have become a welfare state and the private sector will become diminished in a creep toward socialism. The growth of the economy will have stalled out between 1% and 1.25%, which is not great for American prosperity. This is a big problem for keeping down unemployment and creating prosperity for America. The debt to GDP ratio will be 170% by 2040, notwithstanding huge tax increases, major reductions in tax spending, and constrained investments. This isn’t reflecting the real debt to GDP ratio when you include unfunded liabilities. Due to higher debt levels and interest rates, there will be more protests against calls to raise taxes just to pay interest on the debt. If the US defaults on its debt it will precipitate a global depression. Even the Modern Monetary Theory enthusiasts will be concerned. David Walker is not a follower of MMT and believes that the US will experience hyperinflation, the likes of which hasn't been seen since the 1970s, followed by stagflation. The global consensus by 2040 will be that China is considered the most powerful country on Earth, as judged by the four pillars mentioned earlier. The threat of military conflict will increase but the US will be weaker from a conventional military capabilities perspective because most of the money will be going to pay interest on the debt. Our own fiscal responsibility will become our greatest weakness. Most countries in the world use the US dollar to transact but that will change as the dollar becomes unstable. The federal government of the US economy will comprise 28% of the economy, and when combined with state and local spending the number will balloon to 40%. This will lead to a misallocation of resources and less private investment. 50% of graduates from public education will lack bas
S1 E110 · Wed, December 09, 2020
The ABCs of POZ
The historical paradigm says to put your money into a 401(k) or IRA, get a tax deduction and let that money grow tax-deferred so that when you take that money out you’re in a lower tax bracket. Experts and economists are starting to look at the fiscal condition of the US and the picture isn’t good. The US is $23 trillion in debt with unfunded obligations of upwards of $239 trillion. We are marching into a future where the very solvency of the US government is being called into question. We are going to have multi-trillion dollar deficits over the next decade and the debt is only going up. What are the chances that taxes are going to be lower in the future given that reality? The paradigm has been flipped so the focus is now wringing every bit of efficiency out of your retirement accounts. Taxes are on sale right now. Experts have been saying for years that we need to raise revenue and lower spending, but the federal government has been doing the opposite. The 2017 tax cuts that were introduced have an expiration date in 2026, which means we only have six years to take advantage of these historically low tax rates. When you’re retired, every day is Saturday. The average retiree shouldn’t expect to spend less in retirement and studies have backed this finding up. To get to the zero percent tax bracket, the first step is accepting that taxes are going to be higher in the future than they are now. Many notable experts agree that tax rates will have to be dramatically higher than they are today, just to keep the country out of bankruptcy. The second step is to realize that there is an optimal amount of money to have in your three buckets in a rising tax rate environment. In your taxable bucket you should have no more than six months of expenses. In your tax-deferred bucket you want your balances to be low enough that required minimum distributions are offset by your standard deduction and don’t cause social security taxation. Everything else should be systematically shifted to the tax-free bucket. If you don’t have a pension or any other residual income in retirement, you probably shouldn’t have more than $350,000 in your tax-deferred bucket. Everything else should be safely ensconced in your tax-free bucket by 2026. Most people don’t recognize the fact that your social security can be taxed and many financial professionals don’t even know what provisional income is. If you have too much provisional income, up to 85% of your social security can become taxable to you at your highest marginal tax bracket. When that happens you will run out of money five to seven years earlier than you would have otherwise. Plan for RMD’s before they happen to you. Right now, the IRS is not requiring you to pay taxes on your money until age 72, but the question is “does that really make sense?” For most people it makes more sense to preemptively pay taxes on your terms, so that you’re not paying taxes on t
S1 E109 · Wed, December 02, 2020
My Thoughts on the Securing a Strong Retirement Act of 2020
The Securing a Strong Retirement Act is a bipartisan bill currently working its way through the house and has major implications for everyone in the country. We are finally getting some relief from RMD’s. With life expectancy increasing they are looking at pushing out Required Minimum Distributions until the age of 75. This primarily benefits people of substantial means since the average person with money in their retirement accounts are withdrawing it above and beyond the minimum and well before age 75. Another interesting provision has to do with student loan debt. The new bill stipulates that people putting money towards paying down their student debt could have an equal amount of money put into their 401(k). It also says that if you have balances in your 401(k) or IRA you would be completely exempted from taking a Required Minimum Distribution. Seniors will also be able to count certain donations towards their RMD. Under the current law, there is a catch-up provision on the books. They are proposing that if you’re over the age of 60 you will be able to catch up even more. If you believe tax rates are going to be dramatically higher in the future than they are today this is an opportunity to put additional funds into a Roth IRA. There are massive expansions of the buckets into which we can contribute after-tax dollars and allow them to grow tax-free. The average person changes industries seven times over the course of their lifetime and another provision would help people get reconnected with 401(k) accounts that were forgotten or left behind. The biggest takeaway from this new bill is that you will be able to make more contributions to Roth 401(k)s and Roth IRA’s. The goal is not to get a deduction at historically low taxes, we want to pay the taxes at historically low levels so that when taxes are dramatically higher down the road we can take that money out tax-free. If you’re just out of college, this bill will be an opportunity for you to get a jump start on your retirement savings while you’re paying down your student loan debt at the same time.
S1 E108 · Wed, November 25, 2020
My Post-Mortem on the Presidential Election
At the time of recording this podcast the results haven’t been certified but it looks like Joe Biden will be the next US president. There are a couple of different outcomes that you need to pay attention to. The first involves him not controlling the Senate. In order to win the Senate Democrats would have to win two seats in a runoff election on Jan 5 but pundits are saying that result is unlikely. If Republicans control the Senate there will be a lot of obstruction for Joe Biden’s agenda. Everything that Joe Biden campaigned on is going to be effectively neutralized and he will probably have to postpone any changes until the midterms two years from now. This means you can expect two years of relative status quo, but if the Democrats do win those Senate seats in the midterm elections or want to press his program, he will likely try to make the most of the opportunity and push through his agenda more aggressively. If you make more than $400,000 per year, you are essentially a marked man or woman. For example, if you live in California you will have to pay a 13.3% State tax, a 39.6% Federal tax, an additional 14% additional Social Security tax for every dollar over the $400,000, and finally a 3.8% for an Obamacare surcharge. This scenario results in 1970s style tax rates where you would be paying 70.7% in taxes. You will also have fewer ways to mitigate that tax and be unable to deduct 401(k) contributions on the margin as well. Joe Biden has proposed considerable changes to the way 401(k) deductions are done so we are going to start to see deductions phasing out for people in the higher income levels. Joe Biden wants to be able to tax you at high marginal tax rates and doesn’t want to give you a lot of recourse in terms of mitigating that tax. If you have significant income, your long term capital gains could become short term gains. If Joe Biden wins the Senate he will have two years to put this into law but in the process will likely upset a lot of people and potentially lose the Senate after the midterms, however this means that for the first two years you better duck and cover if you make $400,000 a year or more. If you make less than $400,000 a year, a Joe Biden presidency is relatively good news for you. Joe Biden plans on letting the tax cuts expire for the people that make $400,000 or more but for those who make less, he plans on making the tax cuts permanent. This could make contribution to your 401(k) a bit more complicated and for those above the $400,000 threshold they will probably want to consider some other options. In terms of the Power of Zero paradigm, it is largely good news if you believe that Joe Biden will make the tax cuts permanent for those who make less than $400,000 per year. We can’t afford to keep tax rates this low and have actually gone beyond the point of no return. We would have to tax 103% for every dollar made over $400,000 just to pr
S1 E107 · Tue, November 17, 2020
Tax-Free Income for Life Preview, Part 3 – The Secret to Mitigating Tax-Rate Risk and Longevity Risk within the Very Same Financial Plan
Today’s episode covers the last secret to mitigating the two most concerning risks of people planning to retire. People are afraid of running out of money before they run out of life. Traditionally the way you can mitigate that risk is by accumulating a lot of money and restricting your distributions to 3% which gives you a statistical likelihood of not running out of money. The alternative is by guaranteeing your income by way of an annuity. Economists say that the ideal way to guarantee an income stream for life involves giving an insurance company a large lump sum in exchange for a steady stream of income for life. There are a number of shortfalls with that approach including a lack of liquidity and what David refers to as the “Mack Truck Factor”. Single premium immediate annuities do not adjust for inflation which means as inflation goes up your spending power goes down. Insurance companies have recognized a number of benefits of having an annuity as well as attempted to address the shortfalls. The solution they’ve come up with is a fixed indexed annuity. A fixed index annuity gives you liquidity on your dollars and the growth of the money in the account is linked to the upward movement of the market. They also come with death benefit features which do quite a bit to mitigate the issues with traditional annuities. The big mistake that most people make is they implement these annuities in the tax-deferred bucket, exposing themselves to the risk of a rising tax-rate environment. Insurance companies provide options to convert that fixed indexed annuity to a Roth IRA but that comes with its own set of problems. In an attempt to avoid doubling your taxes over time you may end up doubling them in the short term. There is another option known as a piecemeal internal Roth conversion that allows you to convert your annuity over whatever timeframe your financial plan calls for. The piecemeal internal Roth conversion eliminates the two greatest risks to your retirement, tax-rate risk, and longevity risk. When you remove those risks off the table, you also take care of the sequence of return, withdrawal rate risk, and inflation risk. Historically, financial advisors will say you can only mitigate one of those two risks. Either you have liquidity and don’t have to worry about longevity or you cover longevity and have no liquidity. The plan outlined in Tax-Free Income for Life allows you to effectively remove longevity risk, along with all of the risks that get magnified as a result of longevity risk, and tax-rate risk all in the same financial plan. If you’re looking for an advisor to help you navigate all the pitfalls that stand between you and the zero percent tax bracket, as well as mitigate both longevity risk and tax-rate risk you can go to davidmcknight.com to get connected with an Elite Advisor. The Power of Zero and Tax-Free Income for Life are companion
S1 E106 · Wed, November 11, 2020
Tax-Free Income for Life Preview, Part 2 – How the Traditional Approach to Lifetime Income Annuities Could Spell Disaster for Your Retirement
In the previous episode, David explained the surprising benefits of having a guaranteed income stream in retirement via an annuity, including living longer. If there are so many benefits of owning a guaranteed lifetime income annuity, why aren’t more Americans taking advantage of these programs? There are three major barriers that are preventing people from ever entering into the transaction. The first issue that Americans have has to do with liquidity. In order to pull off the annuity deal, you have to give a large lump sum to an insurance company and you can’t undo the transaction. There is a psychological benefit to being able to access your money at a moment’s notice so the act of giving up liquidity is a major barrier for many people. The second problem is the lack of inflation hedge. The typical single premium immediate annuity does not index for inflation and people are afraid the income provided may not be enough to cover their expenses in the future. Some people approach the problem by increasing the lump sum at the beginning but that leads back to the first complaint of lack of liquidity. The third problem is the “Mack Truck Factor”. If you go for a large annuity under the assumption that you will live for a long time but get flattened by a Mack truck a couple of years later, that asset will disappear from your balance sheet. However unlikely the proposition, the potential of making the worst investment ever and losing their kids’ inheritance is a scary scenario for many people. Insurance companies are not blind to these three problems. They’ve created a fixed indexed annuity to try to address these issues and mitigate some of the risks involved. To address liquidity, they allow you to withdraw 10% of that annuity per year. This isn’t full liquidity but basically functions the same way when you think about the 3% Rule. To address inflation, the annuity is placed into a growth account that is linked to the upward movement of a stock market index. You’re not going to hit a homerun in this account but since the goal is to guarantee a stream of income until you die, this fits the bill. The last issue is addressed by a death benefit. If you die up to two years after purchasing an annuity, whatever you don’t spend goes to the next generation including any growth on that money. As great as all that sounds, the last issue is that 99% of fixed indexed annuities get implemented in the tax deferred bucket. There are two major problems with that approach. When you have that annuity in your tax-deferred bucket, it can never be undone, which means you are exposing yourself to tax rate risk. If tax rates rise dramatically in the future you will have a hole in your income and will have to find a way to compensate. The second issue is that taking money out of your tax-deferred bucket, even if it’s from an annuity, counts as provisional income and can lead to the risk
S1 E105 · Wed, November 04, 2020
Tax-Free Income for Life Preview, Part 1 – The Surprising Benefits of Guaranteed Lifetime Income
This is the first of three podcasts leading up to the release of David’s latest book, Tax-Free Income For Life. According to a number of surveys, the number one risk that retirees are most concerned about is outliving their money. One of the ways to mitigate longevity risk is by having an annuity. There are a number of benefits that come with guaranteed lifetime income annuities, the first of which is retirement predictability. The first benefit of a guaranteed lifetime income annuity is closing the income gap between the amount required above and beyond what is provided for by your social security and government pension. An annuity has the ability to completely mitigate longevity risk. The second benefit is that people who have an annuity that can guarantee their income generally have considerably less anxiety and a higher level of happiness than those that don’t. An annuity won’t bring anxiety-free retirement but it will certainly be much less than those who have to rely on the stock market to achieve their retirement goals. The third benefit may surprise you. With a guaranteed lifetime income annuity, you will likely live longer. Studies show, after adjusting for all other variables, people with annuities tend to live longer than their counterparts who don’t have them. The fourth benefit allows you to skirt around the 3% rule. While the 3% rule should generally work to ensure you never run out of money it tends to be a very expensive proposition. An annuity allows you to mitigate that risk with much less money. This can also free up more money to invest in the stock market. The final benefit is that because of the ability to guarantee your income with less money than you would require otherwise, you can take a greater risk in your stock market portfolio and be more aggressive. If the stock market goes down you are not going to be forced to take money out in a down year since you will have your living expenses guaranteed by your annuity. You will have the luxury of waiting for the stock market to recover in that scenario. Most of the money that you are planning on spending on your discretionary expenses in retirement has not been earned yet when you retire. You must have the ability to stretch your stock market portfolio over a possible 30 year time frame which requires you to take more risk in your investments. When you guarantee your lifetime income, you have a permission slip to take more risk in the stock market. A guaranteed lifetime income annuity also neutralizes two risks that have sent many retiree’s portfolios into a death spiral. Namely sequence of return risk and withdrawal rate risk. This can prevent you from running out of money up to 12 to 15 years earlier than you expect. You don’t have to worry about taking unduly high distributions from your stock market portfolio if your income is provided by a different means like a guaranteed lifetime income annuity.</
S1 E104 · Wed, October 28, 2020
The Real Tax Implications of Biden's 401(k) Proposal
Joe Biden is coming for your 401(k) and it’s actually worse than David portrayed it in previous episodes of the podcast. Under Joe Biden’s tax proposal he is going to equalize the tax benefits of retirement plans. David breaks down exactly what this means for people in different tax brackets and what the implications of this plan are. In order for Joe Biden’s plan to be tax neutral the rate at which you receive a tax credit is 26%. This essentially means that anyone in a tax bracket under 26% is getting a great deal and anyone in a bracket above the 26% tax bracket is getting a terrible deal. Let’s say you’re in a 39.6% tax bracket and wanted to contribute $20,000 to your traditional 401(k). With the 26% benchmark you would receive a $5200 tax credit and have to pay $2720 in income tax on that contribution. But wait, there’s more. At some point you are going to have to take those dollars out because they haven’t taxed yet. Not only did you pay 13.6% to put the money in, if you’re still in the 39.6% tax bracket when you take the money out you end up paying 53.2% and that still doesn’t count the state tax implications. The math taking place on the tax return happens on a separate line which means the contribution carries down to the state level. Unless state legislatures act, your retirement plan contribution may be fully taxable at the state level when contributed. Since the retirement account is still pre-tax, which means the balance of your retirement account might be fully taxed at the state level upon distribution. The solution is fairly simple. If you find yourself above the 26% tax bracket, the solution is to simply stop contributing to your 401(k) and only contribute to your tax-free bucket. Pay your tax rate today if it’s above 26% and avoid all the extra taxation. You are not going to be able to keep very much of your savings if you’re above the 26% threshold and you contribute money to your 401(k). This proposal has the ability to radically redefine the retirement landscape. If Joe Biden wins the election, this proposal could become a reality. Mentioned in this Episode: The Biden Tax Plan: Proposed Changes And Year-End Planning Opportunities
S1 E103 · Wed, October 21, 2020
The Post-Mortem on Trump's First Term
Today’s podcast is based on a recent article penned by Maya MacGuineas titled The Debt is Huge Because Trump Kept His Promises. Maya also appeared in David’s documentary The Tax Train is Coming. Much of what Maya says is that we shouldn’t be surprised by what happened during Trump’s first term since it has been exactly what he campaigned on. The debt that has accumulated has been a result of President Trump’s campaign promises of steep tax cuts and increased spending on both defense and veterans, and crucially, he promised to not make any changes to Social Security and MediCare. We are now paying the price for it. The numbers proposed were so huge that they seemed exaggerated and improbable, in other words, the amount of debt that Trump was looking to accumulate over the course of his first term was astronomical. The Nonpartisan Committee for a Responsible Federal Budget estimated that Trump’s agenda would increase deficits over the next ten years by $4.6 trillion. The numbers at the end of Trump’s first term are even worse due to the extra spending for the Covid-19 lockdown. In Trump’s first three years he approved $3.9 trillion in borrowing just to pay for the tax cuts he introduced. Any good economist will agree that tax cuts are okay if they are paired with a commensurate decrease in spending, the problem is we didn’t do that. While all the other economies in the world are paying down their debts, the US is piling debt upon debt. The deficit has never been so high when coupled with an economy that was going as well as it was prior to 2019. When you add up the additional borrowing that the US made to deal with Covid-19 the impact is immense, and the borrowing is just beginning. The $2 trillion borrowed initially was only the first half of the bridge. Had we been more fiscally responsible prior to Covid-19 we would not be in the same bind. We would be in a better position to handle something like Covid-19 had we not accumulated so much debt prior to it. There are a few things that Trump did not follow through on. The business tax cuts have not paid for themselves. Trickle-down economics is the idea that decreased taxes and increased capital going to corporations leads to an increase in the economy, but that would only happen with a concurrent decrease in spending, which did not happen in this situation. Discretionary spending is a relatively small portion of the budget, roughly 23% of the economy, and while Trump proposed reducing discretionary spending it actually increased by over $700 billion. Part of the problem is that Trump ran on not touching Social Security or Medicare and every year that goes by where we do not reform Social Security or Medicare in some way has an economic cost. Every year that goes by where we fail to address these two programs means the fix on the backend is going to become even larger and even more draconian. According to t
S1 E102 · Wed, October 14, 2020
What is The Elite POZ Advisor Group?
