The Power Of Zero Show

Due to low prevailing interest rates, the federal government has restricted the ability of industry experts to show the robust rates of return that LIRPs are capable of. When the Consolidated Appropriations Act was passed in the final hours of 2020 it amounted to a Christmas miracle, and it will be immensely positive for LIRPs and will position them to thrive in an environment of low-interest rates. Section 7702 is the section of the tax code that governs the tax treatment of life insurance and it hasn’t been changed in decades. The tax limitations within the section are calculated by asking a simple question. Namely, at what premium level will the policy stay in force based on the life insurance expenses and assumed interest rate? Baked into the 7702 code was the assumption that your cash value would grow at either 6% or 4%, depending on premiums. When you put money into a life insurance policy, there is a relationship between how much money you can contribute and the death benefit that you are purchasing. This is because the IRS wants to define how much tax benefit you can get, this was directly affected by the assumed interest rates. On page 4923 of the Consolidated Appropriations Act that was passed at the last moment of 2020 we find a hard coded rate of 2% for 2021 and a floating rate based on prevailing interest rates in 2022 and beyond. This essentially means that you are going to be able to put considerably more money into a life insurance policy for the same death benefit. The expenses of these life insurance policies are relatively fixed, which means you are incentivized to put in as much money as you can to maximize your return. For people between 40 and 55, the amount you can contribute has increased anywhere from 60% to 100% with triggering a modified endowment contract which would result in the distributions becoming taxable as regular income. The end result is that LIRPs are going to become more efficient going forward. Bobby Samuelson runs some calculations in his article to illustrate the differences between the past regulations and the recently passed act. Using the new 2% hard coded interest rate, the scenario illustrates that you could contribute significantly more money while still maintaining the preferential tax-free treatment, while also increasing the rate of return. This allows you to also increase the distributions over the life of the program. Because of this act, all policies will now have more efficient cash value growth, which means the LIRP will be an even more attractive alternative to those who are using it as an accumulation and distribution tool. Other countries will eventually stop loaning the US money as we experience a sovereign debt crisis, which means that interest rates won’t stay low for very long. The long and short of it is we should feel better and more optimistic about LIRPs now than we ever have. The ACLI and Finesca were primarily responsible for the new act by persuading legislators to lower the hard coded interest rate and linking it to prevailing rates in the future. This change will not affect any existing LIRPs that are currently in force but there is still some uncertainty regarding whether increasing the death benefit of an existing policy will be affected by the new legislation. This is great news for anyone who has a LIRP or is considering one to maximize their tax-free benefits.   Mentioned in this Episode: https://lifeproductreview.com/2021/01/05/257-the-section-7702-christmas-miracle

Things may seem bleak when you look at the numbers, but there are solutions that we can implement that could help our situation and ultimately prevent the worst outcomes when it comes to the national debt. David Walker’s book was divided into three parts: a wake up call, a call to action, and a way forward. He has a number of solutions that he’s proposed that meet six principles. Any solution would have to be: pro-growth, socially equitable, culturally acceptable, have mathematical integrity, be politically feasible, and have meaningful bipartisan support. We have to agree that the real metric to measure is debt-to-GDP and we need to get it to a sustainable level within a reasonable period of time. We also have to recognize that this can’t be done one reform at a time and needs to be addressed as a package. Medicare seems like the hardest nut to crack because it is tied to demographics and health care costs grow faster than inflation, which prevents the US government from printing their way out of the problem. Most Americans agree regarding gradually increasing the age of retirement over several years which was done in the 1980s Social Security reform package. Increasing the the taxable wage base cap and adjusting the benefits paid out (e.g., higher replacement rate for lower income and somewhat lower for higher income individuals) are reasonable solutions for Social Security. When it comes to healthcare there are a number of more complex issues to deal with. The first is that the US government has overpromised on healthcare. Government needs to determine a reasonable, affordable and sustainable level of healthcare that should be available to everyone and government needs to have a budget. Government will do more for the poor, disabled and veterans. The US is the only country on the Earth that doesn’t have a budget for healthcare, which is one of the reasons that there are so many healthcare horror stories in the US. If interest rates simply return to 2003 levels, the cost of servicing our current debt quintuples. Interest rates are not going to stay low, they are going to go up. The only question is how much and how fast. David Walker believes that we will not default on the debt because federal debt is guaranteed by the U.S. Constitution. The responsibilities of the federal government envisioned by the founders took up 97% of the budget in 1912. This has fallen to 29% of the budget, and was declining as of 2019. The higher the debt-to-GDP goes, the higher that taxes are likely to be, and the lower the level of economic growth we are likely to achieve. The longer we wait to solve the problem, the higher that taxes are likely to go as well. The biggest deficit the United States has is a leadership deficit. We have too many people living for today and not enough people focused on how to create a better tomorrow. The two party system is part of the problem. 