The Power Of Zero Show

When you take social security ultimately comes down to how long you are going to live. If you can accurately predict how long you are going to live you can accurately predict at what age you should draw social security. The question becomes “how do you figure out how long you’re going to live?” One of the best answers is to simply go through the underwriting process for the Life Insurance Retirement Plan. When you go through the underwriting process you get one of thirty different ratings and you can use that to help determine when the best age to take social security is. If you presuppose that you are going to live a nice long life you should put off social security for as long as you can. For every year after your full retirement age that you put off taking social security your monthly benefit increases by 8% per year. A Roth Conversion counts as provisional income. If you do that in the years that you are taking social security you could cause up to 85% of your social security to become taxable. This is why it’s not a great idea to take your social security at a young age. If you take social security at 62, you are also locking yourself in to the lowest amount of social security you could get. If you are doing Roth Conversions while taking social security at the age of 62, not only are you taking the lowest amount, you are also having your social security taxed. Any money taxed could have gone to accrue interest that would have benefitted you for the rest of your life. The longer you live, the better off mathematically you are taking social security as late as possible. It also gives you more time to get your Roth Conversions done. There are a lot of benefits to pushing your social security off, especially if you are going to live a long life and plan on doing Roth Conversions. It comes down to going through the underwriting process and seeing if you can qualify for a Life Insurance Retirement Plan. If you get a good rating, it makes sense to puch social security off as much as possible. If it looks like you’re not going to live very long, then take your social security as soon as you can. There is a huge opportunity cost when you pay a tax that you didn’t otherwise have to pay. Not only do you lose that tax, you lose what the money could have earned for you by investing it.

You’re saying tax rates are going up, so you mean I’ve done this all wrong? Not necessarily… you want to put money into your tax deferred bucket when the deduction means the most to you, when tax rates are historically high. You want to take money out of your tax deferred bucket when taxes are low. Most people put money into their tax deferred accounts during a time when tax rates were higher than they are today. Starting Jan 1, 2018 and going until Jan 1, 2026, we have currently have as a low a tax rate as we will experience in our lifetime. Whether this becomes a deal of historic proportions for you will depend on what you do over the next 7 years. We now know the year and the day when tax rates will go up so if you play your cards right you can reposition your money from tax deferred to tax free and do all the heavy lifting to protect those assets. It’s easy to get discouraged when talking about the fiscal realities facing our country. In 2035, Social Security will go bust, the same will happen for Medicare in 2026. It’s important to start repositioning your money to be tax free quickly enough to get it done before 2026 but slowly enough that it doesn’t give you tax heartburn. We will look back at 2019 as a time when tax rates were at historically low levels and it was the tax deal of our lifetimes. David has been saying that tax rates are going to go up for a long time now, so some people are beginning to doubt whether or not the message is true. With the 2018 Trump tax cuts, we did the exact opposite of what we were supposed to do. This means that when the tax rates do come due, and they will, they will be all the more draconian and austere. We always kick the can down the road and wait as long as possible simply to avoid making the tough decisions because tough decisions are what get politicians voted out of office. Finland is going through a similar situation as America, they are trying to reform their universal health care because the program is going bankrupt but now they are mired in a major financial crisis because no one would vote for the reform. This is your window of opportunity to take advantage of historically low tax rates. If you have a ton of money in your tax deferred bucket, this may be the perfect time to reposition it into your tax free bucket.

The question often comes up, which is better? A chronic illness rider or a long term care rider? For 50 to 65 years, the primary benefit of the Life Insurance Retirement Plan is the ability to receive your death benefit in advance of your death in order to pay for long term care. The long term care rider basically says that for an extra charge you can receive your death benefit in advance of your death at a certain rate per month. Requiring assisted living in two out of six activities of daily living triggers eligibility for this benefit. One critical thing to note is that since it’s a long term care rider, the insurance company is going to underwrite you for long term care. This means that if you have an existing health problem it can be cause for rejection of your application. It also comes with an additional cost where you are paying for the option to take your death benefit early on the front end. If you die peacefully in your sleep without ever needing long term care you don’t recoup that money. The chronic illness rider is essentially the same as the long term care rider with the same trigger conditions and a similar pay out. The main difference is that the insurance company doesn’t charge you on the front end, they charge you on the back end. The insurance company will discount the payout based on a function of your age as a way of compensating themselves for giving you the money prior to when they expected they would. Another difference between the two is that the insurance company will not underwrite you for long term care with the chronic illness rider. Even if you have an existing health problem they will accept you which makes it a great option for people that would otherwise not qualify. One of the biggest problems with the traditional long term care approach is that you are paying for something you hope you never have to use and if you don’t use it you don’t get the money at the end. It’s not that different from the long term care rider. You’re paying extra up front and that is money that could have been invested in your growth account. David prefers the chronic illness rider over the long term care rider mainly because if you do die peacefully in your sleep without having used the money you don’t lose any money along the way. There is no drag on your cash value or opportunity cost of paying for something you never wanted to use. Being able to qualify for a chronic illness rider if you have an existing health condition is also a big advantage, and it neutralizes the single biggest source of heartburn that comes with traditional long term care approaches. The primary motivation for many of David’s clients that use the LIRP is the long term care aspect and David typically recommends a chronic illness rider. It comes with many of the benefits and nearly none of the downsides. [ Between the two options for your traditional life insurance approach to long term care, the chronic illness rider is probably your best option.

After seeing what happened in 2008, Doug has been interested in creating films that can move the needle for society, specifically topics like the national debt, exercise, education, healthcare, and finances. In 2009, David Walker produced the landmark movie “IOUSA” that exposed the fiscal challenges facing the United States, and in many ways, he was the person that got Doug interested in the topic of national debts. Films have a finite lifespan, so creating another film on the topic is another chance to reach new audiences that haven’t heard the message yet. The audience for the Power of Zero film is geared more towards financial advisors. It is more focused on how to protect yourself and is less about a call to action to prevent anything. That time has passed already. 8 million Baby Boomers are marching into a future where tax rates are likely to be much higher than they are today given our fiscal reality. The movie not only raises your awareness of what’s happening, it also tells you what you can do about it. There are a number of prominent guests interviewed in the movie and in many ways, it was a major challenge getting them on board. There are almost no documentaries being made on the topic and it’s a major hurdle to get people to talk about it. Many economists were reluctant to speak on the topic after “An Inside Job” came out and people saw the way the featured economist was treated. Doug had to get a few prominent economists on board before anyone else would entertain the idea.  There were two people that really stood out to Doug who were in the film, Martin Eichenbaum and Tom McClintock. Everything Dr. Eichenbaum said would happen has come true. His message was basically “It doesn’t matter how we look at the problem, taxes are going up.” Tom McClintock was interesting for different reasons, mainly because of his ability to pull back the curtain of what really goes on in American politics.  One of the things Tom McClintock talked about was a sovereign debt crisis which happens when countries stop loaning us money because they believe we won’t be able to pay it back. When that happens, that’s when we really run into trouble.  It’s not possible to print our way out of the problem. Many of the social programs are tied to inflation so if we print money, the cost of those programs go up commensurately. If we can’t print money or borrow money, the only remaining options are raising taxes or cutting spending.  Seeing what the real numbers are, and understanding the fact that even if taxes were raised it wouldn’t do too much to fix the problem, has Doug deeply concerned about the issue. There is no scenario that Doug sees where taxes do not get much higher than they are now and he’s expecting some tough times ahead for the United States.  Doug didn’t want the film to be too focused on the doom and gloom aspects of the problem. It will get ugly, but it’s not the end of the world.  When you get down to it, the country is either going to have to double taxes, cut spending in half, or some combination of the two. Many of the film’s guests believe that we can still avoid a catastrophe if we change things soon enough.  The biggest difference between the Power of Zero and when IOUSA was released is the latter came out right at the beginning of the Great Recession. We have been enjoying an economic boom since then and that would have been the perfect opportunity to be fiscally responsible. We have never had this kind of deficit spending during peacetime in the history of our country. There seems to be no concern about the national debt right now which is why it’s so important to get the film’s message out there into the public discourse.  The fiscal gap should go on the balance sheet of every country in the world. Nearly every country has adopted that way of accounting except for the United States. If we were to measure our debt the way that Japan measures theirs, it would be over 1000% of GDP.  No matter what the numbers turn out to be, we are facing a huge problem. The canary in the coal mine will be when we start having trillion dollar deficits, which has since happened after the launch of the movie.  The film has been theatrically released and now it’s also available for private or commercial screenings as well. You can obtain the license from tugg.com and can show the film in whatever venue you want.  At thetaxtrain.com, you can select the quantity of codes you want which you can then send to your clients so they can get free access to the Power of Zero film. You can also go to realhouse.com and purchase a copy of the film as a gift for someone and send it to them directly.

The best way to pay for long term care protection is by way of a permanent life insurance policy. If you die peacefully in your sleep 30 years from now someone is still getting a death benefit. You are better off dying than requiring long term care, at least if you die your spouse becomes the beneficiary on all of your retirement accounts. Long term care insurance can prevent your spouse from enduring a bare-bones subsistence living in retirement if you end up needing to pay for long term care. 70% of people will need long term care insurance in retirement. There are four ways to insure the need for long term care. The first is a Traditional Long Term Care policy but they are falling out favor because the prices are not guaranteed on these programs. Actuaries have been mostly unable to predict how much money to set aside. They are one of the least expensive options overall but the insurance company can increase the price at their leisure. The big number on Traditional Long Term Care is 0. If you pay into the policy and die without ever having used it, your spouse gets nothing back at the end. There is no death benefit. The second option is known as Hybrid Life Insurance or Asset Based Insurance. It’s more expensive than the Traditional LTC option but it comes with a slightly superior payout for long term care and the death benefit at the end is little more than a refund of the money paid into the policy. The third option is Permanent Life Insurance. The biggest benefit of this option is that the death benefit is passed on to your heirs tax-free.  David relates the story of a life insurance agent that was working with a farmer client who wasn’t sure what approach to take. He gave the client a copy of the Volatility Shield and that convinced the client to opt for the Permanent Life Insurance policy.  The fourth option is a Deferred Income Annuity, many of which come with long term care options. It requires a lot more money up front but it accomplishes both long term care coverage and a decent death benefit for your beneficiaries.  When you compare all the options, Permanent Life Insurance really stands out due to the considerably larger payout upon death. You also don’t have to liquidate your assets right away in the year that you die to pay for expenses if the market is down. The Permanent Life Insurance can be used to pay for expenses because it isn’t affected by the decline in the market and it can serve as a Volatility Shield of sorts.  This is why the LIRP can be a great strategy. You get the long term care coverage as well as the death benefit to pass on to the next generation if it turns out you don’t need it.

The audio version of the Volatility Shield won’t be released for another three weeks, so David gives you a sneak peek at the opening chapter of the book. The story opens with Jack driving down the highway preparing to leave his life behind and start something new. His plans change when he receives a call from his stepfather Ted. Jack visits Ted at his sports store and gets some surprising news. Ted has sold his business and needs a little help from Jack. Ted always seems to have some sort of ulterior motive; in this case he’s hoping Jack can take a look at his finances to make sure that his retirement portfolio will last the rest of Ted and his mother’s life. Jack takes a look and notices that the financial plan in front of him may have some problems with it. It may be less a ‘set it and forget it’ than Ted’s financial advisor first told him. If Ted’s portfolio can average a 9% return each year, theoretically they will never run out of money. Jack asks for a favor that Ted is reluctant to give. The Volatility Shield has a great plot, a nice twist ending, and a $5 million dollar crime that needs to be solved and Jack Wheeler is on the trail. Get your copy of the book on Amazon or pick up the Audible copy when it’s released in a few weeks.

Every once in a while an advisor will attempt to elevate the LIRP by diminshing the Roth IRA. They may, for example, say that the Roth IRA has some inherent limitations, including income limitations--if you make too much money or too little money--lack of plan completion insurance, and the inability to access the money until you’re 59.5 years old. You’re also susceptible to declines in the stock market. The Life Insurance Retirement Plan, on the other hand, has no contribution limits and no income limitations. It’s often referred to as the rich man’s Roth because it has many of the tax-free attributes of the Roth IRA without the limitations. Given the perceived superiority of the LIRP, many advisors will tell you to put all of your money into that. In an effort to lift up the LIRP, they will denigrate everything else. This is folly. You don’t ever want to have only one investment strategy arrow in your quiver. The Power of Zero says that every tax-free stream of income has a purpose. Each has their benefits and limitations. They fit together like a puzzle and compliment each other. None of them are the perfect investment on their own. The more streams of tax-free income you have, the better off you will be. The Roth IRA doesn’t count as provisional income and is truly tax-free as long as you’re 59.5 years old. It also has much more liquidity than a LIRP in the early years, and it can double as an emergency fund. The LIRP is great because it is safe and productive, typically mirroring the growth in the stock market up to a cap while guaranteeing you don’t lose money. With an Indexed Universal Life policy, you can take advantage of Variable Loans, and if you play the arbitrage correctly, it can help your cash value grow significantly. IRA’s on the other hand, have benefits that they above-mentioned alternatives don’t have. For example, if you can get your IRA down to the ideal balance through Roth conversions, your required minimum distributions will be offset by your standard deduction. Of all the tax-free streams of income, this is the only one that gives you a deduction on the front end, allows your money to grow tax-free, and let’s you take money out tax free, by offsetting taxation with the standard deduction. Basically, it’s the holy grail of financial planning. [ Everything has its place because each strategy can do things that the others can’t. [ The Roth 401(k) may offer free money since the company you work for is probably offering some sort of match when you contribute. That free money helps you pay the tax on the back end (if there is any). If you have money inside your traditional 401(k) you should put money into your Roth 401(k) account and the match money into the traditional account. [ If you have all these different streams of tax-free income that are respecting the different thresholds, then your social security becomes tax-free. For Baby Boomers, this means they are getting way more out of these programs than they put into it. [ Because you have a consistent stream of income (SS), you won’t have to rely entirely on your stock market portfolio. This means you’re less likely to deplete your portfolio during down years in the market and decreases the odds of you outliving your retirement funds. [ The Power of Zero point of view when it comes to which is better, the Roth IRA or the LIRP, is neither. Each has qualities that the other does not. The LIRP is not a silver bullet; it is merely a compliment to the other strategies you can make use of. There is a proper and corret amount of money that should be allocated to your LIRP, just like all your other tax-free accounts.

With a Roth IRA you have income limitations. At a certain amount of income, the amount you can put into a Roth IRA begins to reduce and at $203,000 in yearly income you can no longer do a Roth IRA. This is problematic for people that have a lot of taxable income in a given year. There are ways around the limitation but it comes with strings attached. If you make more than $203,000 in gross income as a married couple, you can take advantage of a Traditional IRA. The tradeoff here is you get a tax deduction now and pay the taxes later but if you make more than $123,000 and have a plan at work like a 401(k), you can no longer do a deductible IRA. The back door Roth strategy says that you can convert that IRA to a Roth IRA and since you’ve put in after-tax dollars into that account, it functions just like it would had you just put the money into the Roth IRA. If you have money sitting in more than one IRA, the IRS says you have to make an additional calculation that basically feels like a double tax. Another option that allows you to avoid this calculation is to roll your IRA into a 401(k), and that will allow you to perform the back door Roth without any implications at all. Before you consider the Back Door Roth strategy, consider your portfolio. If you have money in other IRA’s you could end up paying what feels like a double tax. One of the interesting things about a Roth conversion is you have to make up your mind by Dec 31 of any given year. This means you may not fully understand the taxable implications because you haven’t done your taxes for the year. A Roth Recharacterization used to be a way that you could reverse the Roth IRA decision in the subsequent tax year if you felt that it was a bad deal. Given the changes in the tax code, you can no longer do a Roth Recharacterization. This underscores the importance of understanding the taxable implications of a Roth conversion and working with someone who understands your situation as well. You do not want to do a Roth conversion if you don’t understand the taxable implications and can’t undo your decision. If you’re going to do a Roth IRA, make sure you understand the implications and how it’s going to impact you.

The 4% Rule says that when you retire there is a finite amount of money you can pull out of your portfolio per year if you want your money to last your life expectancy. Based on Monte Carlo simulations, that number is 4%. If you take more than 4% out of your portfolio during down years, you’re getting hit twice. Too many years like that and your portfolio could go into a death spiral from which it may never recover. If you want your money to last, 4% is all you should ever take out. For example, if you have a million dollars in your portfolio and take out only $40,000 per year, you can have a strong expectation that your money will last roughly 35 years. Is there a way to beat the 4% rule? That’s what the concept of the Volatility Shield is all about. If during the down years, instead of taking money out of your stock market portfolio, you take money out of a completely separate account. This can give your stock market portfolio a chance to recover. Studies have shown that with this strategy you can take out much more than 4%. The Volatility Shield account must be safe and productive. It can’t just be a savings account. It also has to be tax free and absolutely be in place before retirement. The account that will best serve as a Volatility Shield is called the Life Insurance Retirement Plan. Many of those policies fulfill all four major criteria. The funds for the account have to be in place before you retire and will probably come from the funds you are using for your retirement. Will you have enough lifestyle money accumulated before you retire based on what you’re contributing? If the money is growing safely and productively, that could mean you will have 6-7 years of lifestyle money set aside for the inevitable down years in retirement. The Volatility Shield will allow you to take a much higher withdrawal rate even though your retirement portfolio will have a little less money in it. The Volatility Shield book is written a little differently than the other books. It’s a fiction story that teaches the principles of the concept while delivering an unexpected narrative twist at the end.

The first type of LIRP is Whole Life. It goes back to the very beginning of life insurance and is designed to last you your whole life. You contribute money to your account and that money grows in a predictable way, earning anywhere from 3-5%. Because of this steady, predictable growth, people sometimes use this kind of insurance as the bond portion of their portfolio, enabling them to take more risk in other areas of their portfolio. Similar to Whole Life but with a few distinct differences is Universal Life. This type of insurance is affected much more by the fluctuation of interest rates. This policy tends to not have as many guarantees. Universal Life policies are not used as much in a Power of Zero paradigm. You generally see them minimally funded with guarantees that the policy will stay in force to a given age. This can be the cheapest way to guarantee a death benefit. A Variable Universal Life policy is another type of policy that basically says that your money will be invested in mutual funds called sub-accounts. This is good for people under the age of 45 but becomes more worrisome when you’re older. One problem with VUL is that when the cash value goes down due to market fluctuations, the amount of life insurance you have to pay for goes up. If the market goes down multiple years in a row, a Variable Universal Life policy can go into a death spiral from which it may never recover. If you don’t have at least $1 in your cash value at the time of death, all of the tax free growth you experienced along the way becomes taxable to you all in the same year. Indexed Universal Life is an alternative that tries to mitigate the issues with the Variable Universal Life policy. In this policy your money flows into a growth account that is linked to the upward movement of an index in the market. When the market goes up, you get to keep the gains up to a limit and when the market goes down you are credited a zero. Too many down years in a row can still be problematic since you are still paying the expenses associated with the policy. This policy can average between 5 and 7% net of fees over time. Every ten year period averages between 2 and 3 down years. If you are ok with an average of 3% to 5% growth over time, a Whole Life plan can be a good option for some of the money in your portfolio. No matter which policy you have, you need to fund them correctly. The fees you’re charged in your policy are generally always the same no matter how much you contribute, so it makes sense to put in as much as you can. You want the proportion of the fees to the overall cash value to be as small as possible. Which of the four types of life insurance policies is best for you will depend on your situation. Talk to the person that gave you the Power of Zero book or go to davidmcknight.com to find out more.