The Power Of Zero Show

In every single book David has written he talks about why it's so important to have a trusted and trained advisor in the Power of Zero paradigm. There are dozens of pitfalls standing between you and the zero percent tax bracket which is why it's crucial you have a qualified guide to show you the way. You should work with an advisor that has internalized the Power of Zero principles to help you mitigate both tax-rate risk and longevity risk at the same time. The Elite POZ Advisor Group is a collection of trained professionals that have been vetted by David himself. There are a number of requirements that someone needs to have completed before they can enter the group. Elite Advisors need to have been in the industry for a few years and have demonstrated the ability to answer the client's questions and lead them through the Power of Zero process. Every member of the Elite POZ Advisor Group has also passed a comprehensive written exam. Many advisors have tried and failed to complete this exam because you need to have an in-depth knowledge of the Power of Zero paradigm. Elite Advisors also have to sit through an extensive ten-part training course that covers a number of different case studies and covers all aspects of the Power of Zero retirement strategy. On top of all that Elite Advisors receive ongoing training directly from David to keep them apprised of tax law changes and updates on the approach. When it comes to getting to the Power of Zero tax bracket and tax-free retirement planning, not all advisors are created equal. The Elite Advisors group is the gold standard of the Power of Zero paradigm and if you're working with one of them you can be assured that you are in good hands. Go to elite-poz.davidmcknight.com to find out what the advisors have been through to be part of the elite group. Advisors can go to powerofzero.com to find out how to become part of the Elite POZ Advisor group. There are a number of financial advisors preaching the Power of Zero approach but ultimately they just want to sell you a life insurance policy. That is not what the POZ paradigm is about. It's about having multiple streams of tax-free income and there is no cookie-cutter approach. In the POZ paradigm, most advisors' basic impulses are the exact opposite of what they need to do to lead their clients to the zero percent tax bracket. Head to davidmcknight.com to be connected with an Elite Advisor to help you.

Should Donald Trump win a second term in the Presidency there could be significant changes to the tax code. Donald Trump hasn't laid out a fully realized tax proposal in the same way that Joe Biden has but he has outlined some of the things he would do. One of the things that Donald Trump has already done is unilaterally implemented a payroll tax deferral as an answer to the financial repercussions of Covid-19. It's currently deferred, which means that the money would have to be paid back in 2021, but there are rumors that he would waive that entirely. There have been additional rumors that Donald Trump is thinking about eliminating payroll taxes completely, which would put Social Security and Medicare in difficult positions as they are already underfunded. Unless you subscribe to Modern Monetary Theory (MMT) and the idea of the government's infinity bucket, that's probably a bad idea. The second thing Donald Trump would hope to do is modify the capital gains tax or index them to inflation. The idea being that the cost of doing business would decrease overall and to encourage investment. He has also proposed that the US indexes long term capital gains to inflation as well. David walks through a practical example of what this would mean for the average investor. Should this policy be implemented it would certainly have a positive impact on economic activity and investment in small businesses. The third thing that Donald Trump is considering is a reduction in taxes on the middle class. The current tax brackets are scheduled to expire in 2026 and Donald Trump is looking at a 10% tax cut for middle Americans, although the exact details aren't known at this point. This particular policy could be interesting if implemented, but it would require the Republicans to have control of the House and the Senate to make the tax cut permanent. The fourth thing the President is looking to do is create tax credits for American businesses. He wants people to buy more American products so these tax credits are focused on making American businesses more competitive, particularly in the pharmaceutical and robotics industries. He's also looking to expand the opportunity zones created under the Tax Cut and Jobs act. Keep in mind that none of these changes have been committed to or put down on paper, they've just been some thoughts and ideas discussed so far. David quickly recaps the five tax proposals coming out of the Trump administration. Once we know who our next President is going to be, we'll have a little more clarity about what to expect in terms of taxes for the next four years.

There is a benefit in the tax code that goes largely ignored. The holy grail of financial planning is an investment that gives you a tax deduction on the front end, lets your money grow tax-deferred and allows you to take that money out tax-free. In the Power of Zero paradigm that usually means a combination of Roth conversions and LIRP conversions. For most married couples, the ideal balance of the tax-deferred bucket is between $300,000 and $350,000. In that situation it qualifies as the holy grail of financial planning. There is a second way to accomplish the same tax-free holy grail: through an HSA or health savings account. When you put money into your HSA you get a deduction, the money grows tax free, and when you take it out for qualified medical expenses you don't pay any taxes at all. David breaks down the two scenarios of either having an HSA or not having an HSA in the event of a healthcare issue. With an HSA, healthcare expenses are not taxed. Most people go wrong with their HSA by not using all three tax advantages. They take advantage of the tax deduction on the front end and take the money out tax-free, but they're not taking advantage of the tax-free interest in investment earnings. HSAs are designed to grow the investments inside of them. Instead of using the HSA as a slush fund for smaller, out of pocket medical expenses when you're young, let your precious tax-free dollars experience the ability to grow in a tax-free environment. Use that money when you're older after it's grown and those medical costs are usually higher. Keep all your receipts for medical expenses along the way. There is nothing that says you need to get the reimbursement from your health savings account in the same year that you make the purchase. Let your HSA accumulate tax-free and build steam. It's also important to keep the receipts in case you get audited. You will need to prove that you had a qualified medical expense and that you paid for it. With just a little tweak, you can use all three tax advantages that the HSA confers. Pay for your medical expenses out of pocket now and let that money accumulate tax-free. People don't think of the HSA as the tax-free vehicle that it is, just like a Roth IRA. We are always told that we are either going to be taxed on the seed or the harvest, but with the HSA you are taxed on neither the seed nor the harvest. The problem is people don't let their HSAs grow. If we can all make a little tweak to how we treat our HSAs, we'll have another tax-free bucket to take advantage in the Power of Zero paradigm. There are lots of tax-free streams of income out there and we're not taking advantage of all of them like we should.

A quick recap of the first principles covered in the previous episode. #1 Mitigate longevity risk with an income annuity. #2 Your income annuity only needs to cover your basic lifestyle expenses. #3 Your income annuity needs to have a guaranteed lifetime income feature, inflation protection, liquidity, and a death benefit feature. #4 Cover discretionary expenses with your stock market assets in your LIRP. #5 Always draw your guaranteed lifetime income from your tax-free bucket. #6 Your LIRP must have a chronic illness rider. The seventh principle is to use a time segmented investing approach to grow your assets safely and productively during the time when you are doing your piece meal Roth conversion. If you leave your money in your stock market portfolio you expose yourself to a sequence of return risk. Time segmented investing is about having bonds mature in the year when you know you will need the income and allows you to mitigate the sequence of return risk. Whatever money that isn't going into your LIRP or annuity should be going into an aggressive stock market portfolio. Since you have the luxury of taking money out of your LIRP and guaranteeing your lifetime expenses, you can take much more risk in the stock market. You need to have multiple streams of tax-free income, none of which show up on the IRS's radar, but all of which contribute to you being in the zero percent tax bracket. Preferably between four and six streams of tax-free income, each with unique benefits. Don't take social security until you're ready to draw income from your guaranteed lifetime income annuity. Outside of a short expected lifespan, you should be putting off social security as long as you can, at least until you've paid off your piece meal internal Roth conversion. Identify the ideal balances in your taxable and tax-deferred bucket and shift everything else systematically to tax-free. In a rising tax rate environment, there is an ideal amount of money to have in your taxable and tax-deferred bucket. As of right now, you have six years to reposition your money into the tax-free bucket. Get all your asset shifting done before tax rates go up for good. You have to know what your magic number is and how much money you need to shift to tax-free between now and 2026. Understanding these principles will shield you from longevity risk and tax rate risk. Unless you have the ability to mitigate both risks in the same financial plan, you are going to have a very hard time being fully at peace with your retirement plan. Nobody wants to have to keep constantly looking over their shoulder in retirement.