43% of voters are unaffiliated, and are largely unrepresented. It ultimately falls onto the President to make this issue a top priority. We need a mechanism that engages the American people in unprecedented ways and sets the table for tough fiscal choices in Congress (e.g., a Fiscal Sustainability Commission), and the sooner we do it the better off we’ll be. President Biden needs to deal with this problem because we only have one President at a time and one bully pulpit where the message can really make an impact. We need a number of political reforms because today we have a Republic that’s not representative of, or responsive to, the general public. David recommends redistricting reform, integrated open primaries, ranked choice balloting, campaign finance reform, and 12-year term limits. Career politicians are not what the US needs. It’s not what the founding fathers intended and it’s one of the many things that we need to change to revitalize our republic. On a personal level, we need to focus on our families and our clients. We can’t control what happens in Washington but we have to take steps to hold our elected officials accountable as much as we can.

David Walker is a certified public accountant and has spent many years in public accounting. He’s run three federal agencies, two in the executive branch and one in the legislative branch. As the Comptroller General of the United States he was the chief performance and accountability auditor of the US. More recently, David Walker has run two non-profit companies and been a distinguished visiting professor at the US Naval Academy and has been on a number of boards and advisors groups dealing with a number of issues facing the US. Historically, there have been four things that have defined a superpower and the question is whether the US will still be a world superpower by the year 2040. The four main things are global economic, diplomatic, and military power, and global cultural influence. Under these definitions, in the years after World War 2 the US was the only country to qualify as a superpower, but in modern times China is beginning to overtake the US in many of those areas. China has already passed the US in terms of GDP on a Purchasing Power Parity basis. They have more embassies around the world than the US does. China is currently the #2 military power in the world today but they are dedicated to becoming #1, and they are spending a lot of money on it. Culturally, Chinese investors own the largest movie chain in the United States as part of their effort to have a cultural impact. Economics, demographics, and foreign alliances are starting to work against us instead of for us. It’s important that we wake up, learn from history, and heed the lessons from our nation’s founders, and that we start to change course so that we can remain a superpower and make sure our future is better than our past. The reasons that we are currently having problems today is because we have strayed from the values on which the US was founded. We have also not heeded the prescient warnings of George Washington: to avoid foreign wars, not have excessive debt, to avoid regionalism and factionalism. We are actually experiencing the same challenges as the Roman Empire did before it fell. It’s important that we learn the lessons of history so that we can do what is necessary to stay great and ensure greater opportunities for future generations. We were on an unsustainable fiscal path before Covid-19, and now we are in much worse shape. Debt-to-GDP in 2020 increased by 20% which is the most important metric we need to be paying attention to. It’s clear that additional legislation will be passed now that Biden will be President and the democrats control the House and the Senate. We will defeat Covid-19 but once we do, we need to put a mechanism in place that will allow us to make the tough choices that will get the debt-to-GDP ratio to a reasonable and sustainable level over the next 10 to 20 years. Prior to Covid-19, the Social Security and Medicare trustees estimated that the trust funds were supposed to go to 0 by 2035 and 2026, respectfully, but because of the economic effects of Covid-19, the years are now 2031 and 2023, respectfully. This means that revenue will still be coming in but any bills would have to be paid out of those funds. In the case of hospital insurance, payments will have to be cut 10-15% immediately and across the board, with cuts of 20-25% to Social Security benefits. All the more reason we need to recognize reality and start making the tough choices now. What are the implications of having debt balloon out of control? We have passed the all-time record for Debt-to-GDP which was previously set after World War 2. Unlike then though where we rapidly decreased Debt-to-GDP dramatically after the war, we are now adding Debt-to-GDP and plan to add more. Currently, our interest expense is not increasing because we are not experiencing regular market conditions. The Federal Reserve is buying significant portions of US debt and artificially holding down interest rates, which isn’t sustainable. The other problems stem from the proponents of Modern Monetary Theory, a theory that runs contrary to history and long established economic history. Politicians are already fiscally irresponsible, the last thing you want to do is give them an excuse to be even more fiscally irresponsible. History has shown that when debt as a percentage of the economy reaches unsustainable levels, it has an adverse effect on economic growth and this has a knock on effect on personal opportunity. Over 70% of the national budget is already on autopilot, the remaining 30% covers all the governmental responsibilities envisioned by the founding fathers. Modern Monetary Theory is dangerous and fundamentally flawed. The Biden administration will probably not adopt the theory, but even if that’s true we still need to make tough choices on spending and revenue. The problem can not be solved solely by controlling spending and economic growth, revenue will have to go up because of the reality of compounding and math. A wealth tax will enter the conversation, but it’s not possible to solve the issue only by taxing the rich. There is no question that the tax base will have to be broadened and that most individuals will have to pay higher taxes. One of the most important things to understand is that tax rates will never be lower than they are now. Assuming you will pay lower tax rates in retirement is no longer a viable plan. Tax rates may still have to double in the future, the longer we wait to make changes the more likely that’s going to be the case.

