The Power Of Zero Show

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.

The whole Power of Zero paradigm is predicated on tax rates being much higher in the future than they are today. If you don't believe that, the Power of Zero paradigm is not one you're likely to warm up to. Step one is to recognize that taxes will be higher in the future than they are today. The fiscal gap is an estimated $239 trillion. That's the difference between what we have promised and what we can deliver. Step number two is to recognize that in a rising tax rate environment, there is a perfect amount of money to have in your taxable and tax deferred buckets. The perfect amount for your taxable bucket is six months of basic living expenses. Any amount above and beyond that is costing you money. For the tax deferred bucket, the balance should be low enough that required minimum distributions are equal to or less than your standard deduction and also low enough that it doesn't cause your Social Security to be taxed. Anything above and beyond those ideal amounts in the first two buckets should be systematically shifted to tax free. You should do it quickly enough to get the heavy lifting done before tax rates go up for good but slowly enough that you don't rise too rapidly in your tax cylinder. Once you recognize your magic number (the amount of money you need to shift to tax-free in a given year), you have to recognize that that money is probably going to be allocated to three different places. The first is the IRS, you may not enjoy it but you have to pay the piper first. The second is the Roth conversion, and the third is the Life Insurance Retirement Plan. If you're between the ages of 50 and 65, someone you know is likely dealing with a long-term care issue. People aren't opposed to having long term care insurance, they're just opposed to paying for it. The LIRP is a good option to protect yourself from a long-term care event while at the same time growing your money in a similar risk environment as your savings account. The average expense per year with the LIRP is 1.5%, but in exchange for that, you are getting a death benefit that doubles as long-term care. The LIRP covers the risk that 70% of Americans will be confronted with at some time in their retirement. You want a meaningful and impactful amount of long-term care insurance. That's somewhere between $400k and $500k in coverage. If you have too little coverage, then the LIRP can be a little like rearranging the deck chairs on the Titanic. The four steps are: 1. recognizing that tax rates are going to be higher than they are today, 2. recognizing that in a rising tax rate environment there is a mathematically perfect amount of money to have in your taxable and tax deferred buckets, 3. repositioning the surplus balances and contributions into the tax free bucket, and 4. funneling the money into the appropriate places which may include Roth IRAs, Roth Conversions, Roth 401(k)'s and the LIRP.

Anyone can do a Roth conversion. You need to have money in an IRA. There are no income limitations. The question comes down to how much tax you want to pay. Do you feel like your tax bill will be lower or higher if you were to postpone the payment of that tax? Some opponents of Roth conversions will say that you won't get the full amount of money in your IRA working for you. However, you have to remember that the IRS partners with you in that account and their portion of that money grows right along with yours. If you to convert that money to a Roth IRA, all of that money is growing to your benefit but the scenario stays basically the same. The key to the calculation is what happens if tax rates are much higher in the future. Once you get your money into a Roth IRA, you don't have to worry about tax rates rising in the future. The rationale to Roth conversions is a bird in the hand is worth two in the bush. It all comes down to the tax rates and where you think they will be in the future. There is a sweet spot with Roth conversions. If you're a high income earner it may not make sense to do a Roth conversion today. When you retire, you have to keep in mind what tax cylinder you will be in. If you're in the 10% or 12% tax bracket, you should be converting the maximum amount to get to the top of that tax bracket. The real question becomes "how do we feel about the 22% and 24% tax brackets?" You don't have to go very far back in history to find tax brackets much higher than today. In 1960 to 1963 the lowest tax bracket was about 22% and the highest went up to 89%. Larry Kalikov is predicting that tax rates will have to rise by 51% and spending would have to decline by 35%. If tax rates stayed level in the future, it would probably be a mistake to do a Roth conversion. It really comes down to whether we as a country can afford to be charging 10% to 12% on people's distributions ten years from now. 24% is only 2% higher than the 22% tax bracket. For an extra 2% you can protect another $150,000 of your IRA conversion. We will look back on today ten years from now and think that was the deal of a lifetime. You have to feel like the tax rate that you will pay today will be lower than what you will pay in the future. If you are younger than 50, it's a no brainer. It makes a lot of sense to pay taxes at today's low tax rates. If your 401(k) distributions will fall in the 22% tax bracket once your retire, you should absolutely maximize the 22% and even the 24% tax bracket today. The very best way to insulate yourself from the impact of higher taxes is to get to the 0% tax bracket. David tells the story of his limo driver during a conference that David was speaking at. Even if you don't believe that tax rates will be higher in the future, you should probably look at how long a widower will survive after you die. The minute you or your spouse dies, the cost of taking money out of your IRA or 401(k) pretty much doubles. If your kids inherit your IRA, it will almost certainly not be taxed at the 12% tax bracket since it will probably occur during the peak of their earning years. If you have money in a Roth IRA, your spouse or kids don't have to worry about that income because you will have already paid the piper.

The basic gist of the fiscal gap is that the publicly stated national debt is $20 trillion which is more than enough to cripple our economy, but that's not the whole picture. The fiscal gap is the difference between everything that we've promised to pay over the next 70 years and what we can actually afford to pay. According to Allan Arback and Larry Collicof, the real number is closer to $222 trillion. When you figure in all the numbers, the fiscal gap is growing an additional $6 trillion each year. To get a true vision of the fiscal condition of our country, we need to express our national debt the same way that everybody else in the world is expressing it. If we were a private corporation, we would have to list every debt on the books, not just the debt that is actually owed. There are two kinds of debt, intragovernmental debt and debt borrowed from the public. The more responsible thing to do would be to express what we promised back but can't afford to deliver. In the last week, the number has been revised to $239 trillion. This means that if nothing happens, there will come a day of reckoning. The government will have to raise taxes by 51% and cut spending 35%. This makes the Power of Zero more relevant than ever. If you are thinking about putting money into a 401(k) in order to get a deduction at today's historically low tax rates you should reconsider it. Putting your money into a 401(k) is like going into a business relationship with the IRS and they get to vote each year to decide what percentage of the profits you get to keep. Politicians love to make promises. When they are telling us the national debt is $22 trillion but the real number is $239 trillion, they are making promises they can't actually deliver on. If you are in a 10% or 12% tax bracket, even a 22% or 24% tax bracket, you should probably not be putting money into your IRA or 401(k), put it into a Roth 401(k) instead. The bad news is it's much worse than we thought, the good news is you're now armed with the knowledge of what you can do about it.

The question is "how can we take money out of our life insurance tax free?" Is it possible to take money out of your life insurance policy and have it feel like a distribution from your Roth IRA? Every life insurance policy allows you to take out tax-free distributions, but not all of them allow you to take out tax-free and cost-free distributions. With a traditional life insurance policy, anyone can take out whatever they've put in. This is referred to as your basis. The trick comes in taking out money above and beyond your basis, and the solution is by way of a loan. The first type of loan is the standard/preferred loan. A standard loan is typically for the first six ten years of your policy and is usually done in less than optimal circumstances. You should exhaust your other sources of emergency income first before doing this. A preferred loan typically starts in the first six to ten years of your policy but you are not taking a loan from your own policy. You're not taking a distribution from your policy either. You're taking a loan directly from the life insurance company. They will charge you a real rate of interest on the loan, and at the same time will take an equivalent amount of money from your growth account and assign it to a loan collateral account with an assigned rate of interest. If your collateral account is being credited at the same rate as the loan you received, all you know is you received the money from your account and didn't have to report it as income. If the life insurance company has guaranteed the rate of interest remains the same on the loan and your loan collateral account, it doesn't matter how big the loan gets. The rate at which they are crediting you and the rate at which they are charging you is the same. There are some possible issues with this strategy. Some companies will guarantee that rates won't change but not under every circumstance. When it comes to loan provisions, the devil is in the details. If you have a spread on the interest rates between the loan and the credit, you will eventually run out of money. If you run out of money and you're not dead yet, all the of those tax free distributions become taxable to you. Over the course of your life, a spread loan can crater your distributions. [ The additional interest you owe on your loan will come out of your cash value. This leads to geometric growth of the interest you own on the loan interest and it starts to take a toll. This can bankrupt your policy. [ You don't buy a life insurance retirement plan simply because the guy across the table tells you it's a good idea. That's like getting married after the first date. [ You should have a list of things you want to have in your ideal life insurance retirement plan. A divorce from a wife can be painful, but a divorce from a life insurance plan can be likewise as painful. [ Having the wrong loan provision can really sink your ship. [ There is a second loan type called a Participating Loan that relates to a plan called Index Universal Life. It works similarly to a standard or preferred loan except the interest on your loan may be slightly higher and the interest on your loan collateral account is tied to the index within your universal life plan. The insurance company will give you the growth of that index up to a certain cap and in the event of a down year, they simply credit you a zero. [ Historically, the indexes grow at 7% to 7.5%. If you can get 7.5% growth without taking an more risk than you are used to taking, that's a pretty safe and productive way to grow your assets. [ The way to look at this kind of loan is: will you have more positive arbitrage or more negative arbitrage over a period of time? The Monte Carlo simulations bear out the usefulness. [ You have to find a company that will guarantee that the rates will never go up over a certain number. [ The preferred loan is the conservative way to go. You don't have arbitrage working for you but you won't have the risks associated with it as well.