In every single book David has written he talks about why it’s so important to have a trusted and trained advisor in the Power of Zero paradigm. There are dozens of pitfalls standing between you and the zero percent tax bracket which is why it’s crucial you have a qualified guide to show you the way. You should work with an advisor that has internalized the Power of Zero principles to help you mitigate both tax-rate risk and longevity risk at the same time. The Elite POZ Advisor Group is a collection of trained professionals that have been vetted by David himself. There are a number of requirements that someone needs to have completed before they can enter the group. Elite Advisors need to have been in the industry for a few years and have demonstrated the ability to answer the client’s questions and lead them through the Power of Zero process. Every member of the Elite POZ Advisor Group has also passed a comprehensive written exam. Many advisors have tried and failed to complete this exam because you need to have an in-depth knowledge of the Power of Zero paradigm. Elite Advisors also have to sit through an extensive ten-part training course that covers a number of different case studies and covers all aspects of the Power of Zero retirement strategy. On top of all that Elite Advisors receive ongoing training directly from David to keep them apprised of tax law changes and updates on the approach. When it comes to getting to the Power of Zero tax bracket and tax-free retirement planning, not all advisors are created equal. The Elite Advisors group is the gold standard of the Power of Zero paradigm and if you’re working with one of them you can be assured that you are in good hands. Go to elite-poz.davidmcknight.com to find out what the advisors have been through to be part of the elite group. Advisors can go to powerofzero.com to find out how to become part of the Elite POZ Advisor group. There are a number of financial advisors preaching the Power of Zero approach but ultimately they just want to sell you a life insurance policy. That is not what the POZ paradigm is about. It’s about having multiple streams of tax-free income and there is no cookie-cutter approach. In the POZ paradigm, most advisors' basic impulses are the exact opposite of what they need to do to lead their clients to the zero percent tax bracket. Head to davidmcknight.com to be connected with an Elite Advisor to help you.
S1 E101 · Wed, October 07, 2020
5 Tax Changes You Can Expect If Donald Trump Is Re-Elected
Should Donald Trump win a second term in the Presidency there could be significant changes to the tax code. Donald Trump hasn’t laid out a fully realized tax proposal in the same way that Joe Biden has but he has outlined some of the things he would do. One of the things that Donald Trump has already done is unilaterally implemented a payroll tax deferral as an answer to the financial repercussions of Covid-19. It’s currently deferred, which means that the money would have to be paid back in 2021, but there are rumors that he would waive that entirely. There have been additional rumors that Donald Trump is thinking about eliminating payroll taxes completely, which would put Social Security and Medicare in difficult positions as they are already underfunded. Unless you subscribe to Modern Monetary Theory (MMT) and the idea of the government’s infinity bucket, that’s probably a bad idea. The second thing Donald Trump would hope to do is modify the capital gains tax or index them to inflation. The idea being that the cost of doing business would decrease overall and to encourage investment. He has also proposed that the US indexes long term capital gains to inflation as well. David walks through a practical example of what this would mean for the average investor. Should this policy be implemented it would certainly have a positive impact on economic activity and investment in small businesses. The third thing that Donald Trump is considering is a reduction in taxes on the middle class. The current tax brackets are scheduled to expire in 2026 and Donald Trump is looking at a 10% tax cut for middle Americans, although the exact details aren’t known at this point. This particular policy could be interesting if implemented, but it would require the Republicans to have control of the House and the Senate to make the tax cut permanent. The fourth thing the President is looking to do is create tax credits for American businesses. He wants people to buy more American products so these tax credits are focused on making American businesses more competitive, particularly in the pharmaceutical and robotics industries. He’s also looking to expand the opportunity zones created under the Tax Cut and Jobs act. Keep in mind that none of these changes have been committed to or put down on paper, they’ve just been some thoughts and ideas discussed so far. David quickly recaps the five tax proposals coming out of the Trump administration. Once we know who our next President is going to be, we’ll have a little more clarity about what to expect in terms of taxes for the next four years.
S1 E100 · Wed, September 30, 2020
Why Most People Are Doing HSAs All Wrong
There is a benefit in the tax code that goes largely ignored. The holy grail of financial planning is an investment that gives you a tax deduction on the front end, lets your money grow tax-deferred and allows you to take that money out tax-free. In the Power of Zero paradigm that usually means a combination of Roth conversions and LIRP conversions. For most married couples, the ideal balance of the tax-deferred bucket is between $300,000 and $350,000. In that situation it qualifies as the holy grail of financial planning. There is a second way to accomplish the same tax-free holy grail: through an HSA or health savings account. When you put money into your HSA you get a deduction, the money grows tax free, and when you take it out for qualified medical expenses you don’t pay any taxes at all. David breaks down the two scenarios of either having an HSA or not having an HSA in the event of a healthcare issue. With an HSA, healthcare expenses are not taxed. Most people go wrong with their HSA by not using all three tax advantages. They take advantage of the tax deduction on the front end and take the money out tax-free, but they’re not taking advantage of the tax-free interest in investment earnings. HSAs are designed to grow the investments inside of them. Instead of using the HSA as a slush fund for smaller, out of pocket medical expenses when you’re young, let your precious tax-free dollars experience the ability to grow in a tax-free environment. Use that money when you’re older after it’s grown and those medical costs are usually higher. Keep all your receipts for medical expenses along the way. There is nothing that says you need to get the reimbursement from your health savings account in the same year that you make the purchase. Let your HSA accumulate tax-free and build steam. It’s also important to keep the receipts in case you get audited. You will need to prove that you had a qualified medical expense and that you paid for it. With just a little tweak, you can use all three tax advantages that the HSA confers. Pay for your medical expenses out of pocket now and let that money accumulate tax-free. People don’t think of the HSA as the tax-free vehicle that it is, just like a Roth IRA. We are always told that we are either going to be taxed on the seed or the harvest, but with the HSA you are taxed on neither the seed nor the harvest. The problem is people don’t let their HSAs grow. If we can all make a little tweak to how we treat our HSAs, we’ll have another tax-free bucket to take advantage in the Power of Zero paradigm. There are lots of tax-free streams of income out there and we’re not taking advantage of all of them like we should.
S1 E99 · Wed, September 23, 2020
The Grand Unified Theory on a Happy Retirement, Part 2 – Principles 6-12
A quick recap of the first principles covered in the previous episode. #1 Mitigate longevity risk with an income annuity. #2 Your income annuity only needs to cover your basic lifestyle expenses. #3 Your income annuity needs to have a guaranteed lifetime income feature, inflation protection, liquidity, and a death benefit feature. #4 Cover discretionary expenses with your stock market assets in your LIRP. #5 Always draw your guaranteed lifetime income from your tax-free bucket. #6 Your LIRP must have a chronic illness rider. The seventh principle is to use a time segmented investing approach to grow your assets safely and productively during the time when you are doing your piece meal Roth conversion. If you leave your money in your stock market portfolio you expose yourself to a sequence of return risk. Time segmented investing is about having bonds mature in the year when you know you will need the income and allows you to mitigate the sequence of return risk. Whatever money that isn’t going into your LIRP or annuity should be going into an aggressive stock market portfolio. Since you have the luxury of taking money out of your LIRP and guaranteeing your lifetime expenses, you can take much more risk in the stock market. You need to have multiple streams of tax-free income, none of which show up on the IRS’s radar, but all of which contribute to you being in the zero percent tax bracket. Preferably between four and six streams of tax-free income, each with unique benefits. Don’t take social security until you’re ready to draw income from your guaranteed lifetime income annuity. Outside of a short expected lifespan, you should be putting off social security as long as you can, at least until you’ve paid off your piece meal internal Roth conversion. Identify the ideal balances in your taxable and tax-deferred bucket and shift everything else systematically to tax-free. In a rising tax rate environment, there is an ideal amount of money to have in your taxable and tax-deferred bucket. As of right now, you have six years to reposition your money into the tax-free bucket. Get all your asset shifting done before tax rates go up for good. You have to know what your magic number is and how much money you need to shift to tax-free between now and 2026. Understanding these principles will shield you from longevity risk and tax rate risk. Unless you have the ability to mitigate both risks in the same financial plan, you are going to have a very hard time being fully at peace with your retirement plan. Nobody wants to have to keep constantly looking over their shoulder in retirement.
S1 E98 · Wed, September 16, 2020
The Grand Unified Theory on a Happy Retirement, Part 1 – Principles 1-6
There are 12 basic principles that make up the Grand Unified Theory when it comes to retirement planning. The first section tackles mitigating longevity risk. We know there are two basic ways to mitigate longevity risk, the first simply being to save up enough money. If you save enough money you can weather all the ups and downs of the stock market. Historically, there has been a 4% Rule that makes the calculation simple. More recently the rule has been revised. The new 3% Rule is more common. If you need $100,000 per year in retirement the 3% Rule says you need $3.33 million to successfully mitigate longevity risk. This is a very expensive way to mitigate longevity risk but it can be done. A better option is an income annuity. The number one principle is to mitigate longevity risk with an income annuity and not by way of the stock market. The second principle is to only use the income annuity to cover certain expenses, essentially your basic lifestyle needs. You just need to cover simple lifestyle needs because other vehicles are better suited to other expenses. The money that doesn’t go into the annuity needs to be grown and compounded in another part of your portfolio. The third principle is that your annuity has to have four qualities that you absolutely must have before you commit. It must have a guaranteed lifetime income feature and is designed to last as long as you do. It must have inflation protection because without that inflation could erode your value and leave you looking at a shortfall. Your annuity should also have liquidity in the years prior to electing that guaranteed lifetime income feature. Not all annuities have liquidity which can give people a sense of heartburn in the case where they need that money. That last component is a death benefit feature. Without this, there is the potential for the annuity to be the worst investment you’ve ever made. With the death benefit feature, in the case that you die earlier than expected at least, your beneficiaries will get the portion that wasn’t spent. Once your lifetime expenses are covered by your annuity, you need to look at the rest of your portfolio. There are two types of discretionary needs, emergency expenses, and aspirational expenses, and they will pop up over the course of your retirement and you have to have the ability to grow your money productively to take care of them. You will have two pools of money to draw from to cover those expenses, the first is your stock market portfolio and the second is your LIRP. The rule of thumb is to draw money from your LIRP during down years in the market during the first 11 years, but when the market is up you are simply harvesting the profits from your portfolio. Never withdraw assets from your stock market portfolio following a down year in the market. If you are planning on having an annuity to cover your lifestyle expenses in retirement, you need
S1 E97 · Wed, September 09, 2020
Is Joe Biden Coming for Your 401(k)?
Joe Biden has historically said that taxes won’t go up for anyone that makes less than $400,000 annually , but that may not be the case. Some people may lose some deductibility in their 401(k) contributions which would result in an effective increase in the tax they are paying. If you are in the highest marginal tax bracket of 37%, when you contribute $1 to your 401(k) you essentially save $0.37 in tax. Joe Biden’s perspective is that for people in higher income tax brackets, the tax savings is unduly weighted towards them. The current proposal involves a standard rate at which everyone could deduct money from their 401(k). The exact number is still unknown, but economists are estimating the rate would have to be around 20% to be revenue neutral. This would basically mean that instead of deducting the full $0.37 at the highest marginal tax bracket, you would only deduct $0.20. For people in lower tax brackets, they would get a higher deduction than they otherwise would have. The ramifications of this proposal would mean that people in the higher income tax brackets of 22% or above will skip the deduction. Instead of getting the deduction, higher income earners will likely start paying the taxes on their money today, especially given that we are in a rising tax rate environment. This negates the usual discussion about whether it’s superior to save on paying the taxes today and waiting until retirement, since the deduction is not likely to be much higher than the tax rates you will face in the future. The net effect of all this is that it is going to accelerate the flow of money into tax-free accounts. As things are, there isn’t much reason to forego a 37% deduction today, but if that deduction changes, it’s not going to be very attractive at all. Given this proposal, we are going to see more people foregoing putting money into their 401(k) and looking more towards tax-free options. Despite Joe Biden’s pledge to not raise taxes on anyone making less than $400,000, people who make $200,000 or more will find they will be paying more taxes if they no longer have the ability to deduct 401(k) contributions at their highest marginal tax bracket. Anyone who is in the 22% tax bracket or higher will likely stop making 401(k) contributions and start redirecting those contributions to Roth 401(k)’s or other tax-free plans. The silver lining to this is that more people will contribute to tax-free accounts and end up being better prepared for an eventual rise in tax rates. If Biden does get elected in November, many people are going to have to reassess their approach to saving for retirement. Another thing to keep in mind is the rumor that should Joe Biden get elected, he may bow out at the two-year mark. This could potentially lead to 10 years of Kamala Harris in the presidency.
S1 E96 · Wed, September 02, 2020
Five Things Your LIRP Must Have
There are five important elements your LIRP must have if you are going to have it for the rest of your life. Similar to getting married, these are things you need to look for before committing to the plan. You don’t want to get 10 or 20 years in before you realize there is a ticking time bomb in your LIRP. The first thing your LIRP must have is the ability to get a guaranteed zero percent loan. The best strategy for your LIRP is to work with a company that allows you to take a loan against your plan with a net cost to you of zero percent. This means you have to be diligent in assessing the contract and make sure the guarantee is part of it. Some companies reserve the right to adjust the loan interest rate at their leisure which is exactly what you want to avoid. The caveat is here is that just because someone is saying that they are giving you a zero percent loan, that doesn’t mean it’s guaranteed. This is one of the most important provisions in your contract. The second thing to look for is interest in arrears, not interest in advance. The problem with interest in advance is the lost opportunity cost over the course of the year. Some companies credit you in a way that makes interest in advance work in your favour, but they are few and far between. The third thing to look for is a strong financial rating. There are several rating companies, and the way they rank financial products can vary, or even contradict each other. The best way to determine the financial footing of a company is to use a Comdex rating instead. A Comdex rating below 90 is a sure sign you should avoid that company, and ideally, you’re working with a company with a rating of 95 or higher. The fourth thing your LIRP must have is called an overload protection rider. In order for your death benefit to pay out, your cash value must be at least $1. If your cash value runs out before you die, there are some intense tax repercussions. An overload protection rider is like a failsafe that protects you from that scenario by lowering your death benefit. The last thing your LIRP absolutely must have is a chronic illness rider. This rider allows you to access your death benefit in advance of your death for the purpose of paying for long-term care without paying anything along the way. Compared to a long-term care rider, where you are paying money along the way for the privilege of receiving 25% of your death benefit in advance of your death, the chronic illness rider is superior. If you pay for a long-term care rider throughout your retirement and you die peacefully in your sleep without ever having needed long term care, all of those expenses were a drag on your cash value along the way. You end up having paid for something that you never had to use. A chronic illness rider doesn’t have the same opportunity costs. For more info on the 20 things your LIRP must have, check out the book Look Before You LIRP, preferably before y
S1 E95 · Wed, August 26, 2020
How to Avoid Over-Converting Your IRA
It is possible to convert too much money to your Roth IRA and not leave enough money in your IRA to use when you’re ready to retire. The first principle you have to realize is that in a rising tax rate environment, it’s okay to have some money in your tax-deferred bucket. You have to be very strategic about how you shift your money to tax-free and shouldn’t be too reckless when it comes to converting. You can have too much money in your tax-deferred bucket, you can have too little, what we are looking for is just the right amount. You should have a balance in your tax-deferred bucket that’s low enough that required minimum distributions are equal to or less than your standard deduction, but also low enough that it doesn’t cause social security taxation. Social security taxation could put a $6000 hole in your social security, which will require you to spend down your assets much quicker to compensate. Check out davidmcknight.com and use the Magic Number calculator to figure out the perfect balance you should have in your tax-deferred bucket. The higher your social security, the less money you should have in your tax-deferred bucket. Having too little in your tax-deferred bucket can also be a problem. If you rush into converting all your money to tax-free you may end up paying considerably higher taxes along the way, completely unnecessarily. If by the time you’re 72 you don’t have any money left in your IRA, your standard deduction is left idle. This means that in the process of executing your Roth conversion, you paid some taxes along the way that you didn’t need to pay and have over-converted your Roth IRA. You have to keep in mind the opportunity cost. Any time you pay a dollar to the IRS that you didn’t need to pay them, not only do you lose that dollar but you also lose what that dollar could have earned for you had you been able to invest it. As a general rule of thumb, if you have a large pension your ideal balance in the tax-deferred bucket is going to be zero. For everyone else, the typical range is between $250,000 and $400,000 depending on the sources of provisional income you’re expecting. All streams of provisional income will affect your ideal balance. The more you have, the smaller the ideal balance in your tax-deferred bucket. If you should have had $400,000 in your IRA but converted it unnecessarily to tax-free you will have probably paid at least 25% of that as taxes. What could you have done with that lost money? While your standard deduction does index for inflation over time, your provisional income threshold does not. If you want to avoid social security taxation, you need to keep your tax-deferred bucket under a static number. The Power of Zero approach typically includes having 4 to 6 different sources of tax-free income, the most common of which are RMDs. Tax-free RMD’s are the holy grail of financial planning because when you put money
S1 E94 · Wed, August 19, 2020
Can We Print Our Way Out of Our Problems?
A government can’t simply print however much money they want to be able to buy whatever it is that they want. The Deficit Myth was recently released and in the book the author argues that because the government issues its own currency, it doesn’t have to operate like a traditional household. According to the author, all we need to do is print $239 trillion and the US will be funded for the next 75 years. Stephanie Kelton is a proponent of what’s known as modern monetary theory, which is essentially the belief that the government can print its way out of its problems at any time. One argument for this theory is that it’s okay to inflate the money supply as long as the economy inflates at the same rate. The trick is in what proponents of the theory are proposing they use the newly printed money for. The Green New Deal has an estimated price tag of $93 trillion, but if that money were printed today would it actually productively grow the economy? The government can’t replace the productivity that takes place in a free market economy. The government can’t guarantee that a job that it creates is going to benefit the economy in the same way that a private enterprise, when they create a job, can grow the economy. Governments tend not to be able to allocate resources efficiently in the same way a private enterprise can. Elon Musk just sent two astronauts into space in the first commercial space flight, and he did it far more efficiently and quicker than his government counterparts. Some of the biggest criticisms of modern monetary theory come from the left hand side of the aisle. Paul Krugman has warned the US will see hyperinflation if they adopt the theory. Inflation is a type of tax, but it’s more insidious than a tax increase because at least with a tax increase your representatives have to vote on it. Inflation is like a hidden tax that devalues your money in the same way as tax increases but without any legislation. If the government printed money to pay off the national debt, we know that inflation would rise and that would decrease the value of US bonds, resulting in a sovereign debt crisis. This eventually leads to a spiral of rising interest rates and crowding all other expenses out of the budget. Printing money ultimately creates more problems than it solves. There are three programs that are primarily driving our national debt; Social Security, MediCare, and Medicaid, and those programs are tied to inflation. The US can’t print its way out of its problems, the only option is to raise more revenue via higher taxes. Modern monetary theory is dangerous to the US economy and population and will eventually result in major problems for everyone involved. In the end, we need to become more fiscally sane and fundamentally respect the financial laws of the universe. We know that we shouldn’t spend more than we bring in, so we have to be wary of approaches tha
S1 E93 · Wed, August 12, 2020
If You've Won the Game, Should You Quit Playing?
There is a well-known economist named William Bernstein who originally asked the question “When you’ve won the game, why keep playing?” But should people who are retired avoid the stock market completely? An article on the Motley Fool follows the same line of thought. You do need a plan for withdrawing your money in retirement that is different from your plan for building your nest egg and it needs to be in place before you need to withdraw from your assets. A good rule of thumb is to not have money that you expect you will have to spend in the next five years invested in stocks. If you want to mitigate longevity risk and tax-rate risk, the only way is to have an annuity that gives you a tax-free stream of income for life. If it’s inflation adjusted, that’s even better. The issue is that most annuities are implemented in the tax-deferred bucket. You must find an annuity that allows you to do a Piecemeal Internal Roth Conversion and convert that annuity over time to a Roth IRA. Accomplishing this during the first five years of retirement is where most people run into problems. Chuck Saletta doesn’t completely discount the idea of investing in the stock market during retirement, but believes that for the money you need several years from now, the stock market is one of the few ways to generate the returns you need to accomplish those goals. Ultimately, as you transition to relying on your portfolio to cover your costs of living, you will want to strike that balance between short and long term money. Just because you’ve won the game, that doesn’t mean that you can’t do even better over time. In the Power of Zero paradigm, after you have set up the systems to afford your lifestyle expenses in retirement you will still have other discretionary expenses that will arise. These can include healthcare expenses, family requirements, or aspirational expenses and go above and beyond your lifestyle requirements. Any money that is not earmarked to paying for lifestyle expenses, taxes on Roth Conversions, and LIRP contributions during the first five to six years of retirement should be allocated to an aggressive stock market portfolio. This gives you the ability to wait a year and allow the stock market to recover if necessary before drawing money from your portfolio. The bottom line is that you need to keep money invested in the stock market for all the expenses that will be earmarked after the Roth Conversion. You need to grow that money as efficiently as possible over the expected 30 years of your retirement if you want to have any hope of being able to pay for your discretionary expenses. Just because the numbers say you’ve won the game, that doesn’t mean it’s time to take all your money out of the stock market. Instead, you should be guaranteeing your lifestyle expenses and anything else above that you can invest and take more risk on. Clients of the Power of Zero paradigm will
S1 E92 · Wed, August 05, 2020
How a Piecemeal Internal Roth Conversion (PIRC) Could Save Your Retirement
The Piecemeal Internal Roth Conversion (PIRC) may be indispensable to your retirement plan. There are two massive risks that could waylay your retirement journey and prevent you from living a happy and stress free retirement. The first is tax rate risk, the risk that tax rates in the future will be dramatically higher, and the second is longevity risk, where you run out of money before you die. Historically, financial planners have been decent at mitigating either one or the other of those risks but rarely good at mitigating both. If you’re mitigating tax rate risk, you are executing a series of Roth conversions in a way that stretches out your tax liability over time but quickly enough that you get it done before tax rates go up for good. You should really try to get your financial house in order before 2030 if possible. Dealing with longevity risk is fairly simple and involves accumulating more money in your retirement portfolio but this can be a challenge for most people. The 4% Rule has fallen out of favor in recent times and that means using your stock market portfolio to fund your lifestyle needs has become much more expensive. The other option is to offload that risk to companies that deal in mitigating that risk but they typically come with a few downsides. A fixed index annuity is another option that people have traditionally used to mitigate longevity risk. The problem with the traditional approach that financial advisors use to mitigate longevity risk is they typically do it to the exclusion of mitigating tax rate risk. 99% of advisors implement a fixed index annuity within the tax-deferred bucket and once you begin receiving that income it is impossible to receive that income in any other way. If you draw a guaranteed stream of income via an annuity in your tax-deferred bucket, the whole purpose can be thwarted if tax rates go up. If tax rates double in the future and you are relying on that income, you will have half as much money as you expected and will have to spend down your other stock market assets to compensate. The second issue is that the money will count as provisional income and cause social security taxation, compounding the problem and requiring more money to come from your stock market portfolio. Combined, these problems can lead to running out of money 7 to 10 years faster. Many companies allow you to do a Roth conversion prior to drawing against the annuity but they usually require you to convert the entire dollar amount in the same year. This can result in most of that money being taxed at your highest marginal tax bracket. There are only a few companies that allow you to do a Piecemeal Internal Roth Conversion where you can do those conversions over whatever timeframe your financial plan calls for. By getting the conversion done before tax rates go up for good, you have insulated your guaranteed stream of lifetime income from tax rate ri
S1 E91 · Wed, July 29, 2020
Can You Be Too Old to Implement an LIRP?
David often gets the question of whether a person can be too old to implement an LIRP and like most questions the answer is “it depends”. There are a number of great reasons to implement an LIRP, but you have to keep in mind that it’s not a silver bullet for your retirement and should be paired with other streams of tax-free income. The first benefit of the LIRP is that the money in your account grows safely and productively, but that also means that you’re not going to hit any homeruns inside that account. The LIRP is often used as the bond portion of your portfolio which allows you to take more risk elsewhere. Money in an LIRP also grows tax-free and can distribute the money tax-free via a variety of loan options. The next big advantage of the LIRP is the death benefit, which usually has to be the primary motivation for acquiring an insurance plan. You have to have a need for life insurance and a death benefit. A lot of people are using the LIRP as an alternative to long term care insurance. Many people think that as they get older the money coming out of their LIRP will prevent their cash value from accumulating, but that’s just a misconception about the guidelines around the LIRP. As you get older the amount of death benefit the IRS requires you to have goes down. There does come a point in time where the ratios of the LIRP no longer work in your favor. We need to look at the expenses over the life of the program because as life goes on the average cost of an LIRP goes down, this means that you need time to make that happen. If you get too old by the time you implement the program you don’t have enough runway. You don’t have enough time to allow the expenses to reduce. Many of the benefits are still present but you won’t be able to use the LIRP as a distribution tool over the age of 65. The LIRP can be a great way to pass on money to the next generation, to cover a long term care event, and still have a death benefit, but you probably don’t want to use an LIRP after age 65 if your primary motivation is accumulating money tax-free and then distributing money tax-free. For paying for a long term care event an LIRP will always be a good option, it’s just that one of the main benefits of the LIRP no longer applies once you implement it after age 65. The plan still has a lot of good attributes, and it will mainly depend on what you want to get out of it.
S1 E90 · Wed, July 22, 2020
What to Expect if Joe Biden Gets Elected
In past episodes of the podcast David described the impact of a blue wave in the upcoming November election and what may happen to your finances if Joe Biden becomes the next president. The first major change would likely be the loss of the stepped up basis which could result in a large increase in the taxes on money you inherit in the future. No matter who gets elected in November tax rates will have to go up. There is a rumour that a fifth part of the Covid-19 relief bill will be coming in the next few months and the US will likely be at least an additional $4 trillion in debt by the end of the year. Biden currently has a probability of 55% of becoming the next president in November according to the odds in Vegas. A lot can change by the fall but that’s where the odds sit at the moment. Unlike Elizabeth Warren, Joe Biden is not pushing for a wealth tax. The biggest takeaway is that Biden is not talking about raising taxes on anyone making less than $400,000 but he is talking about raising taxes on the wealthiest Americans prior to 2026. This would require a change in the existing law, but the Republicans are trending towards losing the Senate which means it is a possibility. This would probably mean the 37% tax bracket would go up to 39.6%, but all the other tax brackets would remain the same. This would also mean that come 2026, you would not experience a reversion to pre-2018 tax rates and could actually make the tax cuts made at the end of 2017 permanent. We can’t keep tax rates this low for very long without some very unpleasant consequences for Social Security and Medicaid and this may be a way to do some political maneuvering in the meantime. If the expiration date of the current tax cuts becomes null and void due to a change in the law, that could mean you won’t have the same urgency to condense your conversions in the remaining six years. Corporate tax cuts will go up from 21% to 28%, which will have an impact on GDP. Biden is also looking at capping the value of itemized deductions at 28% which would be a stealth way of eliminating deductions for the top earners. Biden is not levying any direct taxes on the middle class, but they will have to shoulder the burden of the other tax increases as those increased costs are passed on to consumers. The increase in taxation amounts to about $3.4 trillion over the next decade, but that money is not earmarked to pay down debt or create efficiencies in the federal government. It’s all designated towards increased spending above and beyond what we are already paying for. David Walker tells us we need to either reduce spending, increase revenue, or some combination of the two. Biden is increasing revenue but also increasing spending, so he will not be doing anything to solve the structural issues in the US entitlement programs. By 2026, the amount of interest on the debt will be taking up a considerable amo
S1 E89 · Wed, July 15, 2020
What Is Time-Segmented Investing?
Time-segmented investing is a critical concept in the Power of Zero paradigm. The traditional approach says that you can have an investment portfolio balanced in such a way as to protect against systemic risk, but this approach has a serious risk associated with it. A couple of down years in the stock market during a time when you are withdrawing funds from your portfolio can lead to you running out of money up to 15 years faster than you expected. The 4% rule is how people typically protected themselves against that risk but changing times have made that rule pretty antiquated. Now it’s as low as the 3% or 2.5% rule. This also means that in order to live comfortably, many people will need considerably more money in their retirement funds if they want to avoid sequence-of-return risk. During the first ten years of retirement, traditional asset allocation is not the best way to go about funding your lifestyle needs. You need to have six different portfolios that are calculated to produce a certain amount of money at certain times. Each portfolio should be calculated so that it provides the money you need at specific points of your retirement. This allows you to take an amount of risk commensurate with the time horizon when you will need that money. If you know how much money you will need in certain years, you can calculate the exact right amount of money you need for each time segment to generate those results. Anything earmarked for years 11 or later will be placed in a high growth portfolio with a higher amount of risk, because you can afford to take the extra risk. Given the low risk investments for the first ten years and the higher risk investments after year 11, you end up with a standard deviation similar to a traditional portfolio but you have completely eliminated sequence-of-return risk. There are also ways to eliminate longevity risk and guarantee a stream of income for your lifestyle needs in retirement. A piecemeal internal Roth conversion inside an annuity is the key, but it does come with some conditions. If you know from day 1 of retirement that you are going to have your lifestyle needs covered by time-segmented investment for the first seven years, you now have the luxury of taking more risk in the stock market. Sequence of return risk is only dangerous when your lifestyle needs are not guaranteed for the first ten years.
S1 E88 · Wed, July 08, 2020
What Dalio, Cooperman, Slott, Kotlikoff and Swedroe Have Recently Said About the Future of Tax Rates
David Walker has been saying that tax rates are going to have to double since 2008. We didn’t do that. So that means the national debt will continue to accumulate until we reach $53 trillion, at which all the money flowing into the Treasury will only be enough to pay the interest on the debt. Many people other than David Walker are starting to speak about the future of tax rates as the national debt continues to skyrocket. Ray Dalio has said that the US will have little choice but to raise taxes in the coming years to offset its mounting liabilities and debt. In many ways we are looking at a currency problem, not just a debt problem. Leon Cooperman believes that no matter who wins in the coming November election, taxes are on the way up, and the coming tax revamp is going to change capitalism forever. The only variable is how high and how fast tax rates will go up. Leon spoke favourably in the past about the tax cuts implemented by President Trump and why the wealth tax proposed by Nancy Pelosi is pretty much impossible to implement, let alone being unconstitutional. Ed Slott believes that there is a good chance that tax rates will go up before 2026. Should Joe Biden get elected, the tax sale may very well come to an end earlier than expected. Larry Kotlikoff, one of the most famous accountants in the world, is recommending that people implement the Power of Zero principles for their clients. The cost of converting a portion of your stock market portfolio will be lower today than at any other point in your lifetime. There are a few good reasons not to buy municipal bonds in general, but Larry offers another reason. Larry Swedroe echoes much of what Larry Kotlikoff has said. Whatever party is in power, we are likely to see a significant increase in taxes before 2026. More and more experts are seeing the writing on the wall and saying that we will have to endure higher taxes in the near future. Even the most skeptical of experts are coming around and are realizing what’s happening. You must take on a sense of urgency when it comes to your taxable buckets. If you still have money above and beyond the optimal amount in your taxable bucket, you are exposing yourself to some serious risks. You’re much better off paying taxes now than later.
S1 E87 · Wed, July 01, 2020
What is a Before and After Comparison? (And Why You Might Need One)
The Before and After Comparison is an indispensable part of the financial planning process and you can get help with yours over at davidmcknight.com . The comparison is made up of three different projections within some sophisticated financial planning software of side-by-side-by-side life scenarios. The comparison reveals the impact of using the Power of Zero paradigm on your retirement funds. The first projection shows what happens if you continue doing what you are doing right now under the unlikely assumption that taxes don’t rise in the future, and shows how long your money will last. This works as a baseline for the next two comparisons. David Walker has said that tax rates will have to double in the future to keep the US solvent, that’s why the second comparison focuses on what happens to your retirement picture under those conditions. There are a few important things to keep in mind when tax rates double. The first is that it takes much more money to meet your lifestyle needs, but also when tax rates go up that means your Social Security also gets taxed at a higher rate. This leads to spending down your assets that much faster. The average person will run out of money 12 to 15 years faster when tax rates double. The third comparison shows what happens to your finances if you implement all the Power of Zero strategies and how multiple streams of tax-free income will affect your retirement. The point of the comparison is to put a price tag on inaction. You don’t have to love Roth IRA’s, or LIRP’s, or Roth Conversions, you just have to like what they do for you and like them a little more than the IRS because, in the end, someone is going to get your money. The comparisons also measure tax rate risk and show you how long your money will last under multiple different scenarios. The Before and After Comparison can be very valuable by showing how much better off you could be when you implement the Power of Zero strategies, but not everything can be quantified. It’s hard to quantify how important it is to you to protect yourself from a long term care event or sequence of return risk, but those do have to be factored in. The bottom line is the Before and After Comparison will show you the cost of inaction so you won’t be haunted by the reality of letting the opportunity go by. There are huge opportunity costs when you don’t implement these strategies. If you give a dollar to the IRS that you didn’t really need to give them, not only do you lose that dollar, you lose what that dollar could have earned for you had you been able to keep it and invest it over the balance of your lifetime. If this is so important, why didn’t my current advisor bring this up to me? There are two reasons why, and it’s hard to know which one is worse. The Before and After Comparison also comes with a roadmap t
S1 E86 · Wed, June 24, 2020
Will Taxing the Rich Alone Solve Our Fiscal Challenges?
Every once in a while the idea of fixing all our fiscal problems by taxing the top 1% of the population is proposed, but it’s time to do the math and see if it’s true. The Committee for a Responsible Federal Budget put out a report a few years ago, prior to the latest spending due to Covid-19, where they analyzed what it would take to actually balance the budget. The first scenario looks at balancing the budget by not adding any more to the existing debt. The challenge with this scenario is that the interest on the existing debt will crowd out other expenses in the federal budget over time as interest rates rise in the future. In order to balance the budget of the federal government by increasing taxes on only the top marginal tax bracket, they would have to increase it to 102%. Everything earned over $400,000 would be taxed at 100% and then some. When they looked at how high tax rates would have to go if they included anyone that made more than $250,000 a year, the tax rates would have to be 90%. If they went down to $150,000 a year the tax rates would be around 80%. When the committee looked at increasing everyone’s taxes to balance the budget over 10 years, taxes would have to go up to 49% across the board. If you think that you stay in the 24% tax bracket and not be affected by the current fiscal situation the math isn’t looking good. What if the government didn’t want to balance the budget but just maintain the current deficit? The top tax rate would have to go up to 60%, or if applied across the population no matter how much they earned, everyone would have to pay a 42% tax rate. Our fiscal condition is more dire now due to Covid-19 so these numbers aren’t drastic enough. The moral of the story is that our current financial crisis is irreversible and can’t be solved by just taxing the rich, the only solution is to broaden the tax base. When you confiscate 100% of what people make you encounter the Laffer Curve. At whatever the cut off point is those people will just stop working and you will ultimately kill the economy. You also need to keep in mind that when a politician talks about taxing the rich today, they are talking about using that money to fund another program, not to deal with the debt crisis. Taxing our way out of the problem isn’t going to work very well, even if we taxed everyone in the country and spread the burden out, let alone just by taxing the rich. You are not immune to tax increases just because you’re not in the top 1% in terms of wealth. Mentioned in this Episode: Can We Fix the Debt Solely by Taxing the Top 1 Percent? https://www.crfb.org/blogs/can-we-fix-debt-solely-taxing-top-1-percent
S1 E85 · Wed, June 17, 2020
My Family's Escape from Puerto Rico Following Hurricane Maria (and Financial Lessons Learned)
David moved his family to Puerto Rico about three years ago and within six weeks of arriving they experienced something that completely changed their lives. It’s been three years since Hurricane Maria hit Puerto Rico, but there are still residents with significant damage to their house. When deciding to move his family to Puerto Rico, the idea of a hurricane wasn’t even a concern since the last major hurricane to hit the island had happened in 1928. Unfortunately for David and his family, Hurricane Maria turned out to be a category 5 direct hit. While the damage to the house was significant, the damage and destruction of the surrounding rainforest was tragic. With resources running low once the storm had passed, the McKnight family was forced to evacuate. David had to drive around for an hour in order to find a place with a strong enough cell phone signal so he could call and reserve plane tickets for him and his family. David’s family was able to board and evacuate safely but his own reservation was canceled and he had to scramble to reserve another flight. All lines of communication were down for several days but against all odds David’s friend Brian was able to secure a ticket. Puerto Rico struggled for months after the storm to restore electricity and lines of communication while rebuilding the damaged infrastructure, with many areas still suffering the effects of the hurricane three years later. Prepare for the storms of life no matter what form they take, preferably before the storm is about to hit. Not every experience has a financial lesson, but Hurricane Maria taught David something very valuable, namely cataclysmic events happen when you are least expecting them. Take some time now to prepare for the contingencies that life can throw your way because there is always something unexpected in your future.. The story ends well with David and his family moving back into their house in Wisconsin that hadn’t sold yet. His kids were able to complete their school year in their old neighbourhood and they were able to move back to Puerto Rico over the summer once the situation had mostly returned to normal. If you like warm weather, good people, and big tax benefits, Puerto Rico is a place you should consider moving to.