David has written a number of books on the Power of Zero paradigm for retirement and still does about 90 speaking engagements each year. He also runs a program with around 250 advisors that help him espouse the Power of Zero worldview. The basic premise of the Power of Zero is that due to the fiscal irresponsibility of the US, tax rates will have to rise dramatically over the next few years just to keep the country solvent. Combine that situation with a skyrocketing national debt and unfunded liabilities and there are massive implications for a generation that has the majority of their retirement money in the tax-deferred bucket. If you can situate your retirement assets such that in retirement you are in the zero percent tax bracket then you have effectively insulated yourself from the impact of higher taxes. If you’re in the zero percent tax bracket and tax rates double, two times zero is still zero. Conventional wisdom says that you will be in a lower tax bracket in retirement than during your working years, and that made sense in the 70’s but it doesn’t hold true for the current situation. What he found was that a lot of the deductions you enjoy when you’re working disappear once you retire and many people end up in a higher tax bracket instead. We know that the current tax rates expire on Jan 1, 2026 and they will return to what they were in 2017, but the real danger is what will happen to tax rates in 2028, 2030, and beyond. We are moving into a future where the debt we are taking on will be unsustainable and we will either default on the debt or raise taxes. It will be challenging but there are ways for people to insulate themselves from these dire repercussions. Most people believe that tax rates will be higher in the future, but they still have the majority of their retirement portfolio in the tax-deferred bucket. This means there is a disconnect between what people believe and how they act because of the inertia of traditional wisdom. Like the average person, the federal government has trouble delaying gratification. We do a lot of things as a country that help us scratch our itch in the short term but that has a lot of adverse repercussions over time. This is a problem that pervades every single part of government and society, but there are things we can do to forestall these eventualities. There isn’t an official zero percent tax bracket, but it is possible to not pay tax in retirement by positioning your money in the right amounts in the right accounts. David’s second favorite tax bracket is the 24% tax bracket because it doesn’t “cost” as much. If you’re in the 22% tax bracket, increasing your taxes by 2% will give you an additional $150,000 in shifting capacity to get more of your money into the tax-free bucket before tax rates go up for good. There is a right amount of money to shift each year that doesn’t push you up into a higher tax bracket but allows you to complete all the shifting before 2026. The Roth conversion is the workhorse that allows you to shift your money to the tax-free bucket. The Power of Zero strategy is not hard to implement. Roth conversions are relatively easy to do, in terms of not having to liquidate assets. You just have to be willing and able to pay the taxes from some other source. When you figure out your taxable income, you figure out what your highest marginal tax bracket is. David breaks down the basic process of a Roth conversion and why you should pay your tax at the time of the transfer. Your taxable bucket is your least efficient bucket. You know you have a taxable investment if you receive a 1099 form from your financial institution. This isn’t good because when you amortize those efficiencies over a lifetime, it can cost you hundreds of thousands of dollars. Shift money from your tax-deferred bucket to your tax-free bucket by using money from your least efficient bucket. In the act of paying taxes on our Roth conversion out of our taxable bucket, we are reducing our least efficient bucket and maximizing our most efficient bucket. Study the tax brackets and the fiscal condition of the country. Let’s not invest our money in a reflexive sort of way, let’s be more cognizant of the fiscal condition of the country and make investment decisions accordingly.