David believes that life insurance in most cases is the best way to handle long- term care needs in retirement. Why do financial gurus say that you need long-term care insurance? 70% of us will need long-term care in our lives. Nobody wants to save money their whole life only to give it to a long-term care facility two years before they die. Typically a long-term care event lasts an average of 2.3 years and most people do not survive them. The idea behind long-term care insurance is to avoid blowing through all the money you saved up at the end of your life, but it's also about protecting your spouse. You're usually better off dying than experiencing a long-term care event. If you die, the life of your spouse from a financial perspective would go on relatively unchanged. But if you survive, all of your assets except for a small amount gets earmarked to the long-term care facility. If you have assets, the federal government isn't going to pick up the tab unless you've really spent down your savings. There is a massive difference in care in a Medicaid funded facility versus a privately funded long-term care facility. Studies show that you will probably die much sooner in a government funded facility. According to the Wall Street Journal, fewer and fewer people are using traditional long-term care insurance. This is due to a number of reasons including it's expensive and there's no guarantee it won't go higher. Traditional long-term care insurance is underwritten by morbidity criteria instead of mortality, which means you could have a condition that in no way affects the odds of you dying, but you may still be denied coverage. The biggest source of heartburn for people when it comes to traditional long-term care insurance is it's a use-it-or-lose-it proposition. Nobody wants to pay for something for 30 years and not get what they paid for. Instead of long-term care insurance people are switching to a form of life insurance that has a long-term rider or a chronic illness rider. A life insurance policy can be thought of as a bucket of money that grows in a variety of ways. Money drips out of that bucket through a spigot that goes to pay for annually renewable term insurance. When you have a long-term care rider, you are basically paying more expenses along the way for the privilege of using your death benefit to cover your long-term care expenses. [ You are paying for something that you hope you never have to use. If you die peacefully in your sleep, you don't get that money back, and that can be hard for some people to accept. [ The chronic illness rider gives you the same benefit of using your death benefit to pay for long-term care, but you don't pay anything along the way. The difference is that the insurance company discounts your death benefit depending on your age when you access it. [ Other benefits of life insurance retirement plans are being able to touch the cash in the bucket prior to age 59½ with no penalty, not receiving 1099's as your money grows, and if you take the money out in the right way, you can get it out tax-free. [ There are no contribution limits on how much you can put into the policy and there is no income limitations. [ Life insurance retirement plans may be immune from legislative risk. Any changes they have made in the past existing plans have been grandfathered in. [ Clients between 50 and 65 are looking towards the LIRP to cover their long-term care. If you are between 50 and 65 you are probably dealing with at least one person going through a long-term care event. [ People are asking themselves, "How do I avoid the financial carnage of a long-term care event?" [ There are two ways to approach the life insurance plan, you can pay upfront with a long-term care rider or discount the benefit at the end with a chronic illness rider. [ The Power of Zero movie will be released April 21, 2019.

When David speaks to his clients or the public, he's often talking about the nation's fiscal crisis, the national debt, and unfunded obligations. There are really only four ways to resolve our fiscal crisis. You decide what you think the most likely solution will be. The first thing we could do to prevent our country from going over a fiscal cliff is to cut expenses. We know that the real gushers in the fiscal budget are things that Congress doesn't even have control over. Congress controls around 30% of the national budget. These are things that they wouldn't have to pass a law to change. The remaining 70%, things like interest on the national debt, Medicare, Medicaid, and Social Security, are laws. Congress would have to pass a law to make any changes at all which is pretty unlikely given they would need to control the House and the Presidency. The real issue is Medicare, which is growing at least 6% per year. Much of the expense for that program is not on our radar yet. We would have to find a way to pass a law that requires people who already can't afford retirement to find a way to pay for their own healthcare later in life. The second option is to borrow more money. This also presupposes that there are countries that are willing to loan us money. We are on a path where we will get to a point where all of the money flowing into the US Treasury will go to pay only for the interest on all of our debt. If we can only pay the interest on our debt, other countries will not likely be willing to loan us money. This is what is known as a sovereign debt crisis. The third option is to print more money. David's critics believe that we will just start printing and return to 70's era inflation. They forget that Social Security is pegged to the CPI, which means that as inflation rises so does Social Security. Medicare is affected by inflation as well. You can't fix Medicare by inflating your way out of this. David Walker says that we will have to double tax rates in order to keep our country solvent. There is currently ground swell support for higher tax rates. For those that thought that we would never return to the tax rates of the past, you have to understand that these programs have to be paid for somehow. We know that the tax rate has been somewhat of a slush fund for Congress in the past. When there's a war or extraordinary circumstances, they raise taxes. As the highest marginal tax bracket goes up, all of the other tax brackets tend to ratchet up right along with it. You have to basically understand that there are really only four options: you can cut back on expenses, borrow more money, print more money, or raise taxes. It's much easier to raise taxes than it is to get rid of a government program.