The Power Of Zero Show

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 t...

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 yo...

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 make...

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 i...

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. Th...

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 convert...

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...

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 need...

The Piecemeal Internal Roth Conversion (PIRC) may be indispensable to your retirement plan. There are two massive risks that could waylay your retirement journey and prevent you from living a happy and stress free retirement. The first is tax rate risk, the risk that tax rates in the future will be dramatically higher, and the second is longevity risk, where you run out of money before you die. Hi...

David often gets the question of whether a person can be too old to implement an LIRP and like most questions the answer is "it depends". There are a number of great reasons to implement an LIRP, but you have to keep in mind that it's not a silver bullet for your retirement and should be paired with other streams of tax-free income. The first benefit of the LIRP is that the money in your account g...

In past episodes of the podcast David described the impact of a blue wave in the upcoming November election and what may happen to your finances if Joe Biden becomes the next president. The first major change would likely be the loss of the stepped up basis which could result in a large increase in the taxes on money you inherit in the future. No matter who gets elected in November tax rates will...

Time-segmented investing is a critical concept in the Power of Zero paradigm. The traditional approach says that you can have an investment portfolio balanced in such a way as to protect against systemic risk, but this approach has a serious risk associated with it. A couple of down years in the stock market during a time when you are withdrawing funds from your portfolio can lead to you running o...

David Walker has been saying that tax rates are going to have to double since 2008. We didn't do that. So that means the national debt will continue to accumulate until we reach $53 trillion, at which all the money flowing into the Treasury will only be enough to pay the interest on the debt. Many people other than David Walker are starting to speak about the future of tax rates as the national de...

The Before and After Comparison is an indispensable part of the financial planning process and you can get help with yours over at davidmcknight.com . The comparison is made up of three different projections within some sophisticated financial planning software of side-by-side-by-side life scenarios. The comparison reveals the impact of using the Power of Zero paradigm on your retirement funds. Th...

Every once in a while the idea of fixing all our fiscal problems by taxing the top 1% of the population is proposed, but it's time to do the math and see if it's true. The Committee for a Responsible Federal Budget put out a report a few years ago, prior to the latest spending due to Covid-19, where they analyzed what it would take to actually balance the budget. The first scenario looks at balanc...

David moved his family to Puerto Rico about three years ago and within six weeks of arriving they experienced something that completely changed their lives. It's been three years since Hurricane Maria hit Puerto Rico, but there are still residents with significant damage to their house. When deciding to move his family to Puerto Rico, the idea of a hurricane wasn't even a concern since the last ma...

Not everybody is going to get an inheritance but there are some very important strategies you can implement to minimize your taxes if you are going to receive one. The ultimate goal of the IRS, no matter how you inherit money, is to get all of the inheritance money into your taxable bucket within the next 10 years, preferably immediately, because that is how they make the most money. We know that...

A Coronavirus-Related Distribution (CRD) is any distribution by a person diagnosed with Covid-19, this can also include a spouse or dependent. Alternatively, if you've been adversely affected by the Coronavirus in some way, for example being furloughed, you may qualify as well. The CRD allows you to withdraw up to $100,000 from your qualified plan and if you're younger than 59½, the 10% penalty is...

The US is very likely to default on its debt at some in the future, but we're just not sure exactly when. What we do know is that the sooner it happens to smaller the impact will be, but that doesn't seem like it's going to be the case. The reality of our financial situation as of May of 2020 is the US is on course for a $3.7 trillion deficit this year. According to Jerome Powell, we are going to...

The federal government has waived the Required Minimum Distributions for 2020. There are 20% of Americans who don't spend their RMD's which means that 80% of the population relies on those RMD's to pay for daily expenses. This change affects anyone who had an RMD due in 2020 from their 401(k), IRA, and other retirement accounts. The IRS takes the value of your account in December of the year prior...

Can you be in the 0% tax bracket and still be a good citizen?' is a common question that David gets fairly frequently. David relates an exchange he had with a listener on Facebook where they stated that paying less taxes is inherently selfish and paying taxes is how we take care of people as a society. Most people have the thought of "what happens to society if everyone is in the 0% tax bracket?"...

Families that aren't quite rich enough to be affected by the Estate Tax, but have built wealth over time, have another benefit available to them called the step-up-basis loophole. Essentially, what happens with the step-up-basis loophole is when you pass on an investment to your beneficiaries, the present value at the time of your death becomes the new basis for that investment. This will wipe out...

Should you be contributing to your Roth 401(k)? The short answer is yes because anything with the word Roth in front of it is truly tax-free. What does it mean to be truly tax-free? Roth 401(k)'s pass both litmus tests for what makes something tax-free. If you're younger than 50, you can put in $19,500 each year, and if you're over the age of 50, you can catch up a bit with an additional $6,500. Y...

Under what circumstances should a single person want to own an LIRP? There are a number of scenarios where it can make sense, but it definitely depends on the individual's situation. We have to remember the primary motivation for having life insurance is having death benefit, but there are a few close second reasons. Using the death benefit in advance of your death to pay for long-term care is one...

David often gets questions from people asking why they would want to liquify their investment portfolio to fund their annuity, especially now with the markets being down due to the coronavirus. There is an inverse relationship between stocks and bonds, when stocks are down bonds are up. Annuities and the LIRP share a lot of similarities and effectively replace the bond portion of a portfolio. Annu...