S1 E84 · Wed, June 10, 2020
Anticipating an Inheritance? Here's How to Plan for Tax Efficiency
Not everybody is going to get an inheritance but there are some very important strategies you can implement to minimize your taxes if you are going to receive one. The ultimate goal of the IRS, no matter how you inherit money, is to get all of the inheritance money into your taxable bucket within the next 10 years, preferably immediately, because that is how they make the most money. We know that if you inherit money from a taxable bucket you get a stepped-up basis for those investments. Since these investments end up in your taxable bucket, you’re going to pay ordinary income tax on that. When you inherit money from a tax-deferred bucket it goes into your tax-deferred bucket, however the IRS will force you to realize that money within a ten-year timeframe. If you inherit a tax-free investment like a Roth IRA you will continue to experience the tax-free growth over the next ten years, but at that point it will all go into your taxable bucket. The goal of the IRS is to always move your money into the taxable bucket whenever possible. Your job upon inheriting money is to put together a plan that moves the money over into the tax-free bucket as quickly as you can. When you have money in your taxable bucket, there are a number of different things you can do to get that money into the tax-free bucket. The first step is to make sure you and your spouse are fully funding your Roth IRA’s, as well as your Roth 401(k)’s. The easiest way to get money into your Roth 401(k) is to increase the amount of money coming out of your paycheck to fund your account, and then compensate for that reduced pay amount with the money from the inheritance. Remember there is an ideal amount of money to keep in your taxable bucket and a great way to spend that money is by paying the tax on Roth conversions. The final way to move an inheritance into the tax-free bucket is the LIRP. There are a number of advantages that come with the LIRP and the only thing really limiting you is the size of your death benefit. The ideal way to have money flow to you is through the tax-free bucket. If it comes to you in your taxable bucket at the peak of your earning years when taxes are higher than they are today you could end up losing up to 50% of those inherited IRA’s. If it’s not too awkward, you should be having this discussion with your parents to figure out a plan that allows them to convert their dollars to tax-free. Keep in mind that when one parent dies, the surviving parent’s tax bracket doubles and they will be forced to receive their Required Minimum Distributions and pay taxes at double the tax rate. It makes a lot of sense for everyone involved to preemptively shift those dollars to the tax-free bucket. If you’re building your Power of Zero retirement strategy right now and know you are going to be inheriting a large sum of money in the next 10 years, there are a number of things you can
S1 E83 · Wed, June 03, 2020
What Is the Coronavirus-Related Distribution (CRD) Roth Conversion Loophole (And Should You Do It?)
A Coronavirus-Related Distribution (CRD) is any distribution by a person diagnosed with Covid-19, this can also include a spouse or dependent. Alternatively, if you’ve been adversely affected by the Coronavirus in some way, for example being furloughed, you may qualify as well. The CRD allows you to withdraw up to $100,000 from your qualified plan and if you’re younger than 59½, the 10% penalty is waived. Another benefit is you are allowed to pay the money back over the course of the next three years. The IRS treats this as a rollover instead of a contribution so you’re not constrained by the traditional contribution limits. This is where the Roth Conversion loophole comes in. You have the opportunity to recharacterize the money and contribute it into a Roth IRA, and because of the extra benefits that come with the CRD, it’s possible to avoid the 10% penalty you would normally face. This provision allows for someone younger than 59½ to take the money out, retain a portion of it for taxes, and put the rest into their Roth IRA. David runs through a hypothetical example of what this means for the average taxpayer under 59½. The question is whether this strategy is morally permissible for someone affected by the Coronavirus. The spirit of the rule suggests that the answer is yes but only if you are actually adversely affected. This is a loophole, and what do we know about loopholes? When they get abused, eventually the IRS catches on. The IRS reserves the right to change the rules, and if they think people are abusing the CRD, they may come after the people they believe took advantage of it. This doesn’t diminish the importance of taking advantage of Roth Conversions. This is the greatest opportunity in the history of our country to do Power of Zero-type planning. There are two sales going on right now, taxes are historically low at the same time as the stock market is down. The CRD Roth Conversion loophole is available for those that want to take advantage of it, but if you haven’t actually been affected by the Coronavirus it could cause you problems with the IRS in the future. Check out The Hallmarks of a True Power of Zero Advisor podcast episode to learn how a true Power of Zero advisor can help you set up multiple streams of tax-free income.
S1 E82 · Wed, May 27, 2020
What Happens if the U.S. Defaults on Its Debt?
The US is very likely to default on its debt at some in the future, but we’re just not sure exactly when. What we do know is that the sooner it happens to smaller the impact will be, but that doesn’t seem like it’s going to be the case. The reality of our financial situation as of May of 2020 is the US is on course for a $3.7 trillion deficit this year. According to Jerome Powell, we are going to need another stimulus package and could be looking at a deficit of over $5 trillion, a number which normally takes five years to reach. All of the predictions made in the past have all been accelerated because of the increased deficit spending this year. For governments, it’s more attractive to raise taxes than it is to default on their debt because of the devastating consequences of doing so. Essentially, if Congress declines to raise the debt ceiling the US Treasury Department can no longer issue bonds and the federal government wouldn’t be able to fund all its obligations. We have to understand the implications of default. The current debt to GDP ratio of the US is 110%, but it’s actually much higher than that if you include unfunded obligations like Social Security, Medicare, and Medicaid. Timothy Geitner once discussed the implications of what would happen if Congress did not raise the debt ceiling and how it would impact everyone. Defaulting on the debt is not the same as a government shutdown. It’s far worse. The second way the US could default on its debt would be by not paying the interest on the debt, in which case the value of the US Treasuries would drop like a rock and come with its own set of major problems. In the case of a debt default interest rates will also rise dramatically because creditor countries will justifiably see the US as more risky. Other countries would no longer be willing to finance our debt spending unless we pay a lot more. Even the threat of debt default is bad, when the credit rating of a country is downgraded interest rates go up and the effects can be felt throughout the economy. A debt default would also affect the stock market as investments in the US would become riskier as people and countries no longer see the US as the safe haven it used to be. This would precipitate a global depression. The first opportunity for debt default comes in 2035 but it could come sooner. The surest way to prevent a debt default is to prevent budget spending that leads to additional debt and raise more revenue. The trouble is reducing spending isn’t going to be easy. As we accumulate more debt and march into the future, the likelihood of taxes going up becomes all the more inescapable. The cost of servicing the debt will eventually become such a huge part of the budget that the government will have to look for revenue raising activities to pay its bills, i.e. taxes. For people saving for retirement they have to position themselves with the right am
S1 E81 · Wed, May 20, 2020
How to Turn the 2020 Waived RMD In Your Favor
The federal government has waived the Required Minimum Distributions for 2020. There are 20% of Americans who don’t spend their RMD’s which means that 80% of the population relies on those RMD’s to pay for daily expenses. This change affects anyone who had an RMD due in 2020 from their 401(k), IRA, and other retirement accounts. The IRS takes the value of your account in December of the year prior. In this case the stock market of December 2019 was considerably higher than it is now. Over the past few months the Dow Jones has declined by over $4000. In a normal year you would be forced to take the RMD on the value of the account as determined at the end of the previous year. The problem now is that this means the IRS is essentially forcing you to sell low. Even if you don’t need the money at this point in time, you will no longer be able to benefit from the tax-deferred nature of your IRA and will now have to start paying 1099’s on any growth you experience. The last time this was done was in 2009 after the collateralized mortgage debt crisis. Sidenote: We went from $24 trillion to $25 trillion in debt in a little over a month. In one year we may be up another $4-$5 trillion in debt. We are accumulating debt at breakneck speed which means the low tax rates we are enjoying right now are all the more a good deal. When you take an RMD, you have to put it into your taxable bucket. You do not have the luxury of converting it to a Roth IRA, but this year you now have the ability to put it into your tax-free bucket instead of with a Roth conversion. This won’t make a huge difference in your finances overall but every little bit helps as we move into a period in history where tax rates are going to be dramatically higher than they are today. Keep in mind that Roth conversions can no longer be undone, so you must be confident that the tax rate you are paying right now is lower than it will be in the future. The only downside is that for people that need the funds to sustain their lifestyle will not be able to take advantage of this situation. We have six years to take advantage of historically low tax rates and this is a nice opportunity for the 20% of America that doesn’t need those RMD’s and can take advantage of a Roth conversion. Another advantage is that because the stock market is currently down you are going to be paying taxes on a lower amount. Let’s pay that lower amount and get the rest into the tax-free bucket to let it recover and compound. There is an opportunity for those that don’t require their RMD, but they have to take advantage of it by taking action now.
S1 E80 · Wed, May 13, 2020
The Morality of the 0% Tax Bracket
Can you be in the 0% tax bracket and still be a good citizen?’ is a common question that David gets fairly frequently. David relates an exchange he had with a listener on Facebook where they stated that paying less taxes is inherently selfish and paying taxes is how we take care of people as a society. Most people have the thought of “what happens to society if everyone is in the 0% tax bracket?” The trouble is they are coming at the question from the wrong angle. Everyone who earns an income will be paying income tax. The only way to not pay taxes is to not be working and basically be in poverty, the income you earn is below your standard deduction, or you’re retired and have done all the heavy lifting of positioning your money to tax-free. Are we in danger of having 78 million Baby Boomers being in the 0% tax bracket? Not really, at this point, there is still $23 trillion in the cumulative IRA’s and 401(k)’s in the country and only about $800 billion in the Roth IRA’s and Roth 401(k)’s, which is about a 25:1 ratio. Even when people do hear the message of the Power of Zero paradigm they don’t always act on it. Even though people believe that tax rates are going to be higher in the future, they are not doing anything about it. There is an incongruency between what they believe and what they do. That means we are marching into a future where tax rates are going to be higher than they are today and advisors have a lot of heavy lifting to do to get the message out. “Over and over again the courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike, and all do right for nobody owes any public duty to pay more than the law demands.” -Judge Learned Hand The tax code actually encourages us to pay as little taxes as possible. David uses the analogy of a toll road and the question of using a different route. The question comes down to when you are paying the taxes, not if you are paying taxes. You can either pay taxes now at historically low rates or you can postpone the payment of those taxes until the future when taxes are likely to be much higher. People can feel perfectly guilt-free for taking advantage of tax rates while they are low. There is simply nothing wrong with appreciating the fiscal landscape of our country and that a revenue-hungry federal government is going to have to pay for their bills one way or another. It is perfectly moral to keep as much money that you have earned and saved within your own pockets as you can. You are completely within your rights to pay your taxes today while they are historically low instead of waiting until the tax sale is over in 2026. Mentioned in this episode: <span
S1 E79 · Wed, May 06, 2020
How Long Will the Step-Up-Basis Loophole Last?
Families that aren’t quite rich enough to be affected by the Estate Tax, but have built wealth over time, have another benefit available to them called the step-up-basis loophole. Essentially, what happens with the step-up-basis loophole is when you pass on an investment to your beneficiaries, the present value at the time of your death becomes the new basis for that investment. This will wipe out the capital gains on that investment and can be a great deal which compares favourably to inheriting a Roth 401(k). Anything over $23.16 million in your estate will be subject to a punitive estate tax of 40% when you die. But if you have an estate that is worth less than $23.16 million in your taxable bucket, that money can go tax-free to the next generation. What happens to loopholes as time wears on? They become the target of a revenue-starved federal government. There are four reasons why, while this may sound like it compares favorably with a Roth IRA, it is not the best idea. If you receive dividends from one of your investments, even if you reinvest them back into the stock, you are going to have to pay tax on them which can stymie the growth of your stock portfolio. Because you have to pay tax on those dividends, you are exposed to tax rate risk along the way. Should taxes raise dramatically over time, so will the taxes on those dividends. You also have to remember those dividends count as provisional income which could affect your social security. The step-up-basis loophole is also going to come under fire as the country slides into insolvency and the government’s national debt starts to skyrocket. Joe Biden is currently proposing that the step-up-basis loophole be closed, which would mean that you would inherit the original basis of the investment. This would also mean that you would have to pay long-term capital gains on the difference. If you have an annual income greater than a million dollars, you would be required to pay the difference between the basis and the current value at your highest marginal tax bracket, which means you will be paying very close to the 40% estate tax that you wouldn’t otherwise be subject to. Big taxes are coming down the road and letting your stocks grow in your taxable bucket will be a bad idea. Lawmakers have their sights on the step-up-basis loophole in the near future. Some people believe the current tax law is even better than the Roth IRA because you won’t have the same requirement of spending the money down over the next ten years. If you are building your financial plan around this loophole being around for the next 10 to 15 years from now, you’re going to be disappointed. We have to start looking at the four to six different streams of tax-free income for retirement. Life insurance has been around forever and like the loophole we are discussing, it allows you to pass money onto the next generation tax-free but won’t be
S1 E78 · Wed, April 29, 2020
Should I Do a Roth 401k?
Should you be contributing to your Roth 401(k)? The short answer is yes because anything with the word Roth in front of it is truly tax-free. What does it mean to be truly tax-free? Roth 401(k)’s pass both litmus tests for what makes something tax-free. If you’re younger than 50, you can put in $19,500 each year, and if you’re over the age of 50, you can catch up a bit with an additional $6,500. You can also still get the match when contributing to your Roth 401(k). Your company will put those dollars into your tax-deferred bucket. It’s okay to have some money in your tax-deferred bucket because the IRS is going to force you to take money out of that bucket at age 72, but you will be able receive up to a certain amount of money tax-free because of your standard deduction. In many cases, this can mean that you can put pre-tax dollars into your tax-deferred bucket and get a deduction on the front end. It will grow tax-deferred, and you'll be able to take it out tax-free. It’s ideal to have multiple streams of tax-free income and Roth 401(k)’s fit into the typical strategy that David recommends to his clients. There is a big difference between Roth 401(k)’s and Roth IRA’s. With a Roth 401(k), the IRS will force you to take the required minimum distributions at age 72 for the same reason they force your beneficiaries to withdraw money from an inherited Roth IRA. They want that money going back into circulation so it can be taxed again. The strategy around this is to roll Roth IRA dollars into a Roth 401(k) account, but you have to be aware of the different rules around the Roth 401(k) first. Roth IRA’s have a five-year holding period, similar to Roth 401(k)’s, but they function differently. If you don’t currently have a Roth IRA, open up one now and start your five-year clock. Keep in mind that any money rolled from a Roth 401(k) into a Roth IRA will still have to contend with the ten-year window your beneficiaries will have to spend down the account when they inherit the money. If you only have enough money to fund your Roth 401(k) up to $26,000 per year but that doesn’t leave anything left over for the LIRP, what should you do? You need both, so a good strategy is to put enough into your Roth 401(k) to get the maximum match and the rest into your LIRP. Don’t put yourself into a position where it’s either/or. Instead, put yourself into a position where you can get the best of both buckets. You should be doing a Roth 401(k), so reach out to your human resources department to add one. Not only will you benefit, but your fellow employees will as well.
S1 E77 · Wed, April 22, 2020
Should a Single Person Own an LIRP?
Under what circumstances should a single person want to own an LIRP? There are a number of scenarios where it can make sense, but it definitely depends on the individual’s situation. We have to remember the primary motivation for having life insurance is having death benefit, but there are a few close second reasons. Using the death benefit in advance of your death to pay for long-term care is one such reason. With sufficient long-term care insurance, you are able to call the shots and have the long-term care performed in your home, which studies have shown also leads to longer life expectancies. Without long-term care as a single person, you will end up spending down all your other assets in order to pay for it until you basically run out of money and end up qualifying for Medicaid, which is not something you really want to qualify for. Medicaid facilities are typically of the government’s choosing and there is often a wide disparity in the quality of care you will receive when compared to a facility paid for by your LIRP. Should you find yourself unable to do two of six activities of daily living, the LIRP will allow you to take 25% of your death benefit in advance of your death for the purpose of paying for long term care. More and more people over the age of 50 are getting LIRPs mainly because they want to be able to call their own shots when it comes to long-term care instead of being forced into a Medicaid-funded facility. The second big reason has to do with your IRA. If you want to control how your beneficiaries spend your IRA money, you can’t really do it due to the new retirement laws introduced earlier this year. The third reason is you want your money to grow safely and productively. Some LIRPs have a growth account that is linked to the upward growth of a stock market index. If the index were to go out in any given year, your account is credited a zero. Historically, this will net you 5% to 6% after fees. This allows you to use the LIRP as a functional replacement for the bond portion of your portfolio. If you have too much money in your taxable bucket, it may not seem like a big deal until you crunch the numbers on all the inefficiencies and find it can cost you hundreds of thousands of dollars. Many of these benefits of the LIRP are very useful to a single person, but the most important is being able to access your death benefit in order to fund long-term care. Visit the Medicaid-funded facility in your area and see what you think about it and then consider how an LIRP can allow you to ride out a long-term care event in your own home. A lack of income limitations are another important factor in the LIRP that essentially allows a single person with an income greater than what they can put into an IRA access to an unlimited bucket of tax-free dollars. The tax freight train is accelerating due to the Covid-19 stimulus package so be prepared.<
S1 E76 · Wed, April 15, 2020
Should I Fund My LIRP or Annuity While the Market Is Down? with David McKnight
David often gets questions from people asking why they would want to liquify their investment portfolio to fund their annuity, especially now with the markets being down due to the coronavirus. There is an inverse relationship between stocks and bonds, when stocks are down bonds are up. Annuities and the LIRP share a lot of similarities and effectively replace the bond portion of a portfolio. Annuities can be superior to bonds for seniors, giving them high, guaranteed payments for the rest of their lives that allows them to be more aggressive with the rest of their portfolio. Basically, an annuity that guarantees a stream of income for your lifetime functions like the bond portion of your portfolio. If the stock portion of your portfolio is down, that means that the bond portion is up. If you want to guarantee a portion of your income, it may make sense to simply replace the bond portion of your portfolio with an annuity. Once you start drawing income from the annuity it continues to function as the bond portion of your portfolio and in many cases because of the growth mechanism internal to the annuity gives it the opportunity to keep up with inflation over time as well. If you just qualified for a LIRP, you may have the same question in your mind. Why do it now while the stock market is down due to the coronavirus? The key to remember is that you won’t be cementing your losses in the stock portion of your portfolio, you fund it through the bond portion which happens to be doing great right now. When the stock market recovers, the stock portion of your portfolio will grow along with it. Now is an excellent time to start repositioning money to tax-free. Every year is a window of opportunity to take advantage of historically low taxes. You can also take advantage of the cost of a Roth conversion based on the depressed value of your assets. If you're concerned about the losses in your portfolio, you have to remember that the LIRP and annuities are designed to replace the bond portion of your portfolio, not the whole thing. They actually reduce the overall risk in your stock market portfolio while giving you higher rates of return. Don’t wait for the stock market to recover, just think of an annuity as a more effective and efficient bond and if you’re over the age of 50, the LIRP is also a heartburn-free way of mitigating long term care risk. Retirement economists are unifying their voices and saying that your stock market portfolio will last longer if you guarantee a portion of your retirement income.