There are a lot of stigmas around retirement planning and David’s new book addresses two of the most difficult problems facing retirees right now, longevity risk and tax rate risk, and how to deal with them at the same time. Tax rate risk has always been a big problem for retirees, but it’s not their biggest concern. Most people worry more about running out of money before they run out of life. David has observed that financial advisors are stuck believing they can solve one risk or the other. 99.5% of advisors fall into this trap where they mitigate longevity risk within the tax-deferred bucket, and that unleashes a chain of unintended consequences that can bankrupt a stock market portfolio ten to twelve years faster than you thought possible. Daniel recommends to every financial professional he meets that they read the Power of Zero collection of books. You’re not relevant to the retirement space if you don’t have some part of your company’s philosophy centered in the Power of Zero message. David isn’t making big claims about a specific timeframe. His message is universal and experts have been saying we’ll need to deal with all this debt at some point in the future. It’s not a political issue, we all need to prepare for this. An object at rest stays at rest. People are averted to paying taxes to the IRS sooner than they need to, even if they believe that tax rates will be higher in the future. More people are coming over to the Power of Zero way of thinking. There is an incredible divide between the people who think that tax rates will never go up and those who think that the Power of Zero paradigm is the gospel of retirement planning. The biggest skeptics don’t believe that tax rates will rise in the future and the very thought threatens their way of living. David McKnight’s top three advisors to pay attention to include Ed Slott, Tom Hegna, and Van Miller. Each of them has something extremely valuable to add to the conversation. Many experts decry annuities unnecessarily and consumers need to be careful about overgeneralizing. Financial gurus on television and the internet have to paint with a very broad brush so that it applies to a large swath of people. Unfortunately, the people that need more customized strategies get sucked in by the one-size-fits-all idea. Would David ever consider hosting a moderated financial planning debate with the traditional gurus on one side and the Power of Zero paradigm on the one side? Just like in politics, there is an establishment in finance. David’s first book was the #2 bestselling business book in the world, but despite that, it didn’t make it onto any bestseller lists. David and Daniel are up against the invisible hand of the establishment to get the word out. What can we expect from the Joe Biden administration? Much of the answer depends on the Georgia runoffs and whether the Democrats gain control of the Senate. If that’s the case, Joe Biden will push through a number of changes that will affect millions of Americans no matter what tax bracket they are in. If you’re making more than $400,000 each year you better duck and cover. What should you do if you haven’t done anything yet? Start with educating yourself on where you think the fiscal condition of the country will be in the next decade or so. There are a number of experts predicting a perfect financial storm in 2030. If you believe tax rates will be lower in the future, keep putting money into your 401(k)s and IRAs, but if you think tax rates will be higher in the future then start moving money into your tax-free bucket. Be preemptive about your future retirement.

The Power of Zero occasionally gets a negative review. Today’s episode is going to deconstruct and rebut a recent one-star review and go through the different perspectives. The first claim is the book is based on a misleading assertion regarding taxes in retirement. They are basically subscribing to the idea of tax diversification and the idea that we don’t really know what taxes will be in the future, and in that case we should hedge our bets against all possibilities. This would be a fine approach if we didn’t have any data to base a decision on. That’s not the case. The current fiscal trajectory can not sustain the current level of taxation and number of prominent experts in the financial world agree. Absent a dramatic cut in spending, tax rates will have to go up and we will go bankrupt as a country. Tax rates will have to go up or eventually the interest on the debt will consume the entire federal budget. Most people believe that tax rates will go up in the future, but they also have most of their money positioned in the tax-deferred bucket. This means there’s a massive disconnect between what people think of the future of tax rates and what people are doing about it. If you believe that tax rates will be higher in the future, tax diversification is not the right solution. There is a mathematically perfect amount of money to have in your tax-deferred bucket and it’s rarely a fifty-fifty split. The second claim had to do with the LIRP and Roth IRAs. An LIRP costs an average of 1.5% of your bucket per year over the life of the program, which is undoubtedly more expensive than an index fund. You have to remember that the LIRP and an index fund are not designed to do the same thing. If low fees were the only thing we were after we would simply put everything into a savings account. The LIRP is providing a death benefit that doubles as long term care in exchange for that 1.5%. The other thing to keep in mind is that an index fund doesn’t provide long term care or a death benefit. Dave Ramsey