There are 12 basic principles that make up the Grand Unified Theory when it comes to retirement planning. The first section tackles mitigating longevity risk. We know there are two basic ways to mitigate longevity risk, the first simply being to save up enough money. If you save enough money you can weather all the ups and downs of the stock market. Historically, there has been a 4% Rule that makes the calculation simple. More recently the rule has been revised. The new 3% Rule is more common. If you need $100,000 per year in retirement the 3% Rule says you need $3.33 million to successfully mitigate longevity risk. This is a very expensive way to mitigate longevity risk but it can be done. A better option is an income annuity. The number one principle is to mitigate longevity risk with an income annuity and not by way of the stock market. The second principle is to only use the income annuity to cover certain expenses, essentially your basic lifestyle needs. You just need to cover simple lifestyle needs because other vehicles are better suited to other expenses. The money that doesn't go into the annuity needs to be grown and compounded in another part of your portfolio. The third principle is that your annuity has to have four qualities that you absolutely must have before you commit. It must have a guaranteed lifetime income feature and is designed to last as long as you do. It must have inflation protection because without that inflation could erode your value and leave you looking at a shortfall. Your annuity should also have liquidity in the years prior to electing that guaranteed lifetime income feature. Not all annuities have liquidity which can give people a sense of heartburn in the case where they need that money. That last component is a death benefit feature. Without this, there is the potential for the annuity to be the worst investment you've ever made. With the death benefit feature, in the case that you die earlier than expected at least, your beneficiaries will get the portion that wasn't spent. Once your lifetime expenses are covered by your annuity, you need to look at the rest of your portfolio. There are two types of discretionary needs, emergency expenses, and aspirational expenses, and they will pop up over the course of your retirement and you have to have the ability to grow your money productively to take care of them. You will have two pools of money to draw from to cover those expenses, the first is your stock market portfolio and the second is your LIRP. The rule of thumb is to draw money from your LIRP during down years in the market during the first 11 years, but when the market is up you are simply harvesting the profits from your portfolio. Never withdraw assets from your stock market portfolio following a down year in the market. If you are planning on having an annuity to cover your lifestyle expenses in retirement, you need to draw that money from your tax-free bucket. The idea that annuities are only tax-deferred is a misconception. You should be using piecemeal internal Roth conversions to convert your IRA to a Roth IRA, taking however much time you need to stay in a low tax bracket. This is very important because if you draw that guaranteed lifetime income from your tax-deferred bucket, it will always be taxable. As tax rates go up, the amount you get to keep goes down. It can also lead to social security taxation and running out of money ten to twelve years faster. The last principle is to make sure your LIRP has a chronic illness rider. In retirement, one of the things that can really upset your financial position is a long term care event. A chronic illness rider gives you the ability to spend your death benefit for the purpose of paying for long term care. A quick summary of the first six principles of the Grand Unified Theory on a happy retirement.

Joe Biden has historically said that taxes won't go up for anyone that makes less than $400,000 annually , but that may not be the case. Some people may lose some deductibility in their 401(k) contributions which would result in an effective increase in the tax they are paying. If you are in the highest marginal tax bracket of 37%, when you contribute $1 to your 401(k) you essentially save $0.37 in tax. Joe Biden's perspective is that for people in higher income tax brackets, the tax savings is unduly weighted towards them. The current proposal involves a standard rate at which everyone could deduct money from their 401(k). The exact number is still unknown, but economists are estimating the rate would have to be around 20% to be revenue neutral. This would basically mean that instead of deducting the full $0.37 at the highest marginal tax bracket, you would only deduct $0.20. For people in lower tax brackets, they would get a higher deduction than they otherwise would have. The ramifications of this proposal would mean that people in the higher income tax brackets of 22% or above will skip the deduction. Instead of getting the deduction, higher income earners will likely start paying the taxes on their money today, especially given that we are in a rising tax rate environment. This negates the usual discussion about whether it's superior to save on paying the taxes today and waiting until retirement, since the deduction is not likely to be much higher than the tax rates you will face in the future. The net effect of all this is that it is going to accelerate the flow of money into tax-free accounts. As things are, there isn't much reason to forego a 37% deduction today, but if that deduction changes, it's not going to be very attractive at all. Given this proposal, we are going to see more people foregoing putting money into their 401(k) and looking more towards tax-free options. Despite Joe Biden's pledge to not raise taxes on anyone making less than $400,000, people who make $200,000 or more will find they will be paying more taxes if they no longer have the ability to deduct 401(k) contributions at their highest marginal tax bracket. Anyone who is in the 22% tax bracket or higher will likely stop making 401(k) contributions and start redirecting those contributions to Roth 401(k)'s or other tax-free plans. The silver lining to this is that more people will contribute to tax-free accounts and end up being better prepared for an eventual rise in tax rates. If Biden does get elected in November, many people are going to have to reassess their approach to saving for retirement. Another thing to keep in mind is the rumor that should Joe Biden get elected, he may bow out at the two-year mark. This could potentially lead to 10 years of Kamala Harris in the presidency.