S1 E75 · Wed, April 08, 2020
What You Need to Know about the COVID-19 Stimulus Bill with David McKnight
Investors need to understand the latest coronavirus stimulus bill that was just passed. Investors can now take out up to $100,000 from their 401(k) or IRA prior to age 59 and a half without any penalty. The bill has also increased the loan size you can take out from your 401(k) to $100,000. Another big piece of news investors should be aware of is that required minimum distributions are going to be waived for 2020. The question is how will the IRS fill the hole in the federal government’s revenue for the year. This coronavirus bill is twice as large as the previous economic stimulus bill in the wake of the 2008 mortgage crisis. This is the single largest stimulus bill in the history of the world. A quick breakdown of where the $2.2 trillion will be spent over the next few months. Stimulus checks will be sent out. Individuals who make up to $75,000 per year will receive a $1200 check from the government. Couples who make up to $150,000 per year will receive a $2400 check. For individuals who make more than those thresholds, they will gradually reduce the amount of money being sent out. Additionally, parents will receive an additional $500 per child. People that have their automatic bank deposit info on file with the IRS will receive their money in the next two to three weeks, those that don’t will be mailed a check but who knows when that will occur. There is already a push for another stimulus bill beyond the first, specifically with pressure from Nancy Pelosi, that aims to increase the benefits for food stamps, increase the amount of money going to regular Americans, and introduces some environmental restrictions on airlines. There is a lot more spending and money printing/borrowing coming down the line, including a plan for the US Treasury to mint two $1 trillion coins and deposit them in the Federal Reserve. This is essentially an exercise in playing around with Monopoly money. There are universal financial laws at play here, and when you violate them there is always a chicken that comes home to roost. Money is valuable because it is scarce and creating more makes it less valuable and precipitates inflation or hyperinflation. According to the New York Times, the stimulus is going to be financed by borrowing money. When asked how the government is going to pay for this additional spending, they claim that they will actually be reducing taxes on top of the spending. There is always an unintended consequence of printing or borrowing money. This increase in spending will accelerate everything that we’ve been talking about on the podcast and that includes massive inflation. Countries will likely stop loaning the US money unless we raise interest rates in the near future. Low-interest rates mean the loan is riskier for those countries so they are less likely to make them. Increasing interest rates will only make servicing the existing debt that much harder and will likel
S1 E74 · Wed, April 01, 2020
Why Now Is the Perfect Time to Do a Roth Conversion with David McKnight
The coronavirus downturn in the market is actually the perfect time to do a Roth Conversion because of the double sale that’s going on. The first sale involves the next six years where we get to enjoy the lowest tax rates we are likely to see in our lifetimes. The second sale is due to the 35% drop in the stock market, your assets are now at much lower values and that means the tax on a potential Roth Conversion is also 35% lower. If you were to hypothetically convert a $1 million IRA this year your tax bill would be approximately $299,112 or a 29% effective tax rate. If you take in the decline in the stock market of 35% your tax bill is a little more than half. If the stock market goes through a massive recovery over the next few years having done this Roth Conversion, all of that recovery occurs in your tax-free bucket. If the market is down 25%, your portfolio has to recover 33% to get back to where you started. If the market drops 50%, you need a 100% recovery to get back to even. Where would you prefer to have that recovery occur, in your tax-deferred bucket or your tax-free? You have the opportunity to take advantage of a double tax sale right now. Your assets are 35% lower than they were about a month ago and that means the cost of getting into the tax-free bucket is on sale right now as well. There are a couple of caveats to be aware of. If you decide to undertake a Roth Conversion right now and don’t have the tax withheld by your custodian, you don’t want to delay paying the tax because you will end up paying penalties and fees. No matter your age, the very best place to pay for the taxes of a Roth Conversion is out of your taxable bucket. If you have more than six months worth of expenses in your taxable bucket you have some inherent tax inefficiencies in your portfolio that can cost you hundreds of thousands of dollars over your lifetime. Let’s use our least efficient bucket to help move money into our most efficient bucket. When you contribute to a Roth IRA you have to use cash. That can be problematic because there can be lots of movement in the market when you liquify parts of your portfolio. You can’t predict what is going to happen with the market which is why the Roth conversion is so useful. The Roth Conversion allows you to do a like-kind transfer where you can transfer shares you own from one account to a Roth IRA. This insulates you from the rise and fall of prices while you cash out from the market. If you want to get into the zero percent tax bracket, you have a huge opportunity right now. The market will likely recover at some point in the future, and that means there are a number of great deals to be had right now. Ideally, your assets will be able to recover in the tax-free bucket and there is a big opportunity to do so in this market downturn.
S1 E73 · Wed, March 25, 2020
Can the LIRP Serve as the Bond Portion of Your Portfolio? with David McKnight
A common question that David gets fairly frequently is whether or not the LIRP can be a substitute for the bond portion of a portfolio. A lot of people are funding their LIRP’s out of stock market portfolios that are growing at an average rate of 8%. If that’s the case and they take money out of that portfolio to get a 4% return in their LIRP, doesn’t that neutralize the tax benefit that justifies doing the LIRP in the first place? It can make sense for the LIRP to function as the bond portion of your portfolio, so long as you are actually funding your LIRP out of the bond portion of your portfolio! Due to the recent precipitous drop in the stock market this question is popping up more often, but the stock market may be down but the bond market is not down nearly as much. Back in 2008, both the stock and the bond market went down at the same time. In that situation taking some money to fund a LIRP makes sense. You have to recognize that if you are funding your LIRP out of your retirement portfolio, it makes sense to liquidate the bonds when the markets are down to fund your LIRP. This could also hold true with a fixed index annuity. If you’re transitioning money from the bond portion of your portfolio to your LIRP, you should take a little more risk in the stock market in the meantime because a LIRP is typically less risky than the average bond portion of your portfolio. If you are barely retired, most of the money you are planning on spending in retirement has even been earned yet. If you want your money to last as long as you do, you need to continue to grow that money over the course of your retirement. If you take money out of your stock market portfolio during the first ten years of retirement you are exposing yourself to the sequence of return risk and if it’s done during some down years it could send your portfolio into a death spiral from which it will never recover. Having two to three years’ worth of lifestyle expenses in your LIRP is how you want to cover expenses during the two or three down years you are likely to experience in the first ten years of retirement. If you’re just retiring now, you’re going to have to fund it over the next five or six years and let it sit. You don’t want to touch the money until the eleventh year, there are some fees and expenses involved in the first ten years and it doesn't make sense to tap into yet. If you don’t have a funded LIRP that can cover the first ten years of retirement, your best bet is to have your lifestyle needs allocated to a time segmented portfolio. The reality is that the LIRP can certainly replace the bond portion of your portfolio. Annuities are great because they can function as the best kind of bond, with higher rates of return and less risk, and can also allow you to take more risk in the rest of your stock market portfolio. As you are transitioning your money to your LIRP from the stock market portf
S1 E72 · Wed, March 18, 2020
My Thoughts on the Coronavirus with David McKnight
The two single greatest threats to your retirement are tax rate risk and longevity risk. The Power of Zero paradigm is the unified approach to mitigating both of these risks. As of March 9, 2020, the stock market is down 19% from its peak in February which has erased a lot of the returns from 2019. The infections of the Coronavirus are doubling approximately every six days. Around mid-May that doubling interval should start to taper off. People over the age of 70 are at the most risk from serious complications. Everyone else practicing safe social distances and taking precautions will help. There is a lot of panic in the media at the moment. The main concern of the federal government is that the number of infections will overwhelm the nation’s healthcare system. We are not going to avoid 90 million people getting infected, but the longer we can draw out the window of time we can give the US healthcare system the time to deal with the situation. One of the biggest drags of your retirement, it’s not taxes or fees, it’s emotion. Investors left to their own devices make horrible decisions when it comes to stock market investing. Emotion-driven investments could knock about 3% of your expected portfolio returns. The worst thing you can do is say “I know when the bottom of the market is, and I know when to get out and when to get back in.” You can’t predict the market, if you got out before the crash in 2008, you weren’t prescient, you were lucky. Don’t panic. This situation highlights the importance of being able to guarantee your retirement income adjusted for inflation, so you don’t have to panic when the stock market goes up and down. The money in your stock market portfolio should be earmarked to cover your discretionary lifestyle expenses. The LIRP can be a great compliment to your stock market portfolio to cover lifestyle expenses. When you have your lifestyle guaranteed by a combination of social security, a pension, and a guaranteed lifetime income, you have the luxury of not having to worry about the stock market as much. If you are funding your lifestyle needs right now you are probably freaking out at the moment. A guaranteed lifetime income also allows you to take more risk in retirement. If you are retiring now, the vast majority of your money that you are planning on spending has not been earned yet. You have to be able to take some risk in the stock market in order to earn returns that will allow you to properly fund your retirement. The people relying on the 3% or 4% rule and the returns of the stock market to be able to pay for their lifestyle don’t have the luxury of enjoying their retirement. They have to be in hibernation mode in retirement and tend to be more stressed and die earlier. For all intents and purposes, the guaranteed lifetime income becomes the bond portion of your portfolio. It allows you to invest the rest of your money in a more aggressi
S1 E71 · Wed, March 11, 2020
An Ominous Warning from the U.S. Comptroller General with David McKnight
It’s easy to forget how bad the fiscal situation of the United States actually is unless we are being constantly bombarded by experts telling us the truth of the matter. A recent article details a coming report from the Comptroller General. Come March 12, the Government Accountability Office is going to put out an assessment of the fiscal health of the federal government and unsustainability is the key takeaway. The Comptroller General put out a similar report in 2019 and not only has nothing changed since then, but the situation has gotten much worse. The debt is now over $23 trillion and it doesn’t seem like the government is heeding its own warnings. Officials can’t continue indefinitely spending more than the government receives in taxes without incurring staggering long term costs to borrow from China and other lenders. Due to the coronavirus, the Federal Reserve has just reduced interest rates .5%. Their speculation is that interest rates will stay low for the foreseeable future. The trouble is the expected interest rate for future debt will likely be higher than historic averages as the US becomes riskier to lend money to as time goes on and the debt to GDP ratio continues to increase. The imbalance between spending and revenue that is built into current law will lead to the continued growth of the deficit. The situation where the debt grows faster than the GDP of the US means the current federal fiscal path is unsustainable. Historically, debt compared to GDP has averaged 46%. We are now at 109%, which is worse than it was in the wake of World War 2. But that doesn’t count the off the books transfers like Medicare, Medicaid, and Social Security as part of the debt that every other country in the world includes in their accounting. The true debt to GDP ratio is close to 1000%. We are going to pay the interest on our debt, which is money that is taken off the table from other programs. Interest payments are non-discretionary spending. If the US defaults on its debt it will have major economic impacts on every country on the planet. The growing interest payments are going to crowd out all the other expenses in the budget, but we have to pay it so ultimately we are painting ourselves into a corner. As the debt continues to grow and other countries start to believe that the US will not be able to pay that money back, the interest rates on the loans will only get higher and higher over time. For the second year in a row, the highlighted word in the Comptroller General’s report is unsustainable. More skeptics are coming over to the Power of Zero way of thinking every day. We are at a period of historically low tax rates. Every year between now and 2026 is a window of opportunity to take advantage of that fact. Every year beyond 2026 is potentially a year will you be forced to pay the highest tax rates you will see in your lifetime. Never in the history of the US has there b
S1 E70 · Wed, March 04, 2020
The Perils of Paying Long-Term Care Expenses from Your Tax-Deferred Bucket with David McKnight
If you’re between the ages of 50 and 65, there is a good chance that you have at least one parent or in-law that is going through a long-term care event. This may lead you to wonder how you are going to deal with your own long-term care events in the future. The government may be picking up the tab, but people in Medicaid-funded long-term care facilities tend not to live as long as at other facilities. A lot of people in that age range have a false sense of security around how they are going to finance their long-term care events, assuming they will be able to pay for everything out of their IRA or 401(k). The average stay in an assisted living facility is just over two years, but research shows that people receive some form of long-term care in their home for an average of three to six months. Sixty percent of those people in the assisted living facility will go on to spend up to an additional two years in a nursing home. When you add up the averages, you can expect to be in some sort of long-term care situation for four to five years, which is much longer than most people think is the case. Long-term care costs are not uniform across the country, but you can expect to spend around $100,000 after taxes per year of long-term care. There are other expenses that people don’t think about known as shock expenses. These can include things like unexpected health care costs. All told, you can expect a total cost of somewhere around $400,000 a year. In order to net just $100,000 in distributions you need to figure out your effective tax rate, but you also have to keep in mind that since tax rates are going to be dramatically higher in the future those numbers are going to increase as well. People who will need long-term care in the future may have to deal with an effective tax rate of 40%, which means you would need $166,000 before taxes to cover your long-term care expenses. And that’s assuming the costs of long-term care don’t rise in the next twenty years, which is highly unlikely. Are you going to have over $1 million in your IRA’s and 401(k)’s at the age of 85? Most people tend to spend the majority of their retirement money in the early years when they are still mobile. In a rising tax rate environment, it is not a smart move to pay for your long-term care out of your tax-deferred bucket. This is why the L.I.R.P. is something we recommend to cover your long-term care expenses. With an L.I.R.P., you can spend your death benefit in advance of your death in order to cover long-term care expenses. Instead of waiting and hoping you have enough money when you need it, why not proactively pay taxes on that money and position them in tax-free vehicles like the L.I.R.P.? That way, you can have guaranteed access to the cash when you need it. We have to remember that tax rates in the future are going to be much higher than they are today and long-term care costs are likely to be m
S1 E69 · Wed, February 26, 2020
Is Your Annuity in the Wrong Bucket? with David McKnight
99.5% of all annuities are not in the right bucket. There are many reasons to use an annuity: they can be safe and productive, they safeguard against market risk while participating in the upward movement, and many people use them for a guaranteed stream of income. The alternative to annuities for creating a stream of income is the stock market but that approach comes with a set of rules including the previously discussed 4% Rule. When you factor in present conditions, the 4% Rule no longer holds true and it’s now more like the 3% Rule. In order to live your target lifestyle with the stock market strategy, you would typically have five options: you can save more, spend less, work longer, die sooner, or take more risk in the stock market. Most of those options don’t appeal to people, but there is an alternative with annuities. One of the more common ways of solving this problem is using a single premium immediate annuity. The appealing part of this option is that you don’t need nearly as much money upfront to live your target lifestyle. The downside is that if you die early, that money is gone. Some people will use a fixed-index annuity, where the growth of the annuity is fixed to the growth of an index in the stock market. The trouble is that nearly every single annuity is in the tax-deferred bucket. Let’s say you decide to draw an income from your annuity. It’s going to feel like it’s coming from a pension and that means it will be exposed to tax rate risk. If tax rates go up, the portion you get to keep goes down. The reason people are getting a guaranteed lifetime stream of income is they want a guarantee that it will cover their lifestyle expenses when coupled with their social security. If tax rates go up, and we expect them to, that stream of income will not cover your lifestyle expenses and that means you will have to spend down your other assets much faster than you expected Those spare dollars are meant to cover aspirational expenses or shock expenses and spending down this pool of resources will cause you problems down the road. Like a pension, if you draw from an annuity in your tax deferred bucket, it will count as provisional income and counts against the threshold that determines if your social security gets taxed. When your social security gets taxed, you run out of money 5 to 7 years faster. If most annuities are in the tax-deferred bucket, this will force people to pay tax on their social security in a rising tax rate environment. They are going to keep less of their income than they thought they would, and it’s going to force them to spend down their non-annuity assets that much faster. There is a way to get the annuity in the tax-free bucket. When most people retire with 401(k)’s or IRA’s and they roll them into an annuity, they typically get stuck. This is why it’s crucial to use an annuity that allows you to use the Roth conversion option at your leisure
S1 E68 · Wed, February 19, 2020
How Life Insurance Will Replace the Stretch IRA with David McKnight
Historically, people who had large IRA’s, and who didn’t want their beneficiaries to squander their inheritance all in one year, could use a trust to make sure the funds were released over the course of their lifetime. However, due to the recently passed Secure Act, that beneficiary will be forced to spend down that money over ten years or less. The good news is that there is a way to control the flow of money in a similar fashion despite the legislation. Since it makes sense to pay taxes now while taxes are still currently historically low, Roth conversions are one way you can do that, but Roth IRA’s won’t solve the inheritance problem. This is where life insurance comes in. We know that life insurance can be owned by a trust, and this trust can be required by law to distribute those dollars per the language of the trust. The bottom line is life insurance gives us some flexibility in terms of passing money on to the next generation and being able to control how that money gets distributed. Instead of preemptively doing Roth conversions with a large IRA, you would instead pay taxes preemptively at historically low tax rates, and then contribute that money to a life insurance policy that is owned by a trust. Your beneficiaries will not get that money in any other way than the way the trust prescribes it. Life insurance trusts are much more flexible and simple, and you don’t have to navigate a bunch of difficult tax laws. As great as this strategy is, it doesn’t solve the problem of keeping the money growing tax free over the life of the beneficiary in the way it would with the previous form of the stretch IRA. The IRS is getting wise and is now requiring beneficiaries of Roth IRAs to spend that money down over the course of ten years. If a beneficiary inherits a huge IRA or Roth IRA, they will need a tax-free receptacle within which they can continue to grow that money tax-free over their lifetime. One of the things that we know about life insurance is that there is no limit on how much money that you can put into the policy. Ideally, the beneficiary is forced to receive these distributions from a IRA or Roth IRA, or from a trust that owns a life insurance policy, and once received that money is placed into another life insurance policy since life insurance is an excellent vehicle for assets to continue to grow in a tax-free way. We know that you can touch that money in the life insurance policy before age 59 and a half without a penalty. When you take the money out the correct way, it can be tax-free and there are no contribution limits. We also know that life insurance has been historically granted a grandfather clause. Life insurance seems to be immune to tax rate risk. If congress decides that someday in the future they want to change the rules around life insurance, existing policies will be exempt and continue operating under the old rules. Life insurance is the
S1 E67 · Wed, February 12, 2020
Is The 4% Rule Still Viable? with David McKnight
The 4% Rule originated with a man named William Bengen in 1994. He looked back and noticed that people were withdrawing from their portfolios at a very haphazard rate. Prior to 2005, a common way people used to determine how much they could withdraw was to look at the average return of the market at the time. When asked, 40% of retirees said that they could withdraw 10% annually from their portfolio starting from day one of their retirement without ever running out of money. William Bengen started running Monte Carlo simulations on the past 70 years and used a hundred thousand combinations of variables including length of retirement, rate of withdrawal, and stock mix. He found that the current rates of distribution of 7% at the time were completely unsustainable, and that the only way to give yourself a high probability of having your money last through life expectancy was to take out 4%, hence the 4% Rule. If you have a million dollars starting day one of retirement and wanted to keep up with inflation over time, the most you could take out was $40,000. Over a 30 year retirement, you would have a 90% likelihood of your money lasting your whole lifetime. This became the way that most people combatted longevity risk. As long as you only took 4% of your retirement portfolio adjusted for inflation, that gave you a very high probability of your money lasting through a 30 year time period. When William formulated his 4% Rule, he was using a 40/60 split between stocks and bonds, but bonds are no longer performing the way they did in the 90’s. Many economists and retirement experts have revised the rule downwards primarily as a function of bond returns. Combating longevity risk is an expensive proposition, even if you use the 4% Rule. If you require $100,000 to live in retirement, once you factor in inflation you will need roughly $2.5 million by the time you retire. If you’re not on track to hit that amount in your portfolio, you have five heartburn inducing alternatives: save more, spend less, work longer, die sooner, or take more risk in the stock market. It gets even worse with the new 3% Rule. With the 3% Rule, what was before a very expensive, cash intensive, high asset proposition is now even more expensive. You need even more money if you plan on using the stock market and the 3% Rule, even if you manage to acquire enough money it’s not guaranteed. The second issue with the 4% Rule is you have to be able to stick to it even in erratic markets, which is the opposite of what most people do. In order for the Rule to work for you you have to keep your money invested in good and bad markets. Do you have the discipline to keep your money invested even when the market is going down? There is also the illusion of liquidity. When you have millions of dollars in your retirement portfolio, it looks like you have plenty of money that’s easily accessible. The trouble is that every single dolla
S1 E66 · Wed, February 05, 2020
The Difference Between Tax-Deferred and Tax-Free with David McKnight
David gets the same question nearly every single week. Someone invariably asks about how if they do a Roth conversion, won’t they have less money working for them in the tax-free bucket and need more time to catch up compared to had they just left the money in the tax-deferred bucket? If the government came up to you and offered to loan you some money and wouldn’t tell you what the interest rate will be, would you cash the check? Putting money into your 401(k) is very similar, by doing so you are letting the government tell you what the rate will be once you want to take out that money. According to the publicly stated debt, we are $23 trillion in debt but according to fiscal gap accounting we are $239 trillion in debt. Listen to episode 63 of the Power of Zero podcast to find out how dire the situation actually is. The question is why are Americans still okay with that deal? David breaks down the math and compares two scenarios. One person has $1 million in an IRA and another does a Roth IRA and has $700,000 in their tax-free bucket. The question is which person has more money? The thing that people forget is that when you have money in an IRA you have a business partner, and until you distribute money from that bucket, you don’t know how much you actually have. Assuming a level tax rate environment, both people have the same amount. But there are other considerations, the person taking money from their tax-deferred bucket is going to take distributions that will count as provisional income, which will cause their social security to be taxed. The person taking money from their tax-free bucket doesn’t have to worry about that. If tax rates go up by 1%, the person with the Roth IRA will definitely have more money. A Roth IRA gives you certainty and creates an environment where you reasonably expect to know the amount of money you will withdraw into retirement. You won’t have to roll the dice and hope that tax rates stay low as our country slips into insolvency. The January 28th edition of the Wall Street Journal goes through all the Democratic candidates and their tax plans. The nature of political power is to swing back and forth, and since that’s the case we are very likely to see marginal tax rates go up in the future simply because of that. You do not necessarily have more money working for by not doing a Roth conversion, because that money is not just yours. You are in a partnership with the IRS and every year they get to vote on what percentage of your profits they get to keep. It all comes down to what tax rates will be in the future when you are taking money out of your investments, compared to where they are today. If you believe that tax rates are going to be higher in the future than they are today, then it makes sense to do a Roth conversion.
S1 E65 · Wed, January 29, 2020
Could the Federal Government Take Away Your Roth or LIRP? with David McKnight
David prefers to be a clear-eyed realist and face things head on, mincing words about the fiscal situation of the United States would be a disservice to everyone. One of the big things that people have asked about after the previous episode is whether shifting all their money to tax-free will do anything for them. If the situation is so bad, what’s to stop the government from taking these programs away? There are two traditional approaches to retirement and taxation, namely, the government is going to tax you either on the seed or the harvest. That is to say, either preretirement or postretirement. In order for the government to tax your Roth IRA, they would have to completely abandon the very paradigm they have forced you to submit to, which would likely lead to chaos in the streets. When you add up the cumulative Roth IRA’s and 401(k)’s of Americans, it adds up to about $800 billion. When it’s compared to the cumulative amount in traditional IRA’s and 401(k)’s, approximately $23 trillion, it doesn’t make much sense for the government to violate a principle they’ve established because the total wouldn’t have much of an impact on their fiscal situation. It would be much easier for the IRS to do what they’ve done in the past, namely to raise taxes on the pot of money that is owned by the people they are in a business partnership with. It’s legal, they’ve done it before, and as money grows in shorter and shorter supply they become more likely to do it again. If you have a Roth IRA, they will likely prevent you from contributing to it at some point in the future, but the risk of taxing these accounts would probably be too great to justify the action. L.I.R.P.’s will probably go away at some point in the future. As the US approaches the point of no return, the federal government will be looking at all options to increase revenue and they’ve already looked at removing the L.I.R.P. in the past. George W. Bush sought to level the tax playing field in the early 2000’s which reveals a key principle; specifically, whenever they change the rules whoever has the bucket gets grandfathered in. If history serves as a model, if you already have an L.I.R.P., you will get to keep it and continue contributing. This creates even more urgency for people who don’t yet have an L.I.R.P. to get one and get it secured soon. The greatest tax benefit in the US tax code is the tax benefit for life insurance. If the country is going broke, as we are, they will not allow these benefits to exist in perpetuity. If the past is a prologue, we can look to history and be confident that we can continue with these programs and keep contributing to them for the rest of our lives. Don’t worry too much but do face the situation head on. There are places in our country that you can safeguard your money against the inevitable and dramatic rise of tax rates in the future.
S1 E64 · Wed, January 22, 2020
What You Need to Know About Tax Changes in 2020 with David McKnight
The new year brings important changes to the IRS tax code along with various thresholds that we have to know about when it comes to Power of Zero planning. We have to be keenly aware of these thresholds because they can end up being landmines if we’re not doing things correctly. The new income threshold for the Roth IRA is $124,000 to $139,000 for a single person and $196,000 to $206,000 for a married couple. The good thing about the Roth IRA is you have until April 15th of the following year to figure out how much you are going to contribute. The Roth conversion is a little more difficult. You have to make the decision before you have all the information prior to Dec 31 and you can’t change it once it’s been done. 401(k)’s have changed quite a bit as well, with increased limits on contributions for both people younger and older than age 50. This applies to Roth 401(k)’s as well which is good because you should take advantage of anything with the word Roth in it. We’re marching into a financial apocalypse so it’s very important to take advantage of as many of these diversified tax-free streams of income as possible. The standard deduction has also increased, but in 2026 we will be reverting back to the tax code of 2017, so the net result is likely to be pretty much the same. Required minimum distributions have been pushed back by two years. This won’t really impact people who need the money as they would withdraw it either way. This can be advantageous for people who don’t need the money because they won’t be forced to realize the income in their IRA’s. However, they may be hit with higher tax rates as taxes increase in the future. The stretch IRA has been abolished. This means that your non-spouse beneficiaries will have to spend down your IRA’s and 401(k)’s in the ten years following your death. This is another reason to move your money to tax-free so that your inheritors won’t have to pay some of the highest tax rates at the apex of their earning years. You can now contribute to your IRA after age 70 and a half which you couldn’t before. Gift and estate tax exemption is now at $11.8 million per individual but there is a chance that these changes may not last if a different administration takes the Senate, Congress, and White House. These changes are largely good for people looking to implement the Power of Zero strategy but there are some questions for the IRS that can be very revealing. The fact that they haven’t adjusted the contribution limits of the Roth IRA to keep up with inflation should tell you that Roth IRA’s are good things. The ideal approach to tax-free retirement is to take advantage of all the tax-free streams of income that are available to you because they all have benefits and merits that are unique to each bucket. They are all pieces of the Power of Zero puzzle.
S1 E63 · Wed, January 15, 2020
Is Our Country's Fiscal Condition Past the Point of No Return? with David McKnight
For a grim depiction, check out this article The Mathematical Certainty of U.S. Government Default by Ptolemy3 about the future of the US government’s debt situation. The US government reached the tipping point at least fifteen years ago where the only way out will be default. People who calculate debt for the US federal always do it incorrectly. The proper way to do it is to figure out the net present value of everything that we’ve promised over the years minus what we can actually afford to deliver. The US government currently only projects these numbers out for 75 years, if they went out beyond that timeline the situation get much worse. The fiscal gap is growing. The expenses are going up dramatically and will continue to do so for years while the cash flow remains relatively static based on current tax rates. The author begins by looking at US government positive cash flow. Any prediction that economic growth will rise dramatically over time is based on religious belief. There is no data that suggests that economic growth will increase more than 2% in our lifetimes short of an AI revolution. Some people are suggesting that we’ve hit a maturity on economic growth and are actually approaching a decline. The basic standard programs are not likely to change; once a government program gets established it’s incredibly hard to get rid of it. Looking at the current assets and liabilities and estimating what the future cash flows will be over the next 75 years paints a pretty dark picture. When broken down, the net present value of the future obligations for social insurance programs alone is $49 trillion. Core operations of the government are actually running in a surplus, but the situation gets really ugly when you get to the interest payments on the debt. The current payment is around $300 billion but interest rates are projected to increase to an average of 5.1% over time. This means we would have to have $110 trillion dollars in the bank account today earning Treasury rates to be able to deliver on just the debt. The Terminal Value, the number we would need to have in the 75th year to be able to bankroll the expenses of the federal government in perpetuity, is an astonishing $1.6 quadrillion. When you add all the numbers up the net present value of all our future obligations is around $239 trillion. To put that into perspective, our fiscal gap represents almost 70% of all the money in the world. We are deficit spending, basically using debt to pay our bills. As the debt increases, there will be a point where it starts to snowball and we won’t be able to afford the interest on the debt no matter how much we cut back on other programs, and we’ve already passed the point of no return on that number. When interest rates go up, the
S1 E62 · Wed, January 08, 2020
The SECURE Act Passes–Implications for Power of Zero Planning with David McKnight
The SECURE Act was passed a couple of weeks ago and we now know what it’s implications are. The big thing that everyone is talking about is that it eliminates the lifetime stretch provision for non-spouse beneficiaries of IRA’s, 201(k)’s, and Roth IRA’s. Now, if you’re leaving your IRA to a non-spouse beneficiary like a child, they will have to realize it as income over the following ten years. If your child will inherit your IRA, they will probably do so when they are at the apex of their earning years. The question is if this happens 20 years from now, will tax rates be higher or lower than they are today? That money will be piled on top of all their other income and they will be taxed at their marginal income. This is a backdoor tax increase. This is a money grab by the IRS unless you do something about it. This even applies to Roth IRA’s. If that money gets distributed over the next ten years, it will probably end up in a taxable account that the IRS will start earning money on. If you have an IRA, you need to ask yourself if you will have significant amounts of money in those accounts at the end of your life and might they go to a non-spouse beneficiary. This underscores the importance of doing Roth conversions during your lifetime. If you have a large IRA and plan on leaving it to the next generation, you need to consider what taxes will look like in the future. There has been a new estimate that the SECURE Act will generate $15.7 billion in tax revenue over the next decade. The implications for retirees will be largely positive, but the heart of the law is about forcing people to pay higher taxes in the short term. When these beneficiaries inherit these accounts, they will be forced to realize the income whether they need it or not. Once they pay the taxes, they will have to put the money somewhere and the question will be where do they put it. Traditional tax-free options like a Roth IRA are too prohibitive so it will likely end up in the taxable bucket, where the IRA will benefit once again. This is where the L.I.R.P. comes into play. It’s an optional place to put the money that comes with a number of additional benefits. This makes an even more compelling case for people who were still on the fence. They now also have to consider if they want their beneficiaries paying up to half the inheritance in taxes. This is an opportunity to start doing some tax planning, we still have six years to stretch out our tax liabilities if we act now. The other big change coming with the SECURE Act is the required minimum distribution age going from 70½ to 72. 80% of Americans with RMD’s are taking more than they need to anyways so this won’t impact them too much. The last change allows people to do backdoor Roth conversions after the age of 70½. The big question that people now have to ask themselves is “do you think you will have money left over in your
S1 E61 · Wed, January 01, 2020
Will the POZ Approach Increase My Medicare Premium? with David McKnight
One of the most common questions that David gets is regarding what happens to the Medicare Part B premium if someone engages in a Power of Zero tax strategy. Are there unexpected consequences of shifting money from tax-deferred to tax-free? When you do a Roth conversion, it doesn’t count towards the income thresholds that determine whether you can do a traditional Roth IRA, but it does have an impact on your Part B Medicare premium as well as your prescription drug premium. IRMAA stands for income-related monthly adjustment amount and it’s basically a higher premium charged by Medicare Part B and D to individuals that reach certain thresholds. Medicare Part B helps pay for certain services like outpatient care and for the average American they pay 75% of the Part B premium. If you are taking advantage of the 22% and 24% tax brackets you are going to move through two different thresholds when it comes to IRMAA and could be looking at an additional $2000 in costs per year when doing Roth conversions. At the top of the 24% tax bracket, it could be a little over $3000. The thing to keep in mind is you’re only paying this extra premium in the years that your income goes up due to the Roth conversions, it doesn’t mean your premiums will stay that way forever. The question then becomes “is the increase in premium worth it?” The simple way to find out is to do the math. If tax rates are going to double in the future, will those taxes be more or less than the two to three thousand dollars in increased premiums you’re going to pay now? You can also just compare the cost to the tax rate increases coming in 2026. You’ll probably find that your tax rate will still be more than the increase in your premiums. When you get money shifted at historically low tax rates to avoid a doubling of tax rates over time, but you have to pay a little bit extra, you’re still much better off. Pay the higher drug premium now and avoid the tax freight train that is bearing down on your retirement.
S1 E60 · Wed, December 25, 2019
Will the Power of Zero Approach Still Be Valid after 2025? with David McKnight
Once you get past December 31 of 2019 you will only have six years left to reposition dollars from tax-deferred to tax-free before tax rates go up for good. Every year that goes by your timeline gets shorter. The question that David gets all the time is what is going to happen once 2026 hits and will the Power of Zero paradigm still exist? The Power of Zero was written in 2013 and plenty of people between 2014 and 2017 were taking advantage of the Power of Zero strategy before they even knew there was going to be a tax sale. Even back then those tax rates were still considered good deals. Just because the tax sale ends in 2025, that doesn’t mean things are changing that much. Tax rates will still be low historically and especially so given where tax rates are likely to go in the next decade or so. The main thrust of the Power of Zero message is that in a rising tax rate environment there is an ideal amount of money to have in your taxable and tax-deferred buckets. So long as you are paying taxes that are lower today than they will be in the future the strategy still applies. The difference between the low tax rate and the high tax rate is a benefit that accrues to us and helps us wring more efficiency out of our tax dollars. The question you need to ask yourself is “are we in a rising tax rate environment?” The Power of Zero vision is always in effect in a rising tax rate environment, the only scenario where it doesn’t make sense is in an environment where taxes will be lower in the future than they are today. What if you only have two years left? If you’re going to shift all your money in two years, you have to be very cognizant of what tax bracket you will bump into. In many situations, it will make more sense to pay slightly higher taxes by stretching out your plan beyond 2026. There are worse things than paying a few extra percentage points in taxes. Even while taxes are on sale, you don’t want to rise into a tax bracket that you wouldn’t otherwise have to. If you average the tax rates during the tax sale with those few years you may have to pay beyond 2026, you are still probably coming out ahead than if you had shifted all your money prior to 2018. It’s not the end of the world when we get to 2026. The Power of Zero paradigm will still be in full force. Simply put, in a rising tax rate environment you are always going to be better off paying taxes at the lower rate. Don’t panic if you only have 5 years to get all your shifting done. What should worry you is waiting until 2027 and beyond to start the process. All tax rates have to do in the future is to rise by 1% a year for the Power of Zero math to make sense.
S1 E59 · Wed, December 18, 2019
Last Call For Roth Conversions! with David McKnight
The last weeks of December are critical in terms of taking advantage of your last opportunities to do Roth conversions for the 2019 tax year. Many people think you can go all the way until December 31 but that’s not always going to be the case. Some companies require you to submit a Roth conversion much earlier because they can take some time to process. Missing the Roth conversion deadline can have major tax implications. With a traditional IRA you can fund it up until April 15 of the following year, but that’s not the case with Roth conversions. They have to be done by December 31 of the current year which can cause some people problems because of the tax uncertainties involved. The IRS no longer allows you to do Roth recharacterizations in the event you end up in a higher tax bracket than expected. You just have to give it your best estimate. You should be doing a Roth conversion in 2019 because if you don’t, you no longer have seven years to stretch out your tax liability. If you waited until you had only a single year to do your Roth conversions and convert a million dollars, most of that money will be taxed at 37% plus whatever your state tax happens to be, and it will happen all in one year. This means you could give away up to 45% away. The whole idea of this planning is to reduce taxes as much as possible and avoid a doubling of tax rates over time. Even if you take two years to complete your Roth conversions, you’re still likely going to be in the 37% tax bracket. The further you stretch out your Roth conversion, the lower the effective tax rate on that conversion. If you feel like tax rates are going to be higher in the future than they are today then every year counts. There are worse things in the world than simply paying the taxes at what the rates will be in 2026. What you should worry about is what is going to happen beyond that when we get to a crisis point in our country financially. There is a proposal going through the House of Representatives right now that could result in an additional 7% increase in taxes for most Americans. The tax rates in 2026 may still be good deals of historic proportions because at the rate we are taxing Americans right now, there is just not enough money to pay for everything that’s been promised. Every percentage point increase in taxes after you retire means less money for you to spend. Remember, it’s not how much you have, it’s how much you actually get to spend after tax. It’s crunch time. If you’re going to do a Roth conversion this year, now is the time to act. Take advantage of the seven years you have and keep more of your money. Go to davidmcknight.com and find out what your Magic Number is. Keep in mind that you want to have some money in your tax-deferred bucket to take advantage of your standard deduction. The 22% tax brackets for most Americans is golden. These tax brackets are not going
S1 E58 · Wed, December 11, 2019
If Taxes Are Supposed to Go Up, Why Did They Just Go Down? with David McKnight
David gets a number of emails from listeners saying that he’s been wrong for years and the central thesis of the Power of Zero paradigm is incorrect. The question is, do the tax cuts of 2016 delegitimize what he and others have been saying? In reality, the problem has only compounded since the tax cuts came into effect. You have to consider whether the US government is prone to making bad financial decisions and has just kicked the can further down the road. David Walker says that anytime you have tax cuts, they should be accompanied by a commensurate decrease in spending. The Republican Congressional Budget Office says that the tax cuts will cost $1.5 trillion over the next ten years. Notice what’s happened to the deficit. Since the tax cuts have been put in place, the deficit has only gone up. When we get to the point where we have trillion dollar deficits, that’s the canary in the coal mine for a sovereign debt crisis. If anything, we have just covered up the problem and deferred it into the future, but in the process have made the reality of future tax hikes all the more inevitable. What happens if we don’t increase revenue or cut spending? We will get to a crisis point where we will have to have immediate and dramatic increases in taxes just to pay for social services. The federal government has a history of waiting until the very last minute to address these problems. Just because the government behaves irresponsibly, that doesn’t mean the math to which David Walker and other economists refer doesn’t add up. Every year that goes by where the government fails to reduce spending, spending reduces its effectiveness. We will get to a point where the interest on our debt consumes such a large part of the budget that we won’t be able to pay out Social Security and Medicare benefits without raising taxes. We are financing our spending with debt, and eventually the interest on that debt will become so prohibitive that it will crowd all the other expenses out of the budget. Has the central thesis been disproven? Of course not! If anything, the tax cuts have made the Power of Zero paradigm more important. Every day that goes by where the federal government fails to reduce spending means the reality of higher taxes down the road becomes all the more imminent.
