The Power Of Zero Show

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 for good.

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’s a key factor because, as Rebecca explained, as long as you avoid the downside you “win the battle” – even if you planned on a mediocre 4% return for the rest of your life. As she shared, people are so used to chasing returns that they don’t understand that there’s a peak, a point in life at which a person moves from accumulation to distribution. Distribution rules are different from accumulation rules.  There’s a dilemma many of us face: how do we give our children something more than we had, without quenching their innate desire to make something for themselves because they have been challenged? This is one of the reasons why, in Rebecca’s opinion, you see so many wealthy people's children going the wrong way - becoming addicted to a substance, etc. – because they just don't have an outlet for their individual need to become something.

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. However, they forgot to tell people one thing: in order for you to be able to choose your tax rates when you’re going through your lifetime, taxes have to remain relatively stable During Reagan’s second term, with the passing of the Tax Reform Act of 1986, the top bracket to 28%. This widened the bracket, and people who were making $28k a year (after deductions) became part of that bracket. The retirement of baby boomers will shift us to the new phase of taxation in America. It’s the thing that has been talked about since the ‘70s: this decade between 2020 and 2030 will be the decade where everything that has been pushed down the road will come to fruition. For the first time in the history of America, the country will have a European-styled system for a third of its people (one-third of Americans will be on social security and Medicare).  Back in 2009-2010, David Walker stated that tax rates would have to double in order keep the U.S. solvent. Not only does he still stand by that statement but he also thinks that tax rates in the future will never be as low as they are today. Before the pandemic, Rebecca Walser was extremely concerned. Now, after having seen how the world dealt with Covid-19, she is mortified by how scary of a fiscal position America is in, especially because of its special status as the World Reserve Currency. Currently, there is over $8 trillion of printed stimulus currency in the U.S.. To give some perspective: Reagan took office in January of 1981. One trillion dollars of debt wasn’t reached until October of that year. From October of 1981 till February of 2020, the Federal debt was under 29 trillion dollars. In the last 20 months, $8 trillion has been printed to deal with Covid-19. Before the pandemic, Rebecca was worried. Now, we’re at a point where we’re talking about a global Central Bank reckoning. The U.S. has been the World Reserve Currency since 1944. In the past, China and India wouldn’t bilaterally trade in their domestic currencies, they would buy dollars and use those to trade.  Then, you had the BRICS (Brazil, Russia, India, China, and South America) wanting to make a pact to bilaterally trade for the first time. Over the last 15 years, the dollar hasn’t been used much in bilateral trades in countries around the world.  Three months ago, China announced its intention of doing its own digital currency – two months ago, the UK announced its move toward digital currency. As the world moves toward digital currency, the U.S. dollar will literally become irrelevant as the World Reserve Currency. Nearly 3 trillion dollars, nearly half of the U.S. annual spending, comes from its ability to sell its paper to the world. If this opportunity were to end, America would lose almost half of its lifeline (support to the military, social assistance, etc.).

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 America. However, it looks like it’s just not going to happen. According to prognosticators, Democrats will lose majority in the House and majority in the Senate come midterms in 2022.   Mentioned in this Episode: Joe Manchin’s words on Fox News Sunday - youtube.com/watch?v=h61hhGMe_oA

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

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 and graphs, or build the information around a compelling story, so they went with a story. The story may have been dramatized, but a lot of the reactions from the actors in the movie are genuine to the situation being explored. Doug wanted people to feel the emotions of the story in particular, because he wanted to make something that moved the needle for society. Nothing has seemed to really make an impact in terms of the trajectory of the national debt or the direction society is going. That’s the impetus for the message of the Baby Boomer Dilemma. Doug never planned to own an annuity before David’s book came out. Prior to that he didn’t realize the value of annuity and how it can be done. It’s impossible to be an annuity skeptic after seeing the most intelligent people laying out the mathematical case for their benefits.  78% of all businesses with three or more employees are owned by Baby Boomers, and most of those businesses will be sold in the next decade. The $10 trillion that will change hands or fail to sell will pose serious issues in the next ten years. People who sounded crazy in 2006, are now at the forefront of the taxation conversation. Even if we taxed everyone in America at 100% for the next ten years, we would still have a tough time dealing with the existing debt.   Mentioned in this Episode: boomermovie.com

