The Power Of Zero Show

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. Annuities can be superior to bonds for seniors, giving them high, guaranteed payments for the rest of their lives that allows them to be more aggressive with the rest of their portfolio. Basically, an annuity that guarantees a stream of income for your lifetime functions like the bond portion of your portfolio. If the stock portion of your portfolio is down, that means that the bond portion is up. If you want to guarantee a portion of your income, it may make sense to simply replace the bond portion of your portfolio with an annuity. Once you start drawing income from the annuity it continues to function as the bond portion of your portfolio and in many cases because of the growth mechanism internal to the annuity gives it the opportunity to keep up with inflation over time as well. If you just qualified for a LIRP, you may have the same question in your mind. Why do it now while the stock market is down due to the coronavirus? The key to remember is that you won't be cementing your losses in the stock portion of your portfolio, you fund it through the bond portion which happens to be doing great right now. When the stock market recovers, the stock portion of your portfolio will grow along with it. Now is an excellent time to start repositioning money to tax-free. Every year is a window of opportunity to take advantage of historically low taxes. You can also take advantage of the cost of a Roth conversion based on the depressed value of your assets. If you're concerned about the losses in your portfolio, you have to remember that the LIRP and annuities are designed to replace the bond portion of your portfolio, not the whole thing. They actually reduce the overall risk in your stock market portfolio while giving you higher rates of return. Don't wait for the stock market to recover, just think of an annuity as a more effective and efficient bond and if you're over the age of 50, the LIRP is also a heartburn-free way of mitigating long term care risk. Retirement economists are unifying their voices and saying that your stock market portfolio will last longer if you guarantee a portion of your retirement income.

Investors need to understand the latest coronavirus stimulus bill that was just passed. Investors can now take out up to $100,000 from their 401(k) or IRA prior to age 59 and a half without any penalty. The bill has also increased the loan size you can take out from your 401(k) to $100,000. Another big piece of news investors should be aware of is that required minimum distributions are going to be waived for 2020. The question is how will the IRS fill the hole in the federal government's revenue for the year. This coronavirus bill is twice as large as the previous economic stimulus bill in the wake of the 2008 mortgage crisis. This is the single largest stimulus bill in the history of the world. A quick breakdown of where the $2.2 trillion will be spent over the next few months. Stimulus checks will be sent out. Individuals who make up to $75,000 per year will receive a $1200 check from the government. Couples who make up to $150,000 per year will receive a $2400 check. For individuals who make more than those thresholds, they will gradually reduce the amount of money being sent out. Additionally, parents will receive an additional $500 per child. People that have their automatic bank deposit info on file with the IRS will receive their money in the next two to three weeks, those that don't will be mailed a check but who knows when that will occur. There is already a push for another stimulus bill beyond the first, specifically with pressure from Nancy Pelosi, that aims to increase the benefits for food stamps, increase the amount of money going to regular Americans, and introduces some environmental restrictions on airlines. There is a lot more spending and money printing/borrowing coming down the line, including a plan for the US Treasury to mint two $1 trillion coins and deposit them in the Federal Reserve. This is essentially an exercise in playing around with Monopoly money. There are universal financial laws at play here, and when you violate them there is always a chicken that comes home to roost. Money is valuable because it is scarce and creating more makes it less valuable and precipitates inflation or hyperinflation. According to the New York Times, the stimulus is going to be financed by borrowing money. When asked how the government is going to pay for this additional spending, they claim that they will actually be reducing taxes on top of the spending. There is always an unintended consequence of printing or borrowing money. This increase in spending will accelerate everything that we've been talking about on the podcast and that includes massive inflation. Countries will likely stop loaning the US money unless we raise interest rates in the near future. Low-interest rates mean the loan is riskier for those countries so they are less likely to make them. Increasing interest rates will only make servicing the existing debt that much harder and will likely lead to a financial crisis much sooner than would have otherwise happened. 2030 will be a year of massive consequences for the US, and this stimulus bill may even bump that up to 2029 or 2028. We are essentially running a deficit of $3 trillion this year and that will have major consequences for the economy going forward. This is only emphasizing how important the Power of Zero paradigm is for your retirement.