S1 E57 · Wed, December 04, 2019
What Is a Risk Multiplier? with David McKnight
When someone is talking about a risk multiplier, they are essentially talking about longevity risk. The longer you live, the more likely it is for you to experience a subset of risks that could completely derail your retirement plan. There first major risk is the long term care risk. In many ways, you are better off dying than needing long term care, because a long term care event can completely decimate your savings and put your spouse into a very difficult spot. Historically, long term care policies are how people have mitigated this risk, but these policies have a number of disadvantages. They tend to get more expensive over time, often to prohibitive levels, and it can be very difficult to qualify. People also find the chance of paying for a long term care policy but never using it pretty irritating. Insurance companies started exploring the idea of giving people their death benefit in advance of their death in the event of a long term care event. This puts people in the scenario where if they die peacefully in their sleep their beneficiaries will get the death benefit completely tax free. This is why the L.I.R.P. is the recommended way of dealing with the risk of a long term care event. The second major risk is withdrawal rate risk. This risk basically says that there is an ideal amount of money to take out of your stock portfolio each year to avoid running out of money. The previous rule of thumb used to be withdrawing 5%, but that was found to be generally too risky. The current recommendation is somewhere closer to 4%. The sequence of return risk is closely related to withdrawal rate risk. If you are withdrawing money during a down market in the first ten years of retirement, you could send your portfolio into a death spiral where it never recovers. Combined with withdrawal rate risk, sequence of return risk can really mess with your retirement plan. The Wall Street Journal is saying the 4% rule is now actually the 3% rule if you want to mitigate your risk. To shield yourself from sequence of return risk and withdrawal rate risk, to fully mitigate them you need to have a massive amount of money saved by the time you get to retirement. There is another way to mitigate this risk without accumulating a giant amount of money and that is through a guaranteed form of income through an annuity. If you have a pension from your work or are a fan of social security, you are also a fan of annuities because they operate on the very same premise. If you’re going to live a 40-year retirement instead of a 5-year retirement, then you are much more likely to run into these risks. Take a portion of your stock portfolio and give it to a company that pools your risk with other people’s risk in exchange for a guaranteed stream of income until you die. In the case of a down year, you can avoid taking money out of your portfolio and rely on the annuity instead. The answer to the three basic risks
S1 E56 · Wed, November 27, 2019
When Bumping from a 12% to a 22% Tax Bracket Makes Sense with David McKnight
David is generally very reluctant to recommend something that would cause someone to bump from a 12% tax bracket into a 22% tax bracket. We’re trying to avoid the tax apocalypse that’s coming down the road, and that means thinking about the future. There are some circumstances where it makes sense though. A scenario to compare is between two 65 year olds with similar amounts of money in their three buckets. The first thing to do is figure out what their taxable income is by crunching the numbers on the income from their pensions and other sources, as well as their standard deductions. In this scenario, both people are in the 12% tax bracket, which is great for them. The 12% tax bracket will be looked back upon as the deal of the century. But we have to acknowledge the remaining $700,000 in their tax-deferred bucket and they only have $24,000 left before they hit the top of the 12% tax bracket. We could shift some of their money from tax-deferred to tax-free each year to keep them in the 12% tax bracket, but would that really solve anything? How big will their IRAs be once they turn 70 and a half, when they are forced to take the money out? There may be a scenario where it makes sense to go into the 22% tax bracket. We have to project into the future and see how big their required minimum distributions will be in a few years. At that point in time, the 22% tax bracket will be reverting back to the 25% tax bracket, and we may very well see that the 22% was actually a good deal. We also have to recognize that there is a scenario where someone can be bumped into the 22% tax bracket overnight. If you’re over 65 and your spouse dies, you will find yourself in the single filer tax bracket and your thresholds are reduced considerably. It’s a penalty to be single in many ways since your tax bracket gets cut in half. The third scenario to consider is the effect of the upcoming SECURE Act. Starting next year, it could force a non-spouse beneficiary to spend down an inherited IRA or 401(k) over the course of ten years. This could mean that your beneficiaries could inherit your money at the apex of their earning years, at a period of time when taxes are going to be higher than they are today, and when they can least afford to pay the higher taxes. If you are afraid of the 22% tax bracket right now, your children could be paying tax on your money at the 32% or 35% tax bracket, or the future equivalent. Whereas you could have paid the 22% tax now and allowed them to receive the money in the future tax-free. Consider the three circumstances where it may make sense for you to bump yourself into the 22% tax bracket. If you find yourself as a widow prematurely, you could find yourself spending a fair amount of time in the single filer tax cylinder. If the SECURE Act gets legislated into law, your children will inherit your money and end up paying a much greater amount of taxes.
S1 E55 · Wed, November 20, 2019
The 12 Rules for a Power of Zero Retirement with David McKnight
Rule #1: Everyone’s situation is different, and there is no cookie cutter approach. You can’t pick up the Power of Zero book and have the exact recipe for success. It will need to be tailored to your personal situation. Rule #2: It is unlikely that you will be in a lower tax bracket in retirement. The closer you are to 2029, the less likely you are to be in a lower tax bracket. We know when the tax cuts will end and when tax rates will go up. When you look at the ten-year horizon, it’s really tough to make the case that tax rates won’t be higher. This turns conventional wisdom on its ear. We are marching into an uncertain future, and that doesn’t bode well for people that have the majority of their money in the tax-deferred bucket. Rule #3: There is an ideal balance to have in your first two buckets in a rising tax rate environment. Your taxable bucket should contain around six months worth of expenses and your tax deferred bucket balance should be low enough that RMD’s are equal to or less than your standard deduction, as well as not cause social security taxation. Rule #4: Anything above and beyond the ideal balance in those first two buckets should be systematically repositioned to tax-free. Preferably you don’t do it all at once but you do it quick enough to get all the heavy lifting done by 2026. Rule #5: Anything with the word Roth on it is your best friend. These vehicles give you the ability to shift nearly unlimited money from tax deferred to tax-free. Rule #6: Social security taxation is a big deal and you should do everything you can to get your social security tax-free. If your social security is taxed, you will have to spend down all your other assets even faster. In many cases, your money will run out five to seven years faster if your social security is taxed. Rule #7: The best way to deal with long-term care in retirement is not through a traditional long-term care policy. An L.I.R.P. is a much better option. If you die peacefully in your sleep never having used the long-term care, at least someone is still getting a death benefit at the end. L.I.R.P.’s are great way to take the sting out of mitigating the long-term care risk. Rule #8: You will need more than one stream of tax-free income in retirement. You never know when the IRS is going to legislate one of your tax-free streams of income out of existence. You need multiple streams of tax-free income working together. Rule #9: You really want to get all your heavy lifting done before 2026. You have seven years before the tax cuts end and every year you wait to take advantage of these low tax rates, is another year you will have to pay more than you need to. Rule #10: Know your magic number. Your magic number is how much you should be shifting each year from tax deferred to tax-free so that by 2026 everything is perfectly allocated. You only have so many retirement dollars, so you need to spend them in the most tax
S1 E54 · Wed, November 13, 2019
The Holy Grail of Financial Planning with David McKnight
When David is working with a client, his recommendation is to reach the zero percent tax bracket is by having 5 to 7 streams of tax-free income. These can include Roth IRA’s, Roth 401(k)’s, and L.I.R.P.’s. David often asks advisors what they think is his favorite. Rarely, will anyone guess the truth is RMD’s (Required Minimum Distributions). The holy grail of financial planning is any investment that gives you a tax deduction on the front, grows tax-deferred, and you can take it out tax-free. A Health Savings Account and an IRA or 401(k) that allows you to get a deduction on the front end, grow the money tax-deferred, and then allows you to take a portion of the money out tax-free are two of the few vehicles that tick all the boxes. You want a balance in your 401(k) that’s low enough that it’s equal to or lower than your standard deduction and doesn’t cause social security taxation. You can use the calculators on davidmcknight.com to figure out your number. You can also learn your magic number, the amount of money you need to shift each year to achieve your ideal balance. Your IRA and 401(k) only becomes the holy grail of financial planning if they have the ideal balance. That’s when it becomes tax-deductible on the front end, grow tax-deferred, and the money can be taken out tax-free. If you have a high deductible health care plan, an HSA is a good idea because when you put money in, you get a deduction, and when you take money for a qualified health care purpose, you get it tax-free. If your RMD’s are equal to or lower than your standard deduction and don’t cause your social security to be taxed, they become the true holy grail of financial planning. If somebody says to you that you should convert everything you have to a Roth IRA, you have to think about what is going to happen your standard deduction in retirement. If everything is in the tax-free bucket your standard deduction will essentially be left idle. There is an opportunity cost of moving too much of your money from tax-deferred to tax-free. If someone recommends a financial plan that only features the L.I.R.P., you need to run the other way. The L.I.R.P. has significant shortfalls and is not the perfect solution, it’s only one piece in the puzzle of getting to the zero percent paradigm. The holy grail of financial planning is really about establishing the perfect amount to have your tax-deferred bucket. If your advisor can’t tell you what that number is, you’re probably not dealing with a Power of Zero advisor. The ideal approach to Power of Zero retirement planning is to call on as many of these streams of tax-free income in retirement as possible. Each account and investment is meant to be a solution to a specific situation and they only complete the picture when put together the correct way. The L.I.R.P. is for addressing the highest risk in retirement, namely a long term care event. In s
S1 E53 · Wed, November 06, 2019
What is the Public Pension Liability Crisis? with David McKnight
There are three words that don’t get mentioned very much, but they should scare the dickens out of you. Those words are Public Pension Liabilities. It’s a problem that is largely flying below the radar, but if you live in a state with a lot of public pension liabilities, it could end up like Detroit. Public pensions often end up swallowing up the state budget until there is little left over to provide basic services. A pension is a guaranteed stream of income that is paid to you either over your lifetime or the life expectancy of you and your spouse. It used to be very popular in the private sector, but they became phased out as they became too expensive. However, they still persist in the public sector. Public pensions are a great way for politicians to get elected. It’s very easy to make a promise to perpetuate lavish benefits when they don’t have to deal with the consequences for potentially decades down the road. It will get to the point where certain states will go bankrupt because they can’t afford to pay the pensions that have been promised. California, one of the fiscally unstable states in the country, has over 62,000 pensioners that are getting over $100,000 per year. Illinois is on the cusp of bankruptcy because of all the unfunded obligations they have in regards to pensions. These public employees deserve competitive pay, but people are living longer and cities are now in a unique position where they have to fund their current budget. However, they also have to pay one or two generations of retirees. When we ask the states to total up their unfunded obligations they say it adds up to $1.4 trillion, but the Federal Reserve and others put that number as high as $5.3 trillion. You have to realize the precarious position that states are in. They can only raise taxes so high before people start fleeing their state. They can’t print money, so their budget is limited to what they bring in. They will eventually have to cut services. Some believe the federal government will intervene, but that’s not going to play out the way most people believe. We often focus on the broad national debt, but we often forget what’s going on at the local level. If the federal government opts to bail out the states, it will be by raising taxes on everyone. There is a storm looming on the horizon. We have to keep in mind that public pension liabilities are a chicken that will come home to roost sooner or later. It won’t be the states that go into austerity to be able to deliver on these pensions. You’re going to see the federal government intervene and raise taxes to be able to deliver these pensions from the fiscal abyss into which they have descended over the last couple of years. [ There are solutions that states could look at that could potentially fix the problem. Fix number one would be to wean new employees off of pensions so less of the onus is on the state government. [ <
S1 E52 · Wed, October 30, 2019
What is an L.I.R.P. Conversion? with David McKnight
David becomes very uneasy when advisors recommend that their clients take the money in their IRA and convert all of it into an LIRP. The LIRP has a lot of benefits, but it really should be used in conjunction with other streams of tax-free income. The LIRP is powerful only to the extent that it’s used in collaboration with, in most cases, four to six other streams of tax-free income. That’s when it really shines. An LIRP conversion is something that you would use with a client when there are no other opportunities for Roth or Roth conversions available. Most annuity companies are okay with you doing a Roth conversion, as long as you do it all in one year. What do you think the tax implications of that might be? There are some companies that allow what is known as a midair conversion, where you take a distribution from the IRA and then you convert it to a Roth IRA on the other end. This isn’t very common though and most companies shy away from this. With the LIRP we get as little death benefit as the IRS requires of us and stuff it with as much money as the IRS allows in order to mimic all of the tax free benefits of the Roth conversion. As your annuity balance goes down, you will have to structure the LIRP just the right way, but if you do, your money will be able to grow in a completely tax-free environment. The average expenses over a year over the life of a LIRP are about the same or a little less than a typical IRA or 401(k). Not only are you able to grow your money in a tax-free environment, but you’re also able to get a death benefit that doubles as long-term care. The second scenario where an LIRP conversion makes sense is in a situation where you are a non-spouse inheritor of an IRA. If you are a spouse that inherits an IRA, you can do a Roth conversion without any issue, but that’s not true for a non-spouse. They will be required to take RMD’s on that IRA over their life expectancy. You can’t convert an inherited IRA and turn it into a Roth IRA. You can put that money into a traditional IRA, but there are limitations and that’s where a LIRP conversion can be very useful. If you believe tax rates are going to be higher in the future and have inherited an IRA, the natural place to put that money may very well be in a LIRP. An LIRP conversion is not an officially recognized term, but the idea is very useful. If a Roth conversion is not available, an LIRP conversion is your next best option. With an annuity with a 10% withdrawal limitation, that is a great place to start shifting money to an LIRP.
S1 E51 · Wed, October 23, 2019
Meet the Politician Who Sounds Exactly Like a Power of Zero Advisor with David McKnight
There are two people today that are making waves in the national conversation for what they are saying about the national debt. This first is Ken Fisher. Ken says the debt to GDP ratio has been worse in the past and that we really have nothing to worry about. He also says that we borrowed some of that money from ourselves, so it’s really just an accounting issue. The trouble is, that’s all untrue. We owe the money to Social Security and that money has to come from somewhere. Social Security is underfunded and will need to be paid back, either through higher taxes or spending cuts. Ken Fisher is trying to persuade us the stock market is going to go up in perpetuity, which is basically what he said just prior to the crash of 2007. There is one person on the right side of the aisle who is the opposing voice on the debt issue. Mark Sanford is a GOP candidate running against Trump. Mark doesn’t believe we have 8 to 10 years before the coming crash, which is why he’s running now. He’s injecting the topic into the national debate by running for president, despite the very long odds he will succeed. We don’t have the luxury of waiting four years until the next presidential cycle to have this debate. The storm may already have come in 5 years. Tom McClintock has said something similar, namely that the United States will resemble Venezuela in 8 years. The financial storm will be something that we have never seen before. A sovereign debt crisis is looming, which is the straw that could potentially break the camel’s back. Our math doesn’t add up in Washington. The current financial condition of the country is like a family running up their credit cards to create the illusion of real wealth that gets wiped out when the financial storm hits. While all the other countries in the world are getting their financial houses in order, the US is just piling on their debt. This is not all the current president’s fault, but he’s not helping the situation either. We are living in a dream world if we believe that the national debt is only $22 trillion. All the other governments in the world follow fiscal GAAP accounting except the US. We would have to have $239 trillion sitting in a bank account today earning treasury rates to be able to deliver on all the promises. Who’s right? Ken Fisher or Mark Sanford? One has everything to gain where the other has nothing to gain except maybe averting a disaster. If you find yourself in the position where you or your clients have large amounts of money in tax deferred investments, you have a freight train bearing down on you. Take advantage of the next 7 years to position that money to tax free or you may not be able to keep as much of that money as you thought. The Secure Act will most likely be snuck into a spending bill at the end of the year. It means that if you die with money in your IRA’s and it goes to a non-spouse beneficiary like y
S1 E50 · Wed, October 16, 2019
Should I Take the Lump Sum Option with My Pension? with David McKnight
What are the implications of taking your pension normally versus a lump sum? A lot of companies offer the lump sum as a way to get out from under the financial obligation of paying you or your spouse until you die. As a stream of income, your pension will be coming out of your tax-deferred bucket. You also have to realize that once you opt to take your pension as a stream of income you are stuck with that choice regardless of what tax rates are in the future. It will always come out of your tax-deferred bucket, with all the unintended consequences that go along with that. That doesn’t mean you should always take the lump sum option, but it can be a good deal. You just have to crunch the numbers and understand the tax implications of your choice. When you take your pension as a stream of income, it counts as provisional income, so in most cases you can count on it causing your Social Security to be taxed. Anything you take out of your other retirement plans will land right on top of that income and be taxed as well. When 85% of your Social Security gets taxed, which is a situation many people will find themselves in, it forces you to spend down your other assets much faster. You could run out of money 5 to 7 years faster than people who do not have their Social Security taxed. You can spend your other assets down much faster than you planned, in an attempt to compensate for Social Security taxation that’s brought about by electing to take your pension as a stream of income. When you’re taking a pension stream of income in retirement, it is 100% exposed to tax rate risk because it is coming out of your tax-deferred bucket. That means you are going to have to find a way to compensate, and when tax rates increase in the future it’s going to be double hit. A lump sum distribution allows you to roll that money into an IRA. Once it’s there, you could do a Roth conversion and place it into the tax-free bucket. If you’re really bent on having a stream of income you could use a deferred income annuity, which would create that stream of income in a tax-free environment. Pensions are becoming more scarce, only 40% to 50% of the people we see everyday have one. Most people have 401(k)’s or 403(b)’s. If you do have a pension, you should explore a lump sum distribution before you opt to take that stream of income. You should be aware of your options before you have to make that choice.
S1 E49 · Wed, October 09, 2019
Why Line 10 Is My Very Favorite Line on the Tax Return with David McKnight
Line 10 on your tax return can be a great joy for you in retirement. Before the tax cuts of 2018, you may have known it as Line 43, and it simply means your taxable income. Taxable income is important to someone trying to achieve the Power of Zero paradigm because in a rising tax rate environment there is an ideal amount of money in both your taxable and tax-deferred buckets. Anything above those amounts should be repositioned to tax free. That’s approximately six months of living expenses in the taxable bucket, and in the tax-deferred bucket. The ideal balance is low enough that your required minimum distributions are less than or equal to your standard deduction in retirement. When you’re shifting money from tax deferred to tax free, you create a taxable event, and to understand how much your going to pay in taxes, you need to know your taxable income. This is where Line 10 on your tax return comes in. Your Line 10 number will inform how much you can shift in a given year before bumping up into the next tax bracket and how much heartburn you will be exposed to. How do you get to your taxable income? Start with your gross income and then subtract your “above the line” deductions like contributions to your traditional tax deferred plans. Once you’re at your adjusted gross income, to get to your taxable income you have to decide which one is greater: your standard deduction or your itemized deductions. You need to understand the implications of any shifting you do from tax deferred to tax free and you can’t do that without figuring out what your taxable income is. The marginal tax bracket is also the tax rate at which you save taxes when you do something that generates tax savings like taking out a mortgage. Most people we meet are in the 22% tax bracket so they aren’t too upset about doing enough shifting to get to the top of that tax bracket, but they should also take advantage of the 24% tax bracket as well. The 24% tax bracket is only 2% higher than the 22% tax bracket, but it allows you to shift another $150,000 each year before hitting the top of that bracket. If you have a $1 million in your IRA right now, you’re going to need to shift $125,000 each year over the course of the next seven years to get to the right amounts in your tax deferred and tax free buckets. Ultimately you have to ask yourself are tax rates going to be higher in the future than they are today. If you believe they will go down, then hold off on the Roth conversion. If you believe they are going to be dramatically higher, then line 10 on your tax return will be a good barometer for what the implications of shifting will be. Check out your line 10, figure out what marginal tax bracket that puts you in, and then ask yourself how much room you have to shift before you get to the next level. Remember your pension and social security taxation will fill up your first two tax brackets, and any money that c
S1 E48 · Wed, October 02, 2019
The Hallmarks of a True Power of Zero Advisor with David McKnight
Over the years David has noticed a number of advisors who have professed to be Power of Zero advisors, but there are a number of significant shortfalls in their approach. A true Power of Zero advisor believes that tax rates are going to be higher in the future than they are today and knows how to defend that position. They understand the national debt and the true amount of the unfunded liabilities as well as the implications of those things. In a rising tax rate environment, there is an optimal amount of money to have in your taxable and tax-deferred buckets. Regardless of the direction tax rates go in the future, your taxable bucket should contain about six months of living expenses. The real litmus test for the Power of Zero paradigm is in how much should be in the tax-deferred bucket. For most people that number is around $350,000. You can have too much money in your tax-deferred bucket, and when you do it unleashes a cascade of unintended consequences that could potentially lead to social security taxation. A true Power of Zero advisor believes in the idea of multiple streams of income. If your advisor says all you really need to get to the zero percent tax bracket is a Life Insurance Retirement Plan or something similar, that’s a tipoff that they haven’t really embraced the paradigm. It’s nearly impossible to get to the zero percent tax bracket by relying on just one stream of tax-free income. Each type of tax-free stream of income has a strength and is able to accomplish things that the other types can’t. They should be used in conjunction with one another to get to the zero percent tax bracket. The holy grail of financial planning is when you can use your standard deduction to offset your required minimum distribution from your IRA. The LIRP has its own set of advantages. It allows your money to grow safely and productively, has low fees as long as you keep the plan for your lifetime, and you get a death benefit that doubles as long term care insurance. Social security helps mitigate against a number of risks, including longevity risk, sequence of returns risk, inflation and deflation risk, and the longer you live the greater your return on the program. An advisor should be able to talk about all the advantages and disadvantages of all these things. A true Power of Zero advisor recognizes the importance of the date Jan 1, 2026, when tax rates revert to what they were in 2017. You’re going to have to pay taxes now or later, so why not pay them when they are at historically low rates? When the tax sale is over January 1st, 2026, it’s over for good. According to Tom McClintock, in eight years the US will be in the same boat as Venezuela. A true Power of Zero advisor would never lock up a significant portion of your assets in the tax-deferred bucket in the form of an annuity that didn’t have Roth conversion features. Annuities have a lot of benefits in retirement but the
S1 E47 · Wed, September 25, 2019
How to Get Your Social Security 100% Tax-Free with David McKnight
Social Security can indeed be taxed, despite the feeling that you’re getting taxed twice. This year, 89% of all federal tax revenue is only going to go towards four things: Social Security, Medicare, Medicaid, and interest on the debt. These are non-discretionary spending items. It would take an act of Congress to choose not to pay for them and doing so would result in a worldwide depression. That means that only 11% is left to fund everything else in the budget and that doesn’t include the additional trillion dollars we spend above and beyond the federal tax revenue. We are going to come to a point where we have a sovereign debt crisis and will have to either dramatically reduce spending, increase tax revenue, or some combination of both. Provisional income is the income that the IRS keeps track of to determine if your Social Security will be taxed. Any 1099’s coming out of your taxable bucket, including investments that generate income or dividends, count as provisional income. The same is true for any distributions from qualified plans and 401(k)’s in your tax deferred bucket. Most people have no basis in their 401(k). They used pre-tax dollars to fund those accounts and when they take that money out the IRS is going to count 100% of it as provisional income. Any sort of taxable income that accrues to you during retirement will count as provisional income. The kicker is one half of your Social Security counts as provisional income. If, as a single person your provisional income adds up to $25,000, or as a married couple it adds up to more than $32.000, up to 50% of your Social Security can become taxable to you at your highest marginal tax bracket. It’s important to remember that your standard deduction has nothing to do with your provisional income. Interest from your municipal bonds counts as provisional income, which is the reason we aren’t very keen on them since they don’t count as true tax-free investments. There is a longform process you can use to determine your provisional income, but there is also a short cut. Many people think that provisional income is based on a threshold and if they exceed that number, they are taxed at their highest marginal tax bracket, but that’s not how it works. It’s graduated, so you have to get well above the threshold to feel the full brunt of the tax. Somewhere between $80,000 and $85,000 in provisional income is where your Social Security will be taxed at your highest marginal tax bracket. Many financial advisors think about provisional income incorrectly. We have to recognize that provisional income works in a graduated system and there are ways to keep your provisional income low enough to make your Social Security tax-free. You have to remember that even before you take the first dollar out of your IRA, you are already at the 50% mark, so you have to keep the balance of your IRA low enough that the RMD comin
S1 E46 · Wed, September 18, 2019
My Response to an Amazon Review Critical of The Power of Zero with David McKnight
When you come from a tax-deferred paradigm, it can really skew how you view the types of accounts that you are accumulating dollars in. The main thrust of the reviewer’s critique is that we shouldn’t focus on minimizing taxes if that means that investment fees will leap up over the course of retirement. Of course, you shouldn’t build your financial plan while only considering taxes. If you look at the financial path the country is on, we can make some educated guesses on the future of tax rates and adjust our financial strategy based on that. The Power of Zero paradigm essentially means that if tax rates are going to be higher in the future than they are today, then there is a mathematically ideal amount of money to have in your taxable and tax-deferred buckets. Anything above that should be systematically transferred to tax-free. Life insurance policies do have higher fees than other potential investments, but only if you don’t keep the policy for your entire life. If you do keep it for your whole life, it becomes very inexpensive. To say that you can go out and get useful advice about retirement for less than one tenth of 1% is to say that you are working with an advisor that isn’t making any money. The key is that if you’re going to work with someone who is going to help you navigate all the pitfalls that stand between you and the zero percent tax bracket, that person is not going to work for free. The average rate of return of the S&P 500 over the last 30 years is about 8%, but the average return enjoyed by most investors is between 1% and 3% because they make decisions emotionally. If you’re paying 1/10th of 1% to an advisor, you are getting what you pay for, and you will definitely not get any advice on when to move money from taxable and tax-deferred to tax-free. When you take a loan from your life insurance policy, it’s not actually coming out of the policy, it’s coming from the insurance company with your policy, being used as collateral. There is a reason why hedge fund managers and banks are the biggest purchasers of life insurance. All life insurance loans are tax-free, but not all of them are cost-free and we’re looking for both. Roth accounts are mentioned all throughout the Power of Zero book because they come with a lot of advantages, but one of the things you can’t get is the safe and productive growth you can get from the LIRP. The biggest selling point of the LIRP is the death benefit that doubles as long-term care. Baby Boomers are recognizing that one of the single biggest risks they face is long-term care. David has never argued that the LIRP should be used instead of Roth accounts, it should always be used as another stream of tax-free income alongside those accounts. We know that 53% of our country pays all of the taxes, with 80% of that being paid by the top 20%. In order to keep social security, Medicare, and Medicaid, we have to widen
S1 E45 · Wed, September 11, 2019
All About MEC's, 1035 Exchanges and Life Insurance Taxation with David McKnight
The IRS has a test called the seven pay premium test. It basically states that it’s possible to put too much money into a life insurance policy. If you fail that test than any loans that you take from your life insurance policy get treated differently. Traditionally, if you obey the rules of the IRS you put money into a life insurance policy after tax and if you take the money out the right way you can do it tax free, typically by way of a loan. The alternative is to take the money out of a non-MEC life insurance policy with a policy withdrawal. This happens on a first-in, first-out basis, which essentially means that you can take out the money in your basis tax-free, but anything from the growth portion of your account will be subject to ordinary income taxes. Anything above the basis, you would take out in the form of a loan from the insurance company itself. However, there are some policies that allow you to take out variable or participatory loans against the whole amount. Many people do Modified Endowment Contracts on purpose. In either case, the money will go to the heirs tax-free. The big difference is the order of the withdrawal structure. With an MEC policy, the order is last-in, first-out which means you will pay tax on the growth first before getting to your tax-free basis. If you’re younger than 59 and a half, you will also pay a 10% penalty on any loan or withdrawal from a MEC policy. This can have major implications if you end up using the contract the way that most people do, as it can end up being the worst investment you will ever make. The advantage to a MEC policy is that you can get a large lump sum into the policy early on and take advantage of the time value of money. You just have to recognize that you want to have the right amounts of money in the right accounts in a rising tax rate environment. If you want to change your existing life insurance policy you can do a 1035 exchange and roll that money tax free into a new policy, but there are some things to watch out for. Once a MEC, always a MEC. There is another thing you can do with a 1035 exchange where you can take the money in a non-MEC life insurance policy and roll that into an annuity. Once it’s an annuity, you will lose any ability to take money out tax-free, but the option is there if you need an escape hatch from your current life insurance policy. The shift only goes one way, you can’t take an annuity and roll it into a life insurance policy.
S1 E44 · Wed, September 04, 2019
Do LIRP's Really Have High Fees? with David McKnight
The number one criticism of the Life Insurance Retirement Plan online is that the fees are simply too prohibitive, but the question is really what are they expensive compared to? The best way to compare the fees is to think about where else you could be putting your money, in most cases that’s going to be some sort of investment. When it comes to typical investment fees, you’re looking at an expense ratio of 1.5%. The baseline number to compare the fees with the LIRP is that 1.5%, which means you have to consider whether the LIRP is more or less expensive than the traditional 401(k) account. The LIRP is a bucket of money that grows tax free, there is no contribution limit or income limitation, you don’t pay taxes if you take the money out in the right way, it doesn’t affect provisional income and there isn’t likely to be any legislative changes down the road. The IRS requires that a certain amount of money flows out of your LIRP in order to pay for certain expenses. The expenses in the LIRP are likely to be much cheaper than what you are paying in your 401(k) or IRA. The fees are a little bit higher in the early years of the LIRP compared to other accounts, but the fees drop off a cliff after the eleventh year. When you average out the fees over the life of the program, it’s going to cost you less than the 1.5% baseline. Don’t do an LIRP if you don’t plan on keeping it for your whole life. There are a lot of benefits to the plan that only make sense if you keep it until you die. If you do plan on keeping it for your whole life, why would you be concerned with the higher fees in the beginning instead of considering the impact over your lifetime. Since the plan isn’t a short term investment, it doesn’t make sense to only pay attention to the negative return in the first six years. The longer you keep the plan the closer your internal rate of expense gets to 1%. If the internal rate of return reflects a 1% expense over the life of the program, it might as well have been that rate for the entire time. The costs are significant over the first ten years, but if you stick with it for the rest of your life the more dramatically the expenses reduce and the better the internal rate of return becomes. The LIRP may come with expenses but you also get advantages by paying those expenses. If you could get a 6.5% return without taking any more risk than you are accustomed to taking in your savings account, would you? The expense issue with LIRPs is overblown. We have to contextualize the expenses within the broader picture and also consider the benefits it conveys over the course of our lifetime. LIRPs are not a silver bullet, they should complement your other tax-free streams of income. If you put it all together just the right way you get to be in the 0% tax bracket. When you have the right levels of money in the right accounts, that’s how you reach the 0% tax
S1 E43 · Wed, August 28, 2019
The Great Roth Conversion Myth with David McKnight
You will find articles on the internet that claim that if you are going to do a Roth Conversion you have to do it a number of years before retirement, because you must have the ability to recuperate the dollars you’ve paid towards tax, but that doesn’t stand up to the math. David goes over the example of two brothers, each taking a different approach to investing $100. One goes for the tax deduction on the front-end approach, and one for the tax-free approach. The moral of the story is that most people believe that if they have $100 in an account and it doubles to $200, that $200 is theirs, but they don’t actually have $200 because the IRS is going to take their cut one way or another. As your portion of the invested money grows over time, the IRS’s portion grows over time as well. In a level or stable tax environment, both the IRA and the Roth IRA are worth the same amount of money. The value of the Roth IRA has nothing to do with having enough time to recover from the taxes you pay on the Roth Conversion. The same math holds sway no matter the approach you take. It comes down to whether you think the taxes you pay on the front end will be greater or less than the tax you will pay on the back end. The only variable that really matters is expected tax rates. If taxes are higher in the future, the Roth IRA is the better choice. If you believe tax rates will be lower in the future, than go for the IRA or 401(k). Always be asking yourself where you think tax rates will be in the future. This is why David focuses on conveying the financial reality of the US. The unfunded liabilities of the country are close to $239 trillion at this point. If you think that tax rates are going to be higher in the future to help keep our country solvent, then the tax free worldview is the way to go. It’s okay to keep some money in your tax deferred bucket to offset your standard deduction in retirement, but for most people the sweet spot is somewhere between $250,000 and $350,000. The people who aren’t sure if the Roth IRA is worth it or not need to crunch the numbers year by year, and see that there is no catch-up period. The myth around Roth Conversions is not accurate. If after examining all the evidence and you believe that tax rates will be higher in the future, don’t believe all the nonsense around Roth Conversions. The math is always on your side if tax rates are going to be higher down the road than they are today.
S1 E42 · Wed, August 21, 2019
How the 72(t) Can Help You Get To Zero with David McKnight
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.
S1 E41 · Wed, August 14, 2019
3 Huge Retirement Mistakes and How To Avoid Them with David McKnight
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
S1 E40 · Wed, August 07, 2019
Reverse Mortagages with David McKnight and Harlan Accola
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,
S1 E39 · Wed, July 31, 2019
15 Things You Should Know about the Roth IRA--Part 2 with David McKnight
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.
S1 E38 · Wed, July 24, 2019
15 Things You Should Know about the Roth IRA--Part 1 with David McKnight
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.
S1 E37 · Wed, July 17, 2019
Why Your Tax Rates Could Double (No Matter What) with David McKnight
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 ra
S1 E36 · Wed, July 10, 2019
The Surprising Tax Benefits of Living in Puerto Rico with David McKnight
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.
S1 E35 · Wed, July 03, 2019
Part 2, Jonathan Krueger from Living a Richer Life By Design, interviews David McKnight
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 ta
S1 E34 · Wed, June 26, 2019
Jonathan Krueger from Living a Richer Life By Design, interviews David McKnight
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 like
S1 E33 · Wed, June 19, 2019
The SECURE Retirement Act: Implications for Your Retirement with David McKnight
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.
S1 E32 · Wed, June 12, 2019
Can You Have Too Much Money To Get To The 0% Tax Bracket? with David McKnight
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 tha
S1 E31 · Wed, June 05, 2019
A Power of Zero Case Study (Pension Example) with David McKnight
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. I
S1 E30 · Wed, May 29, 2019
A Power of Zero Case Study (No Pension) with David McKnight
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.
S1 E29 · Wed, May 22, 2019
Five Key Takeaways of The Power of Zero Message with David McKnight
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
S1 E28 · Wed, May 15, 2019
When Should I Take Social Security? with David McKnight
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.
S1 E27 · Wed, May 08, 2019
The Historic Timing of the Power of Zero Message with David McKnight
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.
S1 E26 · Wed, May 01, 2019
What’s Better, A Chronic Illness Rider or a LTC Rider? with David McKnight
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,
S1 E25 · Wed, April 24, 2019
A Conversation with Doug Orchard, The Power of Zero Documentary Producer, with David McKnight
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. </
S1 E24 · Wed, April 17, 2019
What’s Better: Traditional LTC, Asset Based LTC, or Permanent Life Insurance? with David McKnight
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.
S1 E23 · Wed, April 10, 2019
Sneak Peek: The Audio of Chapter 1 of “The Volatility Shield” with David McKnight
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.
S1 E22 · Wed, April 03, 2019
What’s Better - the Roth IRA or the LIRP? with David McKnight
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 ar
S1 E21 · Wed, March 27, 2019
The Back Door Roth and Roth Recharacterizations with David McKnight
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.
S1 E20 · Wed, March 20, 2019
My Next Book “The Volatility Shield” Releases Today! - with David McKnight
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.
S1 E19 · Wed, March 13, 2019
The Four Types of LIRP's (And How to Find the Right One for You) with David McKnight
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.
S1 E18 · Wed, March 06, 2019
How To Implement The Power of Zero Strategy with David McKnight
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.
S1 E17 · Wed, February 27, 2019
Should I Do A Roth Conversion? with David McKnight
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
S1 E16 · Wed, February 20, 2019
What is the Fiscal Gap? with David McKnight
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.
S1 E15 · Wed, February 13, 2019
How To Take Tax-Free Distribution From Your Life Insurance Policy with David McKnight
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
S1 E14 · Wed, February 06, 2019
Should I Use Life Insurance For Long-Term Care? with David McKnight
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
S1 E13 · Wed, January 30, 2019
Four Ways To Save Our Country From Financial Ruin with David McKnight
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.
S1 E12 · Wed, January 23, 2019
David McKnight's Interview with the Nation's #1 Financial Podcast, Stacking Benjamins
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 o
S1 E11 · Wed, January 16, 2019
Jill Schlesinger from CBS Radio Interviews David McKnight
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 e
S1 E10 · Wed, January 09, 2019
The Volatility Buffer with David McKnight
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! I
S1 E9 · Wed, January 02, 2019
Pensions and the Zero Percent Tax Bracket with David McKnight
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
S1 E8 · Wed, December 26, 2018
Clark Howard Article With David McKnight
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 progr
S1 E7 · Wed, December 19, 2018
Power of Zero Documentary with David McKnight
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 convin
S1 E6 · Wed, December 12, 2018
The Tax Sale of a Lifetime with David McKnight
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 i
S1 E5 · Wed, December 05, 2018
The Life Insurance Retirement Plan with David McKnight
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.
S1 E4 · Wed, November 28, 2018
The Power of Tax Free Investments with David McKnight
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.
S1 E3 · Wed, November 21, 2018
Tax Deferred Investments with David McKnight
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
S1 E2 · Wed, November 14, 2018
The Taxable Bucket with David McKnight
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.
S1 E1 · Thu, November 01, 2018
The Coming Tax Storm with David McKnight
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
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