The national debt is fast approaching $32 trillion dollars, nearly double from only a few short years ago. Neither parties are blame-free for the situation we find ourselves in as of 2023.

That $32 trillion does not include the unfunded liabilities and obligations that we will be paying for over the next ten years. We got to this point without including the added costs of Social Security, MediCare, and Medicaid.

Politicians are facing a situation where they either cut those programs, which is a surefire way to get kicked out of office, or dramatically raise taxes.

David Walker predicted that effective tax rates for Americans will rise to 45% by 2030. Right now, the effective tax rate for Americans on average is only 18%.

Rising tax rates aren’t just speculation, it’s in the tax code. The tax rates are scheduled to rise already unless the law is altered. In 2026, the steps between tax rate tiers are going to get much less steep.

The trust fund for MediCare is scheduled to go bust by 2027. The trust fund for Social Security is scheduled to go bust in 2032. 

Many people think we can print our way out of our problems, but that’s not going to work with entitlement programs. Rising inflation due to printing money will ensure that we never really catch up with the problem.

Historically, the highest tax rate in America was 94%. 

There is historical precedent for both raising taxes dramatically and cutting expenses. The trouble is that politicians haven’t had the backbone in the past to deal with these issues before they become crippling to the economy and average Americans.

Further trouble is due to the different circumstances in how we spend money. Unlike in the past, the debt-to-GDP ratio is worse and we are living beyond our means by a considerable margin.

We are spending money like drunken sailors and there doesn’t seem to be any willpower in Washington to change the direction.

Politicians also have the tendency to avoidtelling people what they really need to hear.

The Power of Zero strategy is basically the idea of systemically positioning your retirement savings to the tax-free bucket and protecting yourself from the ebb and flow of future tax rates.

We could see tax rates rival the 1970’s.

The Trump Tax Cuts are the tax sale of a lifetime. Most people that David works with are good at saving and find themselves in the 22% tax bracket. By converting up to the 24% tax bracket, those people have much better odds of converting the majority of their savings to tax-free before tax rates rise, possibly for good, once 2030 comes around.

2026 is an important date, but not as important as 2030. People should take advantage of historically low tax rates while they are still around and get their houses in order by 2030.

It can be especially challenging for widows in retirement when you factor in how the loss of a Social Security payment can impact cash flow and taxes.

Recent changes to inheritance laws are also making legacy planning more difficult. If you delay required minimum distributions from an IRA, there’s a good chance you can end up paying way more in taxes than expected.

Now is the time to look at your tax plan.

The antidote to all these issues is the Roth Conversion. If you die and your spouse inherits your Roth IRA, whatever the tax rates are at the time will no longer be an issue.

Roth Conversions aren’t the silver bullet. There are other strategies within the Power of Zero that allow you to truly reach the zero-percent tax bracket. Things like the Life Insurance Retirement Plan, Roth IRAs and 401(k)s, annuities, and multiple streams of tax-free income.

Mentioned in this episode:

David's books: Power of Zero, Look Before You LIRP, The Volatility Shield, Tax-Free Income for Life and The Infinity Code

Come Back America by David Walker

DavidMcKnight.com

DavidMcKnightBooks.com

PowerOfZero.com (free 3-part video series)

@mcknightandco on Twitter 

@davidcmcknight on Instagram

David McKnight on YouTube

Get David's Tax-free Tool Kit at taxfreetoolkit.com

There are a number of popular finance YouTube personalities like Graham Stephan talking about how you can be a millionaire by simply contributing $18 a day into a Roth IRA, but that doesn’t tell the whole story.

Not only is that advice too simple, it doesn’t take into account the value of a million dollars thirty years in the future.

Inflation will approximately reduce the spending power of that million into $250,000.

The 4% Rule says that if you constrain yourself to only taking 4% of your day one retirement balance, adjusted for inflation as income, you have an 86% chance of your money lasting through your life expectancy.

When you crunch the numbers, this would mean surviving on $10,000 a year in today’s dollars in retirement.

You have to be much more aggressive with your investing and saving as a 30 year old person.

Instead of just fully funding your Roth IRA as a 30 year old, you could also befully funding your Roth 401(k). By investing $82 a day, your final balance after thirty years would be over $4 million, or roughly $1 million after you factor in inflation.

According to a recent Ernst & Young study, if you were to earmark 30% of your retirement savings to cash-value life insurance you could as much as double your sustainable withdrawal rate in retirement.