There are five important elements your LIRP must have if you are going to have it for the rest of your life. Similar to getting married, these are things you need to look for before committing to the plan. You don't want to get 10 or 20 years in before you realize there is a ticking time bomb in your LIRP. The first thing your LIRP must have is the ability to get a guaranteed zero percent loan. The best strategy for your LIRP is to work with a company that allows you to take a loan against your plan with a net cost to you of zero percent. This means you have to be diligent in assessing the contract and make sure the guarantee is part of it. Some companies reserve the right to adjust the loan interest rate at their leisure which is exactly what you want to avoid. The caveat is here is that just because someone is saying that they are giving you a zero percent loan, that doesn't mean it's guaranteed. This is one of the most important provisions in your contract. The second thing to look for is interest in arrears, not interest in advance. The problem with interest in advance is the lost opportunity cost over the course of the year. Some companies credit you in a way that makes interest in advance work in your favour, but they are few and far between. The third thing to look for is a strong financial rating. There are several rating companies, and the way they rank financial products can vary, or even contradict each other. The best way to determine the financial footing of a company is to use a Comdex rating instead. A Comdex rating below 90 is a sure sign you should avoid that company, and ideally, you're working with a company with a rating of 95 or higher. The fourth thing your LIRP must have is called an overload protection rider. In order for your death benefit to pay out, your cash value must be at least $1. If your cash value runs out before you die, there are some intense tax repercussions. An overload protection rider is like a failsafe that protects you from that scenario by lowering your death benefit. The last thing your LIRP absolutely must have is a chronic illness rider. This rider allows you to access your death benefit in advance of your death for the purpose of paying for long-term care without paying anything along the way. Compared to a long-term care rider, where you are paying money along the way for the privilege of receiving 25% of your death benefit in advance of your death, the chronic illness rider is superior. If you pay for a long-term care rider throughout your retirement and you die peacefully in your sleep without ever having needed long term care, all of those expenses were a drag on your cash value along the way. You end up having paid for something that you never had to use. A chronic illness rider doesn't have the same opportunity costs. For more info on the 20 things your LIRP must have, check out the book Look Before You LIRP, preferably before you commit to a life insurance policy that doesn't have what you need in it.

It is possible to convert too much money to your Roth IRA and not leave enough money in your IRA to use when you're ready to retire. The first principle you have to realize is that in a rising tax rate environment, it's okay to have some money in your tax-deferred bucket. You have to be very strategic about how you shift your money to tax-free and shouldn't be too reckless when it comes to converting. You can have too much money in your tax-deferred bucket, you can have too little, what we are looking for is just the right amount. You should have a balance in your tax-deferred bucket that's low enough that required minimum distributions are equal to or less than your standard deduction, but also low enough that it doesn't cause social security taxation. Social security taxation could put a $6000 hole in your social security, which will require you to spend down your assets much quicker to compensate. Check out davidmcknight.com and use the Magic Number calculator to figure out the perfect balance you should have in your tax-deferred bucket. The higher your social security, the less money you should have in your tax-deferred bucket. Having too little in your tax-deferred bucket can also be a problem. If you rush into converting all your money to tax-free you may end up paying considerably higher taxes along the way, completely unnecessarily. If by the time you're 72 you don't have any money left in your IRA, your standard deduction is left idle. This means that in the process of executing your Roth conversion, you paid some taxes along the way that you didn't need to pay and have over-converted your Roth IRA. You have to keep in mind the opportunity cost. Any time you pay a dollar to the IRS that you didn't need to pay them, not only do you lose that dollar but you also lose what that dollar could have earned for you had you been able to invest it. As a general rule of thumb, if you have a large pension your ideal balance in the tax-deferred bucket is going to be zero. For everyone else, the typical range is between $250,000 and $400,000 depending on the sources of provisional income you're expecting. All streams of provisional income will affect your ideal balance. The more you have, the smaller the ideal balance in your tax-deferred bucket. If you should have had $400,000 in your IRA but converted it unnecessarily to tax-free you will have probably paid at least 25% of that as taxes. What could you have done with that lost money? While your standard deduction does index for inflation over time, your provisional income threshold does not. If you want to avoid social security taxation, you need to keep your tax-deferred bucket under a static number. The Power of Zero approach typically includes having 4 to 6 different sources of tax-free income, the most common of which are RMDs. Tax-free RMD's are the holy grail of financial planning because when you put money in the front end you get a deduction, it grows tax-deferred, and when you take it out it's tax-free. The RMD should be used as a compliment to other tax-free sources, not the only one you are relying on. It's okay to have some money in your tax-deferred bucket. Sometimes in our zeal to get our hard-earned money over to tax-free, we needlessly pay taxes along the way, and that's the massive mistake we're trying to avoid. If you get your tax-deferred balance down to zero, your standard deduction will sit idle.