is guilty of this comparison by not taking all the variables into the calculation. The LIRP is not a replacement for the Roth IRA, it’s meant as a complementary strategy. It’s not a one or the other choice which is how the review frames it. There is a cost that comes with low fees as well. Vanguard did a study that found people with a financial advisor had a 3% greater return over time because the advisor is there to make sure you are following through with your investment objectives. There are insurance companies that guarantee their 0% loans. David breaks down the way this works and why the review is incorrect on how the loan process works. When the Power of Zero was written the Roth 401(k)s were not that available, but since then David has spoken and advocated for those plans. The choice is not either/or, having a Roth IRA and Roth 401(k) is a good way to create more than one stream of income. The reviewer also doubts that taxes will rise across the board in the near future. If we confiscated all the wealth of the 2500 billionaires in the US it would be enough money to fund the government for 7 months. We can’t just tax the rich to solve the US debt problems. We have to broaden the tax base and this means taxes will go up for every American or the country will eventually become bankrupt. Mentioning the tax brackets of the 1960’s is not to say that those are the tax rates of the future. It’s to take people out of the belief that tax rates are low today and will always be low in the future. Tax rates ebb and flow over time. They are artificially low right now but that should not give us any false sense of security. We will likely soon see the types of tax rates we see in Scandinavia or Canada where the effective tax rate is 50%. There is no cap on interest on the national debt. Defaulting on the debt results in a global depression which is something we definitely want to avoid. A sovereign debt crisis could be the result of not reigning in spending.

Last week David did part 1 of the review of David Walker’s new book and talked about the reasons why the US will probably no longer be a world superpower by 2040. In this episode we’re going to cover the proposed solutions. 40% of Americans don’t pay any tax at all with 20% of Americans receiving a refundable tax credit. This has been used in lieu of raising the minimum wage. The federal government forgoes $1.4 trillion in taxes per year in allowable deductions. One solution would be to shore those deductions up. Tax cuts don’t pay for themselves unless they are accompanied by a dramatic spending cut. We can’t grow our way out of the problem with tax cuts. All exemptions, deductions, and exclusions would have to be eliminated. David Walker also proposes making income tax more inclusive and progressive so that everyone above the poverty level would pay taxes and more people would be invested in the system. It’s not enough to tax the rich. He also discussed a wealth tax of 2%-3% per year. This comes with a number of details that would need to be hammered out and should be considered alongside eliminating the estate tax. Broadening the tax base is just the beginning. David Walker had a number of recommendations for spending and the federal budget. The first is if a member of congress doesn’t submit their budget on time, they don’t get paid. In all but 4 of the last 60 years, Congress has failed to pass their appropriation bills by the end of the fiscal year. This usually results in all these bills being combined into a massive omnibus bill with a number of other pieces of legislation being added in. If the federal government can’t take their budget seriously and get it filed on time, how are they supposed to gain control of their spending? Whatever changes that will happen will happen under budget reconciliation which doesn’t require a supermajority. The state of California was having similar problems with their appropriation bills and passed a provision like the one proposed. They have not had a problem since. The second big pillar is recapturing control over the federal budget. In 1912 the government had control over 97% of their spending, now 71% of the budget is non-discretionary. We are writing a blank check for 71% of the annual budget and have no control over it. That’s primarily Social Security, MediCare, and Medicaid. The only program that David Walker was reluctant to cut was Social Security since it’s one of the most popular federal programs. We can not put a cap on the interest on the national debt, given enough time the interest will overtake 100% of the federal budget. We need to change our approach to debt limits. Most industrialized nations have a cap on the debt in relationship to GDP which is something the US should adopt. The debt on its own is not a problem, it's the debt relative to GDP that’s the problem. Given the scale of the debt, having a 90% cap is more realistic but will still be very difficult to meet. Any proposed tax cuts or spending increases would have to be offset so that our debt to GDP situation doesn’t worsen. The time has come for a fiscal responsibility constitutional amendment to keep the debt-to-GDP ratio at a certain level. This is currently the way the states operate and could be applied federally. These recommendations could help and David Walker has been talking about the federal debt for a long time trying to raise awareness at the grassroots, which is where the will to change has to come from. The catastrophe of the first half of the book is going to come to pass. The reality of David Walker’s vision becomes more real and inescapable with each year that passes.