It gives your stock market balance a chance to recover from any down years during the crucial first decade of retirement.

Even when you factor in that your Roth IRA and 401(k) will have lower balances, your ability to pay your lifestyle expenses allows you to take 8% distributions from your portfolio in retirement.

Because your cash value life insurance is growing safely and productively, it effectively replaces the bond portion of your portfolio. This gives you a permission slip to take more risk in your stock market portfolio and yield a higher overall return on investments.

When you factor all that in, with the 8% distribution rate, even with inflation, your distributions in retirement would be closer to the equivalent of $80,000 a year in today’s cash value.

If you heed these YouTuber’s advice, it’s a good start but you will end up with very little spendable cash flow in retirement. If you instead up your savings rate and fully fund your Roth IRA and 401(k), while allocating 30% to your cash value life insurance, you can supercharge to your tax-free retirement plan.

Mentioned in this episode:

David's books: Power of Zero, Look Before You LIRP, The Volatility Shield, Tax-Free Income for Life and The Infinity Code

Come Back America by David Walker

DavidMcKnight.com

DavidMcKnightBooks.com

PowerOfZero.com (free 3-part video series)

@mcknightandco on Twitter 

@davidcmcknight on Instagram

David McKnight on YouTube

Get David's Tax-free Tool Kit at taxfreetoolkit.com

Step one of the Power of Zero strategy is to realize that due to unfunded obligations for Social Security, Medicare, and Medicaid and interest on the exploding national debt, tax rates in the future are going to be dramatically higher than they are today.

Step two is to understand that in a rising tax rate environment there is an ideal amount of money to have in your taxable and tax-deferred buckets. 

For your taxable bucket, that’s around six months of living expenses. 

For your tax-deferred bucket, the amount should be low enough that your RMDs in retirement are equal to or less than your standard deduction and low enough that it doesn’t cause Social Security taxation. For married couples, that amount is around $350,000, and for single filers, it’s half that amount. If you have a sizable pension, the amount could be zero.

Step three is to calculate how much time it will take to shift your balances to tax-free in order to achieve those balances. Preferably slow enough that you don’t rise into a tax rate that will give you heartburn, but quickly enough that you get all the heavy lifting done before tax rates rise for good.

2030 is currently the target date.

Step four is to see if you qualify for the Life Insurance Retirement Plan. With the LIRP, it gives you a death benefit that counts as long-term care and it can greatly extend the life of your stock market portfolio.

One of the primary reasons you are paying for your LIRP is being able to access your death benefit if you need long-term care, but if you die peacefully in your sleep your heirs still get the death benefit.

Step five is calculating your income shortfall in retirement. Figure out your after-tax needs in retirement that subtract any sources of guaranteed income like Social Security or a pension.

Step six is to contribute a portion of your IRA to an annuity in the form of a fixed indexed annuity with the piecemeal internal Roth conversion feature. You want to contribute enough today so that by the time you have finished your Roth conversion it will produce enough tax-free guaranteed lifetime income that it will bridge the shortfall in your after-tax shortfall.

Mentioned in this episode:

David's books: Power of Zero, Look Before You LIRP, The Volatility Shield, Tax-Free Income for Life and The Infinity Code

Come Back America by David Walker

DavidMcKnight.com

DavidMcKnightBooks.com

PowerOfZero.com (free 3-part video series)

@mcknightandco on Twitter 

@davidcmcknight on Instagram

David McKnight on YouTube

Get David's Tax-free Tool Kit at taxfreetoolkit.com

Your LIRP functions as the ideal volatility buffer because it grows safely and productively in a tax-free way.

According to a recent study by Ernst & Young, investors that contribute 30% of their retirement savings to a LIRP will have their savings last longer than people who put 100% of their savings into investments alone.

This seems to fly in the face of every financial guru who has ever opined about cash value life insurance like Dave Ramsey and Suzy Orman.

It’s commonly understood that with an investment-only approach to retirement, you build up a large pile of money and take a modest distribution rate each year adjusted for inflation. If you take out higher than 4% per year, you drastically increase the odds of sending your portfolio into a death spiral during down years in the market.

The most critical time is the first 10 years in retirement where you can expect two or three down years, any of which can cause your retirement portfolio survival odds to plummet.

The LIRP serves as a volatility shield during those first ten years by allowing you to take tax-free loans from the policy during those first ten years of retirement. 

The LIRP has a few features that make it the ideal volatility shield. 

