The Power Of Zero Show

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 PowerOfZero.com (free video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube

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

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

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 Twitter @davidcmcknight on Instagram David McKnight on YouTube

"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): powerofzero.com/blog/the-white-coat-investor-responds-and-i-rebut-his-response David McKnight vs Financial Guru (Part 3): powerofzero.com/blog/power-of-zero-vs-white-coat-investor-final-response The Power of Zero: The Tax Train Is Coming--TheTaxTrain.com MarketWatch Article: marketwatch.com/story/heres-a-way-to-make-your-retirement-savings-last-longer-2020-12-08 POZ episode 181: Should High Income Earners Do Roth Conversions--podcasts.apple.com/us/podcast/should-high-income-earners-do-roth-conversions/id1441026169?i=1000558116209 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

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 YouTube

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

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 year. The longer you keep your LIRP, the lower the average annual expenses over time. For David, Dave Ramsey is so fixated on the fees of the LIRP in the first few years that he fails to see the forest for the trees. He fails to recognize that the longer you hold your LIRP, the greater the internal rate of return. A situation David has seen happening is when some people get to the point in their policy when the fees start falling through the floor and, after reading a book or listening to a podcast episode by Dave Ramsey, they drop their policy because of what they have heard him say. Just when the LIRP was starting to build a head of steam, they succumb to Ramsey's mischaracterization of LIRP fees – which leads to them dropping their policy, losing their death benefits, and incurring unwanted surrender fees along the way. David recommends having the following retirement planning approach in a rising tax rate environment. You want to have between four and six different 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 0% 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

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 David McKnight on YouTube

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) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube