The Power Of Zero Show

There is no retirement planning class based on the Power of Zero book, but there is one that David created. He’s taught it to hundreds of advisors across the country. The Power of Zero is not the basis of the class, but it may be a homework assignment. The workshop conveys the idea that even in a rising tax rate environment, there is still a mathematically perfect amount of money you need in your taxable and tax-deferred buckets LIRP’s are the same greatness as Roth IRA’s. As with all tools, they can be used inappropriately. A LIRP is not a silver bullet, it’s just another tool you can use alongside all the other tools. A LIRP is a bucket of money that gets treated differently from the other buckets we’ve already talked about. You can’t talk about the LIRP without talking about one of the primary reasons for having a LIRP: it provides a death benefit. You have to have a need for life insurance to be able to get the LIRP. The companies that sponsor LIRP’s make it a little more attractive by allowing you to access your death benefits in the event that you require long-term care. As a result, many people are dropping their life insurance. The fees over the life of the LIRP are, on average, about the same as your 401(k), they just tend to be front loaded. They are higher in the early years and lower in your later years. Whatever road you take in life, somebody is making 1.5%. The question is “what are you getting in exchange for that 1.5%?” $350,000 doesn’t correspond to any tax bracket and does make sense as a threshold of comparison. Financial gurus tend to paint everything with a very broad brush. They are in the business of dispensing general financial advice and target people who make less than $75,000 a year. You can’t get custom-tailored financial plans from financial gurus because that is not what they get paid to do. You don’t get the LIRP unless you die. If you quit after the first year, it will likely be the worst investment you’ve ever made. The longer you keep it the better your rate of return will be. If it is structured properly, the LIRP will almost never run out of money. Just because a salesperson makes a commission off the sale, doesn’t mean the product is bad. No one would have a car or many other things we highly value if this were the case. There is always a mathematical basis for what David recommends. It’s almost like the author fell asleep in 1985 with his ideas about Universal Life firmly decided. There is nothing magic about a life insurance policy. When used as a compliment to your other tools, they can be an excellent contributor to getting you into the 0% tax bracket. Guarantees cost money. They will also drag you cash value down. If you have money in your bucket to sustain the drips that are coming out of your spigot, that’s what keeps the policy enforced. The program is not a miracle worker, it simply performs a function that other investments can’t accomplish. Everyone should have level-term life insurance, but you have to remember that the cost of admission to the LIRP is you have to be willing to pay for some life insurance. If you’re paying for term insurance, you are already paying for the bucket. You’re just not putting anything in it. Retirement classes are often held and sponsored by universities. They are purely educational experiences. Failing to adopt some of these strategies could be the most expensive thing you do in your life. You could run out of money seven to ten years faster without them. Most people make emotion-based investment decisions. When you are feeling an emotional impulse to buy low and sell high, will your robo-advisor give you a call? Most of David’s clients are between the ages of 50 and 65 so robo-advisors would not be ideal for them. There are no LIRP’s that are only fee-based. It’s hard to work with a LIRP when you are working with a fee-only financial planner. Being optimistic doesn’t necessarily translate into being realistic. Let’s look at the financial landscape of our country, and figure out how things are trending. You can be optimistic in nature and still believe that tax rates are going up so you should prepare accordingly. If tax rates in the future are going to be even 1% higher than they are today, there is one right strategy which is to position your money to tax free. The LIRP is one of many streams of tax free income and when used appropriately it can accomplish things that your other investments can’t. Financial gurus will only get you so far, especially in a rising tax rate environment. Consulting with a qualified Power of Zero advisor can help lay out your roadmap and mathematically show you the best strategy for you.

Some people don’t read books. Creating a documentary is a way to reach those people. Plenty of people read the book but are still unconvinced that tax rates are going to be higher in the future than they are today. The documentary was a way of bringing together the most compelling experts in the country with something meaningful to say about debt and putting them on record. The tax train is coming. If you were sitting on a train track with a huge freight train bearing down on you what you do. For those of us who have accumulated the lion’s share of our retirement in 401(k)’s and IRA’s, we have a huge freight train bearing down on us and it’s coming in the form of higher taxes. You have a couple of choices of what to do: you can pretend like the problem doesn’t really exist and the math doesn’t add up, or you can face it head-on. David Walker made an Oscar-nominated movie back in 2009 called IOUSA about the debt at the time where it sat at around $10 trillion. Nearly ten years later we’re sitting on over $21 trillion in debt. The stated national debt is $21 trillion but if you count the unfunded liabilities that have been promised it totals up to over $200 trillion. Allen Arbuck makes a very compelling case that printing our way out of our problems is not a solution. Printing money isn’t going to do the trick. The real issue that we’re facing here that’s going to squeeze everything out of the budget is Medicare. It’s not five years from now or eight years from now, we’re in a crisis right now. -George Schult. Tom McClintock is a congressman and on the Republican Budget Committee and he doesn’t pull any punches. According to Tom, in eight years we will be where Venezuela is now. According to Gary Herbert, the Governor of Utah, we have the Democrats and Republicans sitting in the front seat of the car and we’re heading towards a fiscal cliff. If no one relinquishes the steering wheel and compromises, the car goes over the cliff and we all go with it. There are lots of nations in the history of the world that have taken the same course, it’s not like we are forging into new territory. 401(k)’s and IRA’s are like the government saying “Hey look, I want to loan you some money. I don’t need the money to be paid back right now. I’m not going to tell you what the interest rate is on the loan I’m going to give you but I will come back to you when I do need the money.” Would you ever cash that check? Van Miller speaks about the demographic issues facing the country that is only just beginning. Most of the Baby Boomers have yet to retire. The real heavy birth rates didn’t happen until well into the fifties. Getting all these experts into the movie was very tricky. There were certainly some very harrowing weeks were no one had committed to be in the movie at all! But once we got David Walker to agree, we were able to use his name to convince others. One of the people we really liked in the movie was Armstrong Williams. He spoke very passionately and eloquently about the issues and says that now is the time to speak to your representatives. We are really getting to the point where, as Tom McClintock says, we could approach what is called a sovereign debt crisis. If you’re a financial advisor, go to thetaxtrain.com to watch the movie and get DVD’s to distribute to your clients. If you’re a Baby Boomer that wants to know more, the movie will be available in April or you can ask your financial advisor.

One of the things we tell 75 million Baby Boomers preparing to retire is that tax rates are going to be higher in the future. Some people will point to the latest tax cuts and think that the urgency of David’s message is diminished. David Walker has famously said we have to double taxes, reduce spending by a half, or some combination of the two. The question is what did we do with this latest tax cut? We lowered taxes but also increased spending by $1.5 trillion over the next ten years. All that means is that the fix on the back end is going to be even more draconian and aggressive than it already was going to be. We did the exact opposite of what we should have done. The cost of admission to the tax free bucket is you have to pay a tax.  Either you pay now or you pay later. With this new tax cut, we now know the year and the day when tax rates will go up. It’s no longer a guessing game, all the uncertainty and doubt has been removed from the equation. We now have the ability to understand where tax rates are today and where they are going to be in 2026, but who knows what will happen beyond then. With the latest tax cut, a lot of the media focused on Joe Mainstreet America and what he will be saving. While that’s important to know, it’s also important to understand what the opportunity is for people looking to get off the train tracks. The reason people postpone the decision is because of uncertainty and doubt. They don’t want to pay a tax today only to regret it if tax rates get lower in the future. The general rule is you want to stay in your current tax bracket when you are doing things like Roth conversions. Don’t let a year go by where you are not maxing out what you can do within your tax bracket. There is one exception, which David calls the sweet spot in the 2018 tax code, which is the 24% tax bracket. For 2% more you can shift an additional $150,000 dollars to the tax free bucket. Come 2030, we will look back at the 24% tax rate and think of it as the deal of the century. Tax rates will likely never be as low again. Every year that goes by where you fail to take advantage of historically low tax rates, there will potentially be a year beyond 2026 where you are forced to pay the highest tax rates you are likely to ever see. If you wait until 2027 to do the same Roth conversions, that will push you into the 33% tax bracket and you will pay an additional $15,000 each year. We know when the tax sale is going to be over. Every year between now and 2026 is a tax cylinder that you can take advantage of. When it comes to shifting money to be tax free, it all comes down to whether you believe tax rates will be higher or lower in the future than they are today. The only way for this new tax law to change before 2026 is for Democrats to seize the House, the Senate, and the Presidency which is pretty unlikely. You have an eight year period to stretch that tax liability out over time and get the heavy lifting done before 2026 when tax rates are going to go up and will likely be the highest you will ever experience in your lifetime.

The tax free paradigm essentially says there is an ideal amount of money you should have in your taxable and tax deferred buckets. Everything above and beyond that should be systematically repositioned in the tax free bucket. The ideal amount of money in your taxable bucket is around 6 months of your basic living expenses. The ideal amount of money in your tax deferred bucket should be low enough that Required Minimum Distributions in retirement are equal to or less than whatever your standard deductions are within that year. You want to be slow and steady when moving money into your tax free bucket. If you move too much in one year, you could bump up into a tax bracket that gives you heartburn. The Power of Zero roadmap gives you the plan to shift your money over 5 to 8 years. Sometimes despite all our efforts to get all that shifting done through traditional means, we have to use a different type of tax free tool called a Life Insurance Retirement Plan. An LIRP is a bucket of money that gets treated differently by the IRS tax code. You are not constrained by the typical rules of accessibility. There are no blackout periods with an LIRP. You do not pay taxes on this money as it grows. When you take out the money in the right way it does not count as taxable income. It also doesn’t count as provisional income so it won’t cause social security taxation. There are also no contribution limits or income limitations. Roth IRA’s are really designed for mainstream America, they are not designed for the rich. If you make a lot of money and need to put a lot of money away, you’re not going to make a lot of headway with a Roth IRA. If history serves as an example, there is no legislative risk to an LIRP. If you have the plan in place before a legislative change, your plan is grandfathered in. The more you want to put into this bucket, the higher your death benefit has to be. As we slowly go broke as a country, they will be looking at all quarters for more revenue. One of the places they may look is the tax exemption for life insurance, so get in while you can. You have to pay some expenses out of this bucket month in and month out in order to retain the benefits of the bucket. Annual renewable term life insurance is term life insurance that gets a little bit more expensive every year, and that’s one of the major expenses that can come out of this bucket. In the event you suffer from a chronic illness, you can access your death benefit which deals with some of the most common issues people have with long term care insurance. You don’t have to love life insurance, you just have to like it a little more than the IRS. If you’re between the ages of 50 and 65, you likely have at least one parent that is experiencing a long term care event. People aren’t opposed to having long term care insurance, they are just opposed to paying for it. If you don’t die and need long term care instead, you may end up leaving your spouse or family the bare bones in terms of inheritance. One of the biggest threats to retirement can be long term care. There is a 70% chance that you will have long term care event that lasts at least three years during your retirement. You have to protect yourself or you could burn right through your life savings. There are three main ways to grow your money within your LIRP: the stock market (this one comes with a fair bit of risk), the general portfolio within the insurance company (mitigating risk is something that insurance companies are really good at), and the indexed approach. The indexed approach is a way to grow your money in an indexed type of account that mirrors the stock market, with some conditions. Historical rates of return on this approach can be anywhere from 5% to 7% after expenses. A recurring theme from LIRP critics is that the expenses are high, but you have to ask the question “high compared to what?” The average expense in a 401(k) is approximately 1.5% of your balance. As your money grows, you pay more for people to manage your money. The reverse is true about LIRP. The expenses are front loaded and it works about to be about the same 1.5% but the longer you keep it, the less the expenses are. The goal of this bucket is safe and productive growth, and you can’t get safe and productive without paying for it. The longer you keep it, the better it gets. A LIRP is a compliment to everything we’ve already talked about, not something to put all your assets into.

Do you believe tax rates will be higher in the future than they are today? There is about $21 trillion in the 401(k)’s and IRA’s across the country. If you were to look at the cumulative amount of money in Roth IRA’s and Roth conversions, there is only about a trillion dollars. Most people believe taxes will be higher down the road and aren’t doing anything about it. You are either going to pay the IRS now, or you are going to pay them later. It’s as simple as that. If you put money into a tax deferred bucket, you are saying it makes more sense to pay taxes in the future when they will be higher rather than they are now. People just can’t seem to be able to bring themselves to pay a tax preemptively, even if it will save them money. We love to procrastinate painful things. Paying taxes at historically low tax rates is going to be much less painful than if you wait until later. Leading economists believe that taxes may be dramatically higher as soon as in the next 8 to 10 years. There are a lot of investments that masquerade as tax free but in order to be tax free an investment has to be free from both state and municipal taxes. When you take a distribution from a tax free investment it shouldn’t count as provisional income. Up to 85% of your social security can become taxable to you at your highest marginal tax rate. The Roth IRA is truly tax free as long as you are 59 and a half when you take the money out. There are other versions of the Roth that are also tax free. Taking up to standard deductions from your IRA or 401(k) can also be considered a tax free stream of income. The life insurance retirement plan works very similarly as a tax free investment that comes with a few other perks you can take advantage of. By prepaying taxes, you are shielding yourself from the ebb and flow of tax rates over time. The only way to truly insulate yourself from the impact of higher taxes is to get to the zero percent tax bracket. It’s almost impossible to get to the zero percent tax bracket with a single stream of tax free income. Make sure you shift your money to your tax free bucket slowly enough to avoid dramatically increasing your tax rate in the meantime. On the other hand, you do want to shift it quickly enough that you get all the heavy lifting down before tax rates go up. The amount you should shift each year is your Magic Number and it depends on your investment horizon. There is another deadline that you have to consider, if congress does nothing 2028 to 2030 may be a big problem in terms of taxes. Small increases in the marginal tax rate are not the issue, what you should be prepared for is tax rates doubling some time in the future. Don’t put all your eggs in one basket, the IRS or congress could legislate that one basket out of existence.

The number one piece of information you should consider when thinking about your tax deferred bucket is what you think the tax rate will be when you take out your money. Will it be higher or lower? You may hear the argument that If you take money out of your Roth IRA, you will have less money working for you and less money for your retirement. However, that’s not true. People think the money in their Roth IRA account is theirs, but really you have entered into a business partnership with the IRS and they are joint owners of that account with you. It’s not all your growth, a portion of it is owned by the IRS. When your money grows over time, the portion for the IRS is going to grow and compound over time just like your portion. The IRS loves it. If tax rates are always going to be at 30%, it doesn’t matter if you use a Roth IRA, or a Roth conversion or a traditional IRA. It all ends up the same. If tax rates were to go up by just 1%, your portion of the account will go down, which is where a conversion makes more sense. It’s very important to understand the fiscal landscape of our country. You have to try to anticipate where tax rates are going to be because at the end of the day, that should inform all of your decisions as it relates to these types of accounts. The true purpose of a retirement account is to maximize cash flow at a period of your life where you can least afford to pay the taxes. Any distributions you take out of your IRA count as provisional income and could cause your social security to be taxed. All tax deferred investments have two things in common: when you put money in you get a tax deduction, and your deductions will disappear when you need them most. A lot of financial gurus say that you will always be in a lower tax bracket when you retire, but that idea has largely been debunked. In retirement, every day is a Saturday. Most of your largest deductions are gone once you retire. Your house is mostly paid off. You probably aren’t receiving a child tax credit anymore. You’re not contributing to your 401(k). People tend to contribute time instead of money to charity. The IRS thinks nothing of your time because it is not tax deductible. After 2026, tax rates are likely to be dramatically higher than they are today as the national debt balloons up to $30 trillion. In a rising tax rate environment, there is a perfect amount of money to have in your tax deferred bucket. If you don’t have a pension, the magic number is between $250,000 and $350,000. You want the balance in your tax deferred bucket to be low enough that the RMD’s coming out are less than your standard deduction, and don’t cause your social security to be taxed. You want your distributions to be tax free, while also maintaining your tax free social security. If you have a big enough pension, it will probably take up all of your standard deductions so make sure you get as much that money into tax free accounts. Quick quiz. Can you guess David’s favorite tax free investment? The holy grail of financial planning is to get a deduction on the front end, it grows tax deferred, and you take it out tax free. Take advantage of your 401(k). Contribute up to your match, and not a penny more. Get that tax deduction on the front end. Mathematically, nothing beats this strategy for tax free income in retirement. When you put the puzzle pieces together, then the zero percent tax bracket emerges.  

The taxable bucket contains investments that you get to pay a tax on. Things like savings accounts, money markets, stocks, and bonds. You know your investment is taxable when you receive a 1099 from the IRS. These are not the most efficient investments in the world. You can have as much money as you want in your taxable bucket, as long as you recognize that there is a financial consequence for doing so. It may not seem like a big deal, but if you take those inefficiencies and amortize them out to a lifetime it can cost you several hundred thousand dollars. The ideal balance in your taxable bucket will depend on your marital status, whether both spouses working, or if you’re a business owner. A good rule of thumb is if you have at least two steady incomes in your family, you should have at least three months worth of barebones expenses set aside. If you have one income earner or are a business owner, you should have around six months worth of expenses set aside. Your taxable bucket is where your least valuable dollars go. Take a look at the contribution limits that the IRS defines for certain accounts, the more limited the contribution amount the better that account probably is in terms of taxes. You have to be contributing to your taxable bucket in a very defined way and limit it as much as possible. If your taxable bucket grows every year, so does your 1099. Your taxable bucket has a purpose, primarily to meet your needs in an emergency. There are taxes in life that we pay, that we are not required to pay. Provisional income is the income that the IRS keeps track of to determine if they are going to tax your Social Security. You can lose up to one-third of your social security if you have too much money in your taxable bucket. There are a number of accounts and strategies that you can use to keep as much money out of your taxable bucket as possible. Don’t let a year go by where you are not taking advantage of all of the tax-free investments that the IRS makes available to you.

There is a massive disconnect between what people think the future of tax rates will look like and what they are doing to prepare for it.  If you believe that tax rates will be 1% higher than they are today, you should have as much money as you can in tax-free vehicles like a Roth IRA. The national debt is currently around $21 trillion dollars. A lot of people think that is not necessarily a big deal since that is only 106% of GDP but that is only a piece of the overall picture. If we were to run our accounting like every other country in the world, we would actually have $200 trillion dollars in debt due to all the unfunded liabilities. We’ve made a huge number of promises that we can’t afford to keep. The reason the media hasn’t made a big deal about the debt is the cost of servicing the debt has been close to zero for the last 15 years. When interest rates start to creep up, the cost of renting the money could double or triple. The cost of servicing the debt would start to crowd out a lot of really important things in the national budget. The problem is not pork barrel spending, it’s the obligations that we can’t get out of by law. “This is crisis time.” -George Schultz The real problem with our budget is Medicare, as Baby Boomers leave the workforce the cost of Medicare is going to crowd out everything else out of the budget. There is not a lot of upsides for politicians to try to change the existing law so as to modify what we are paying for Social Security or Medicare. People don’t want to make tough decisions when it comes to either raising taxes or cutting spending. If we get to the point where we have a sovereign debt crisis, we risk financial insolvency. A lot of economists believe we won’t get to that point until we see trillion dollar deficits, which we could see by the end of 2018. You can buy a trillion dollar bill from Zimbabwe and it only costs you $4, and that includes shipping and handling. Money is valuable because it is scarce, the more you print, the less valuable it becomes. As inflation goes up, the cost of basic services will go up as well. Reducing spending is known as the third rail of politics. If anyone brings it up, they will probably find themselves voted out of office. Every year that goes by where they fail to reduce spending, the fix will be more draconian and severe. The likelihood that taxes will go up is increasing every single year.  You don’t have to go very far back in history to find tax rates that were dramatically higher than they are today. Tax rates ebb and flow over time based on the needs of the government. There isn’t any reason to expect that tax rates won’t be higher in the future than they are today. When you take your money out at retirement, do you believe taxes will be higher or lower? If you believe it’s going to be higher, then you should put as much money as you can in tax-free vehicles.