David’s new book did quite well during the launch week, quickly becoming the 3rd most sold business book in the world. David Walker is well known for his expertise regarding the fiscal condition of the United States and is perhaps the person who most understands the potential impacts. Based on David Walker’s current projections for the US in the next 20 years things are not looking good. There is a real question about whether or not the US will still be a world superpower at that point. What does it mean to be a superpower? Being a superpower comes with four pillars: we are widely respected from an economic perspective, a diplomatic perspective, military power, and cultural influence. Currently, the US produces 50% of the global GDP but that number will be 18% by 2040 as China and India eclipse the United States’ productive ability. Workers to retirees will be reduced to a 2:1 ratio by 2040, which speaks to the insolvency of our entitlement programs. David Walker predicts higher unemployment and economic disparity between the classes. Because capitalism has been under attack for so long the US will have become a welfare state and the private sector will become diminished in a creep toward socialism. The growth of the economy will have stalled out between 1% and 1.25%, which is not great for American prosperity. This is a big problem for keeping down unemployment and creating prosperity for America. The debt to GDP ratio will be 170% by 2040, notwithstanding huge tax increases, major reductions in tax spending, and constrained investments. This isn’t reflecting the real debt to GDP ratio when you include unfunded liabilities. Due to higher debt levels and interest rates, there will be more protests against calls to raise taxes just to pay interest on the debt. If the US defaults on its debt it will precipitate a global depression. Even the Modern Monetary Theory enthusiasts will be concerned. David Walker is not a follower of MMT and believes that the US will experience hyperinflation, the likes of which hasn't been seen since the 1970s, followed by stagflation. The global consensus by 2040 will be that China is considered the most powerful country on Earth, as judged by the four pillars mentioned earlier. The threat of military conflict will increase but the US will be weaker from a conventional military capabilities perspective because most of the money will be going to pay interest on the debt. Our own fiscal responsibility will become our greatest weakness. Most countries in the world use the US dollar to transact but that will change as the dollar becomes unstable. The federal government of the US economy will comprise 28% of the economy, and when combined with state and local spending the number will balloon to 40%. This will lead to a misallocation of resources and less private investment. 50% of graduates from public education will lack basic language, math, and technology skills. Politicians will be calling for higher taxes and more wealth redistribution. This will result in poverty rates in seniors to skyrocket due to changes that will have to be made to Social Security and Medicare. Many wealthier individuals will leave the US, primarily leaving for Canada. For the first time in history, the quality of life of future generations of Americans may not be better than in the past. We don’t face an immediate crisis, which is part of the problem. We are headed to a very bad place unless we can make some serious changes to shore up the fiscal conditions of our country.

The historical paradigm says to put your money into a 401(k) or IRA, get a tax deduction and let that money grow tax-deferred so that when you take that money out you’re in a lower tax bracket. Experts and economists are starting to look at the fiscal condition of the US and the picture isn’t good. The US is $23 trillion in debt with unfunded obligations of upwards of $239 trillion. We are marching into a future where the very solvency of the US government is being called into question. We are going to have multi-trillion dollar deficits over the next decade and the debt is only going up. What are the chances that taxes are going to be lower in the future given that reality? The paradigm has been flipped so the focus is now wringing every bit of efficiency out of your retirement accounts. Taxes are on sale right now. Experts have been saying for years that we need to raise revenue and lower spending, but the federal government has been doing the opposite. The 2017 tax cuts that were introduced have an expiration date in 2026, which means we only have six years to take advantage of these historically low tax rates. When you’re retired, every day is Saturday. The average retiree shouldn’t expect to spend less in retirement and studies have backed this finding up. To get to the zero percent tax bracket, the first step is accepting that taxes are going to be higher in the future than they are now. Many notable experts agree that tax rates will have to be dramatically higher than they are today, just to keep the country out of bankruptcy. The second step is to realize that there is an optimal amount of money to have in your three buckets in a rising tax rate environment. In your taxable bucket you should have no more than six months of expenses. In your tax-deferred bucket you want your balances to be low enough that required minimum distributions are offset by your standard deduction and don’t cause social security taxation. Everything else should be systematically shifted to the tax-free bucket. If you don’t have a pension or any other residual income in retirement, you