• You can’t combat market risk with an account that is exposed to market risk. LIRPs grow safely and productively.
• LIRPs in the form of universal indexed life insurance have a historical track record of 5% and 7% net over fees over time, making it easy to accumulate the amount of capital you need to shield yourself from volatility.
• LIRPs are tax-free. If you don’t have to pay taxes during the accumulation and distribution phase, your money will grow more efficiently and you won’t have to save as much money along the way.
• If you can take distributions tax-free, you aren’t exposing yourself to tax rate risk and those distributions don’t count as provisional income.
• If your LIRP is fully funded from day 1 of retirement, you will be in a position to pay for lifestyle expenses during the years following a down year in your stock market portfolio.

According to the study, if you contribute 30% of your retirement savings to an LIRP you will find that your sustainable distribution rate skyrockets to as high as 8%.

The study made a statistical case that shows the LIRP can extend the life of all your other investments significantly.

The most viable retirement strategy is the one that gives you the highest likelihood that your retirement savings will last through life expectancy.

Mentioned in this episode:

David's books: Power of Zero, Look Before You LIRP, The Volatility Shield, Tax-Free Income for Life and The Infinity Code

DavidMcKnight.com

DavidMcKnightBooks.com

PowerOfZero.com (free 3-part video series)

@mcknightandco on Twitter 

@davidcmcknight on Instagram

David McKnight on YouTube

Get David's Tax-free Tool Kit at taxfreetoolkit.com

The biggest issue with Dave Ramsey’s view on Roth Conversions, and most of his advice in general, is his one-size-fits-all approach which costs his listeners hundreds of thousands of dollars.

Dave starts off on the right foot by recommending people pay the taxes up front for a Roth Conversion but then veers off the track pretty quick.

Dave breaks down a hypothetical married couple filing in 2020 doing a Roth Conversion, but makes the mistake of conflating the 24% tax bracket as a trap of the Roth Conversion strategy.

If you have more than a million dollars in your IRA, you will never convert to Roth before tax rates go up for good without taking advantage of the 24% bracket.

Dave then goes on to say that you should never do a Roth Conversion unless you have money sitting in cash to pay the taxes. 

If Dave’s advice were taken by everyone, only 5% of people would realistically be able to take advantage of the Roth Conversion.

Some scenarios require you to pay cash for your Roth Conversion, but that’s not the only choice you have.

If you don’t have the cash to pay the taxes on your Roth Conversion, there is no harm in having the IRS withhold the tax from the Roth Conversion itself. It’s not optimal, but it’s far better than the alternative of leaving your money in your IRA and watching tax rates double over time.

Dave identifies the Five Year Rule on the Roth Conversion, but he fails to tell people that if you are older than 59 ½, the penalty won’t apply to you. This leads people to believe the rule of thumb is everyone should avoid the Roth Conversion unless you are five years or more away from retirement.

Dave Ramsey’s explanation of Roth Conversions is disastrous at every turn. All three of his recommendations are almost completely backwards.

When it comes to making important decisions about your retirement plans you should avoid financial gurus like Dave Ramsey at all costs.

Mentioned in this episode:

David's books: Power of Zero, Look Before You LIRP, The Volatility Shield, Tax-Free Income for Life and The Infinity Code

DavidMcKnight.com

DavidMcKnightBooks.com

PowerOfZero.com (free 3-part video series)

@mcknightandco on Twitter 

@davidcmcknight on Instagram

David McKnight on YouTube

Get David's Tax-free Tool Kit at taxfreetoolkit.com

We know for sure that we currently have three more years of historic tax rates.

The good news is that it’s fairly likely that those tax rates will be extended for another eight years, giving us a wider window of opportunity.

Congress has essentially removed the limits on how much money you can convert to a Roth IRA. All you have to do is decide how much tax you want to pay.

Most people assume that the 0% tax bracket is David’s favorite, but it’s actually the 24% tax bracket. For only an additional 2% in tax, you can convert an extra $170,000 to tax-free each year.

The 24% tax bracket is the sweet spot in the Trump Tax Cuts. The 24% tax bracket is still lower than the future level of the 22% tax bracket.

The average American is going to end up in the 40% to 45% tax bracket when everything gets settled, which will be a significant change for people in a negative way.

Denmark has a 50% tax rate, but in exchange the population gets universal health care, paid sick leave, paid maternity leave, and more. When the US gets to that point, it will all go to service the national debt.

David’s least favorite tax bracket is the 32%. Even if the tax cuts aren’t extended, which is unlikely, the future version of the 24% tax bracket is 28%, which is still lower than the current 32%.

Don’t preemptively bump up into the 32% tax bracket because you think you’ve got all the heavy lifting done before 2026.

Everybody’s situation is different so it’s very important to work with a financial advisor and go through the financial planning process to find what’s right for you.

When doing a Roth conversion, the ideal method is to pay taxes from an account other than the conversion itself, preferably the taxable bucket. If you don’t have enough money in your taxable bucket, withholding is your only other real option but you have to take into account the additional tax on withholding. 

Mentioned in this episode:

David's books: Power of Zero, Look Before You LIRP, The Volatility Shield, Tax-Free Income for Life and The Infinity Code

DavidMcKnight.com

DavidMcKnightBooks.com

PowerOfZero.com (free 3-part video series)

@mcknightandco on Twitter 

@davidcmcknight on Instagram

David McKnight on YouTube

Get David's Tax-free Tool Kit at taxfreetoolkit.com

The Trump tax cuts went into effect at the end of 2017, but because they lacked a supermajority of approval in Congress those tax cuts had an expiration date. David has long maintained that the government won’t let those tax cuts expire.

There is a broad swath of Americans that are responsible for getting the current politicians re-elected and those people have short memories. If taxes go up, they’re going to blame those same politicians. No politician wants to be responsible for raising taxes on that many Americans.

There is a high likelihood that if you are in the 10%, 12%, 22%, or 24% tax brackets, those tax brackets will be extended until 2031.

If you’re construed as someone who earns a higher income, you’re probably going to face higher tax brackets. Politicians seem to be focused on the 24% tax bracket and below.

The implications of these tax cuts being extended are vast. In 2018, we cut taxes and raised expenses, which was exactly the opposite of what we needed to do as a country.

By extending these tax cuts, we’re kicking the can down the road and the fix is going to have to be even more draconian.

We are currently spending our children’s future because there is no courage in Washington.

The debt ceiling is upon us once again and Congress is waiting until the very last minute to do anything about it.

The debt continues to rise for a variety of reasons. We’ve had Covid relief, wars, and tax cuts that led to additional borrowing. In the near future, the debt will be going up primarily because of Social Security, MediCare, and Medicaid.

It’s projected that the national debt will be around $51 trillion by 2033. Even if we stay at historical interest rates we would struggle to be able to afford to pay that.

President Joe Biden wants to raise the debt ceiling so that Congress can pay for things that have already been approved.

If the US defaults on its debt, most experts predict a recession, if not a depression, millions of people would lose their jobs, interest rates would go up, the country’s credit rating would plummet, and the status of the US dollar as the world’s reserve currency would be in question.

Even if people got their Social Security checks in that situation, there would be so much chaos in the economy that it would hardly matter.

Mentioned in this episode:

David's books: Power of Zero, Look Before You LIRP, The Volatility Shield, Tax-Free Income for Life and The Infinity Code

DavidMcKnight.com

DavidMcKnightBooks.com

PowerOfZero.com (free 3-part video series)

@mcknightandco on Twitter 

@davidcmcknight on Instagram

David McKnight on YouTube

Get David's Tax-free Tool Kit at taxfreetoolkit.com

For David, financial gurus seem to hold a deep hatred for permanent life insurance – be it whole life, universal life, index universal life, or variable life.

A key question to ask: with so many financial gurus against life insurance, how can we conclude that it should be integrated into a balanced, comprehensive approach to tax-free retirement?

David believes that such an approach stems from the fact that these gurus address a huge homogenous audience, who’s generally drawing in debt, and that they don’t have the luxury of nuanced explanation. Everything they discuss should either be good or bad.

Ed Slott, who the Wall Street Journal called ‘the best source for IRA advice’, is an expert whose approach differs from the ones mentioned above.

Slott sees life insurance as an investment that’s better than your typical investment accounts for the fact that it’s tax-free.

Slott goes so far as to say, “Roth IRAs and life insurance can single-handedly remove most of the taxes you or your beneficiaries will ever have to pay.”

The difference in approach between Ed Slott and other financial gurus has to do with Slott’s 30 years of experience working with actual clients that has allowed him to observe the impact that cash value life insurance has on the lives of retirees and their beneficiaries.

Ed Slott is not a financial guru using a one-size-fits-all strategy for the masses. He’s an educator who understands the IRS tax code and who clearly knows that tax planning and retirement require nuance, especially if you have substantial assets.