A government can't simply print however much money they want to be able to buy whatever it is that they want. The Deficit Myth was recently released and in the book the author argues that because the government issues its own currency, it doesn't have to operate like a traditional household. According to the author, all we need to do is print $239 trillion and the US will be funded for the next 75 years. Stephanie Kelton is a proponent of what's known as modern monetary theory, which is essentially the belief that the government can print its way out of its problems at any time. One argument for this theory is that it's okay to inflate the money supply as long as the economy inflates at the same rate. The trick is in what proponents of the theory are proposing they use the newly printed money for. The Green New Deal has an estimated price tag of $93 trillion, but if that money were printed today would it actually productively grow the economy? The government can't replace the productivity that takes place in a free market economy. The government can't guarantee that a job that it creates is going to benefit the economy in the same way that a private enterprise, when they create a job, can grow the economy. Governments tend not to be able to allocate resources efficiently in the same way a private enterprise can. Elon Musk just sent two astronauts into space in the first commercial space flight, and he did it far more efficiently and quicker than his government counterparts. Some of the biggest criticisms of modern monetary theory come from the left hand side of the aisle. Paul Krugman has warned the US will see hyperinflation if they adopt the theory. Inflation is a type of tax, but it's more insidious than a tax increase because at least with a tax increase your representatives have to vote on it. Inflation is like a hidden tax that devalues your money in the same way as tax increases but without any legislation. If the government printed money to pay off the national debt, we know that inflation would rise and that would decrease the value of US bonds, resulting in a sovereign debt crisis. This eventually leads to a spiral of rising interest rates and crowding all other expenses out of the budget. Printing money ultimately creates more problems than it solves. There are three programs that are primarily driving our national debt; Social Security, MediCare, and Medicaid, and those programs are tied to inflation. The US can't print its way out of its problems, the only option is to raise more revenue via higher taxes. Modern monetary theory is dangerous to the US economy and population and will eventually result in major problems for everyone involved. In the end, we need to become more fiscally sane and fundamentally respect the financial laws of the universe. We know that we shouldn't spend more than we bring in, so we have to be wary of approaches that fly in the face of common sense.

There is a well-known economist named William Bernstein who originally asked the question "When you've won the game, why keep playing?" But should people who are retired avoid the stock market completely? An article on the Motley Fool follows the same line of thought. You do need a plan for withdrawing your money in retirement that is different from your plan for building your nest egg and it needs to be in place before you need to withdraw from your assets. A good rule of thumb is to not have money that you expect you will have to spend in the next five years invested in stocks. If you want to mitigate longevity risk and tax-rate risk, the only way is to have an annuity that gives you a tax-free stream of income for life. If it's inflation adjusted, that's even better. The issue is that most annuities are implemented in the tax-deferred bucket. You must find an annuity that allows you to do a Piecemeal Internal Roth Conversion and convert that annuity over time to a Roth IRA. Accomplishing this during the first five years of retirement is where most people run into problems. Chuck Saletta doesn't completely discount the idea of investing in the stock market during retirement, but believes that for the money you need several years from now, the stock market is one of the few ways to generate the returns you need to accomplish those goals. Ultimately, as you transition to relying on your portfolio to cover your costs of living, you will want to strike that balance between short and long term money. Just because you've won the game, that doesn't mean that you can't do even better over time. In the Power of Zero paradigm, after you have set up the systems to afford your lifestyle expenses in retirement you will still have other discretionary expenses that will arise. These can include healthcare expenses, family requirements, or aspirational expenses and go above and beyond your lifestyle requirements. Any money that is not earmarked to paying for lifestyle expenses, taxes on Roth Conversions, and LIRP contributions during the first five to six years of retirement should be allocated to an aggressive stock market portfolio. This gives you the ability to wait a year and allow the stock market to recover if necessary before drawing money from your portfolio. The bottom line is that you need to keep money invested in the stock market for all the expenses that will be earmarked after the Roth Conversion. You need to grow that money as efficiently as possible over the expected 30 years of your retirement if you want to have any hope of being able to pay for your discretionary expenses. Just because the numbers say you've won the game, that doesn't mean it's time to take all your money out of the stock market. Instead, you should be guaranteeing your lifestyle expenses and anything else above that you can invest and take more risk on. Clients of the Power of Zero paradigm will also be funding their LIRP during the first five to seven years of retirement, which grows safely and productively and can be used to cover discretionary needs after the eleventh year. You should not be taking risk in investments that are going to be used to fund expenses early on in retirement. Work with your advisor to create a timeline that incorporates the right level of risk with investments that mature at the right times during your retirement. Once the Roth Conversion period is up, whatever money is not earmarked for the first five or six years of your retirement should be allocated to your high octane stock market portfolio so you can pay for any additional expenses you will need to cover. Stocks are not toxic once you retire, it is absolutely necessary that you continue to invest in stocks in such a way that your account lasts long enough to cover your discretionary needs during the balance of your retirement.