probably shouldn’t have more than $350,000 in your tax-deferred bucket. Everything else should be safely ensconced in your tax-free bucket by 2026. Most people don’t recognize the fact that your social security can be taxed and many financial professionals don’t even know what provisional income is. If you have too much provisional income, up to 85% of your social security can become taxable to you at your highest marginal tax bracket. When that happens you will run out of money five to seven years earlier than you would have otherwise. Plan for RMD’s before they happen to you. Right now, the IRS is not requiring you to pay taxes on your money until age 72, but the question is “does that really make sense?” For most people it makes more sense to preemptively pay taxes on your terms, so that you’re not paying taxes on the IRS’s terms at age 72. Leaving a large amount of money in your IRA or 401(k) that you want to leave to your children is also a poor choice. They will be forced to pay taxes on that money over the course of ten years and it won’t be unusual for people who inherit these accounts to pay upwards of 50%. Unfortunately the paradigm that most CPA’s work in is to keep you as a client which means keeping you happy by saving you money this year instead of in the future. The Power of Zero paradigm is about changing this perspective. The best way to learn about the Power of Zero paradigm is by reading David’s book or just listening to David Walker. If your advisor hasn’t told you about this, it’s for one of two reasons. Either he or she doesn’t know about it, or he or she knows about it but they are not telling you about it. There isn’t any one tool you can use to get to the zero percent tax bracket. It usually requires four to six streams of tax-free income. Generally, anything with the word Roth in front of it is a good idea. One thing that many people overlook is paying for long-term care. People aren’t opposed to having long-term care insurance, they’re just opposed to paying for it, which is why David recommends the LIRP as a great option. The general conclusion of the experts seems to be that tax rates will have to double by 2030. Governments are not currently doing anything about the debt and tend to wait until the last hour to act. The government likes to kick the can down the road. The problem with this approach is that the fix on the backend will be all the more draconian and severe than if they simply put a permanent fix in place today. There are a few people that doubt the prognostications of tax rates being higher in the future than they are today but we are starting to run out of critics. Since social security, Medicare, and Medicaid are tied to inflation it’s impossible to print our way out of our problems. The more the debt grows, the less opposition there is to the Power of Zero paradigm. The math doesn’t lie. Tax rates have to go up or we will go broke as a country, therefore we need to change our entire approach to retirement planning. The math will show you the path. David takes his clients through three different scenarios showing them what would happen if taxes stay the same and they do nothing, taxes double and they do nothing, and taxes doubling but they implement the Power of Zero paradigm. There is really no downside to the Power of Zero strategy because tax rates would have to go down in order for it to be the wrong choice. If you want to adopt the Power of Zero approach to retirement planning you need to find someone who has walked that path before.

The Securing a Strong Retirement Act is a bipartisan bill currently working its way through the house and has major implications for everyone in the country. We are finally getting some relief from RMD’s. With life expectancy increasing they are looking at pushing out Required Minimum Distributions until the age of 75. This primarily benefits people of substantial means since the average person with money in their retirement accounts are withdrawing it above and beyond the minimum and well before age 75. Another interesting provision has to do with student loan debt. The new bill stipulates that people putting money towards paying down their student debt could have an equal amount of money put into their 401(k). It also says that if you have balances in your 401(k) or IRA you would be completely exempted from taking a Required Minimum Distribution. Seniors will also be able to count certain donations towards their RMD. Under the current law, there is a catch-up provision on the books. They are proposing that if you’re over the age of 60 you will be able to catch up even more. If you believe tax rates are going to be dramatically higher in the future than they are today this is an opportunity to put additional funds into a Roth IRA. There are massive expansions of the buckets into which we can contribute after-tax dollars and allow them to grow tax-free. The average person changes industries seven times over the course of their lifetime and another provision would help people get reconnected with 401(k) accounts that were forgotten or left behind. The biggest takeaway from this new bill is that you will be able to make more contributions to Roth 401(k)s and Roth IRA’s. The goal is not to get a deduction at historically low taxes, we want to pay the taxes at historically low levels so that when taxes are dramatically higher down the road we can take that money out tax-free. If you’re just out of college, this bill will be an opportunity for you to get a jump start on your retirement savings while you’re paying down your student loan debt at the same time.