The Power Of Zero Show

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.

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.

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.

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