Mentioned in this episode:

David's books: Power of Zero, Look Before You LIRP, The Volatility Shield, Tax-Free Income for Life and The Infinity Code

DavidMcKnight.com

DavidMcKnightBooks.com

PowerOfZero.com (free 3-part video series)

@mcknightandco on Twitter 

@davidcmcknight on Instagram

David McKnight on YouTube

Get David's Tax-free Tool Kit at taxfreetoolkit.com

I’ll Teach You to Be Rich (book)

How to Get Rich (Netflix series)

Dave Ramsey

Suze Orman

The Total Money Makeover 

Ed Slott

The decision of whether to contribute to a Roth 401(k) or a Traditional 401(k) all comes down to whether you are likely to be in a higher tax bracket than you are now when you retire.

The only determining factor in whether you should contribute to a Roth 401(k) is what you think your tax rate will be when you retire.

David takes an example of two twin brothers and compares the difference between a Traditional 401(k) and a Roth 401(k) over the course of 30 years. The takeaway is that if tax rates remain the same, both plans are identical, but if tax rates are even just 1% higher than they are today then the Roth 401(k) will always win.

If tax rates go up, the Roth 401(k) wins hands down. If tax rates stay the same, then both plans will get the same results. The only scenario where the Traditional 401(k) wins is in the unlikely event tax rates are lower in the future.

Some economists have suggested that tax rates will have to double by 2030 just to keep our country solvent.

In his book Comeback America, former Comptroller General David Walker predicted that average effective tax rates in the US would have to rise to 45% by 2030 to pay for unfunded obligations, Social Security, MediCare, Medicaid, and interest on the national debt.

The farther out your investment horizon the more likely your tax rate in retirement will be substantially higher than it is today.

With the passage of the Secure 2.0 Act, you now have the ability to direct your employer’s match to the Roth portion of your 401(k).

When you retire, it is important to have some tax-deferred income in order to maximize your standard deduction.

If you have all your money in your Roth 401(k) then your standard deduction will stand idle and you will have paid taxes on your contributions unnecessarily.

The goal should be to allocate the lion’s share of your retirement money to your Roth 401(k) to protect you against future tax rate increases, and have the match put into the tax-deferred portion of your 401(k) so it can be offset by the standard deduction in retirement.

Mentioned in this episode:

David's books: Power of Zero, Look Before You LIRP, The Volatility Shield, Tax-Free Income for Life and The Infinity Code

DavidMcKnight.com

DavidMcKnightBooks.com

PowerOfZero.com (free 3-part video series)

@mcknightandco on Twitter 

@davidcmcknight on Instagram

David McKnight on YouTube

Get David's Tax-free Tool Kit at taxfreetoolkit.com

When it comes to investing, I’ll Teach You to Be Rich author Ramit Sethi sees whole life insurance, annuities, and Primerica as major red flags.

David believes that, in the Netflix documentary How to Get Rich, Ramit Sethi makes sweeping insurance product condemnations with little or no evidence to support his case.

If David had a chance to sit down with Ramit Sethi, there’s a series of questions he would like to ask him, including “Why are annuities bad?”

Yale Professor Robert Schiller recently affirmed that bonds aren’t the best solution for managing risk in retirement.

While analyzing 10-year returns for stocks, bonds, and fixed index annuities, Schiller uncovered four startling truths. 

For David, if you were to reach into your retirement portfolio, remove the bonds and replace them with a fixed index annuity, you would increase returns while safeguarding that portion of your portfolio against loss.

The 4% Rule says that if you have a 60-40 stock-bond mix, the most you can take from your portfolio, and maintain a high likelihood of not running out of money before you die, is 4% per year (adjusted for inflation).

If you have done a good job saving money, don’t take advice from financial gurus who are dispensing one-size-fits-all financial planning advice on Netflix.

Mentioned in this episode:

David's books: Power of Zero, Look Before You LIRP, The Volatility Shield, Tax-Free Income for Life and The Infinity Code

DavidMcKnight.com

DavidMcKnightBooks.com

PowerOfZero.com (free 3-part video series)

@mcknightandco on Twitter 

@davidcmcknight on Instagram

David McKnight on YouTube

Get David's Tax-free Tool Kit at taxfreetoolkit.com

I’ll Teach You to Be Rich (book)

How to Get Rich (Netflix series)

Dave Ramsey

Suze Orman

Prof. Robert Shiller

Dr. Roger Ibbotson

Yale University