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. With your basic needs covered, you have a permission slip to take more risk in your stock market portfolio. This also allows your portfolio to recover during down years instead of forcing you to take money out during those years which can put your portfolio into a death spiral. The LIRP is another excellent place to draw money for discretionary expenses during the years the market is down. The Volatility Shield covers this strategy in depth.     Mentioned in this Episode: How the supply chain caused current inflation, and why it might be here to stay - pbs.org/newshour/amp/economy/how-the-supply-chain-caused-current-inflation-and-why-it-might-be-here-to-stay Paul Tudor Jones says inflation could be worse than feared, biggest threat to markets and society - cnbc.com/2021/10/20/paul-tudor-jones-says-inflation-could-be-worse-than-feared-biggest-threat-to-markets-and-society.html

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 government would have to do to simply prevent the debt from growing by $1 trillion per year, and she found that they would have to tax every dollar earned above $50,000 at a rate of 40%. There is no way around the math. If we are going to fix this problem, no amount of taxing the rich or everyday Americans will do it. We have to fundamentally reform Social Security, MediCare, and Medicaid to get our country back on track. On Jan 1, 2026 tax rates are going to revert to what they were prior to the tax cuts. If you want to do Roth conversions, now is the time. You have five years to take advantage of the current historically low tax rates.  Every year that goes by that you fail to take advantage of those tax rates, it increases the likelihood that you will rise into a tax bracket that gives you heartburn. When it comes to Roth conversions, time is your friend and when time is short they become less appealing. When doing a Roth conversion, you have to be convinced that the tax rate you will pay today will be lower than what you would be forced to pay somewhere down the road. If tax rates are even 1% higher, then it’s probably the right move.

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 guaranteed income annuity.  The financial industry has accepted the reality of longevity risk and the benefits of annuities in mitigating that risk, but since the standard is to implement that annuity in the tax-deferred bucket it comes with a number of drawbacks and other risks. Some companies allow for piecemeal Roth conversions which allow you to convert that annuity money to tax-free. For people who say annuities are not for them, they aren’t going to like Social Security or their company pension plan since they operate exactly the same way. The Power of Zero paradigm basically says that tax rates are going to rise dramatically in the near future, and when you have the majority of your money in tax-deferred accounts like 401(k)s and IRAs, you are at risk. David advocates for five or more streams of tax-free income including the Roth IRA, Roth 401(k), Roth conversions, and LIRP. The LIRP stands out because of its additional features of mitigating long-term care and coming with a death benefit. Very few Americans will be exposed to the estate tax even if it’s lowered by Joe Biden. There are strategies you can use to avoid going past that threshold. David’s number one tip as a father of seven is that you have to remember to stop and smell the roses along the way. Have a long-term perspective and know there are precious moments that will pass you by. Starting a life insurance policy is like getting married, it only really works if it’s until death do you part. You have to make sure you have a list of things in mind when picking a policy. They are long-term contracts so have a long-term perspective when choosing one. Required Minimum Distributions may be impacted by the Secure Retirement Act working its way through Congress right now, but RMDs only affect 20% of Americans since most people will be accessing in excess of their RMD. The death of the stretch IRA is a big deal and puts an emphasis on converting your IRA to tax-free today. Even if you think your tax rate is higher now, it may still be lower than your kid’s tax rates in which case you should strongly think about doing Roth conversions today.

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 up slightly in 2022 from $204,000 to $214,000. This is something that should definitely be changed because the cost of living is not the same all over the country. There has been no change to the provisional income thresholds. If inflation continues to go up and Social Security is increased to keep up, there are going to be more people that bump into Social Security taxation.