The coronavirus downturn in the market is actually the perfect time to do a Roth Conversion because of the double sale that's going on. The first sale involves the next six years where we get to enjoy the lowest tax rates we are likely to see in our lifetimes. The second sale is due to the 35% drop in the stock market, your assets are now at much lower values and that means the tax on a potential Roth Conversion is also 35% lower. If you were to hypothetically convert a $1 million IRA this year your tax bill would be approximately $299,112 or a 29% effective tax rate. If you take in the decline in the stock market of 35% your tax bill is a little more than half. If the stock market goes through a massive recovery over the next few years having done this Roth Conversion, all of that recovery occurs in your tax-free bucket. If the market is down 25%, your portfolio has to recover 33% to get back to where you started. If the market drops 50%, you need a 100% recovery to get back to even. Where would you prefer to have that recovery occur, in your tax-deferred bucket or your tax-free? You have the opportunity to take advantage of a double tax sale right now. Your assets are 35% lower than they were about a month ago and that means the cost of getting into the tax-free bucket is on sale right now as well. There are a couple of caveats to be aware of. If you decide to undertake a Roth Conversion right now and don't have the tax withheld by your custodian, you don't want to delay paying the tax because you will end up paying penalties and fees. No matter your age, the very best place to pay for the taxes of a Roth Conversion is out of your taxable bucket. If you have more than six months worth of expenses in your taxable bucket you have some inherent tax inefficiencies in your portfolio that can cost you hundreds of thousands of dollars over your lifetime. Let's use our least efficient bucket to help move money into our most efficient bucket. When you contribute to a Roth IRA you have to use cash. That can be problematic because there can be lots of movement in the market when you liquify parts of your portfolio. You can't predict what is going to happen with the market which is why the Roth conversion is so useful. The Roth Conversion allows you to do a like-kind transfer where you can transfer shares you own from one account to a Roth IRA. This insulates you from the rise and fall of prices while you cash out from the market. If you want to get into the zero percent tax bracket, you have a huge opportunity right now. The market will likely recover at some point in the future, and that means there are a number of great deals to be had right now. Ideally, your assets will be able to recover in the tax-free bucket and there is a big opportunity to do so in this market downturn.

A common question that David gets fairly frequently is whether or not the LIRP can be a substitute for the bond portion of a portfolio. A lot of people are funding their LIRP's out of stock market portfolios that are growing at an average rate of 8%. If that's the case and they take money out of that portfolio to get a 4% return in their LIRP, doesn't that neutralize the tax benefit that justifies doing the LIRP in the first place? It can make sense for the LIRP to function as the bond portion of your portfolio, so long as you are actually funding your LIRP out of the bond portion of your portfolio! Due to the recent precipitous drop in the stock market this question is popping up more often, but the stock market may be down but the bond market is not down nearly as much. Back in 2008, both the stock and the bond market went down at the same time. In that situation taking some money to fund a LIRP makes sense. You have to recognize that if you are funding your LIRP out of your retirement portfolio, it makes sense to liquidate the bonds when the markets are down to fund your LIRP. This could also hold true with a fixed index annuity. If you're transitioning money from the bond portion of your portfolio to your LIRP, you should take a little more risk in the stock market in the meantime because a LIRP is typically less risky than the average bond portion of your portfolio. If you are barely retired, most of the money you are planning on spending in retirement has even been earned yet. If you want your money to last as long as you do, you need to continue to grow that money over the course of your retirement. If you take money out of your stock market portfolio during the first ten years of retirement you are exposing yourself to the sequence of return risk and if it's done during some down years it could send your portfolio into a death spiral from which it will never recover. Having two to three years' worth of lifestyle expenses in your LIRP is how you want to cover expenses during the two or three down years you are likely to experience in the first ten years of retirement. If you're just retiring now, you're going to have to fund it over the next five or six years and let it sit. You don't want to touch the money until the eleventh year, there are some fees and expenses involved in the first ten years and it doesn't make sense to tap into yet. If you don't have a funded LIRP that can cover the first ten years of retirement, your best bet is to have your lifestyle needs allocated to a time segmented portfolio. The reality is that the LIRP can certainly replace the bond portion of your portfolio. Annuities are great because they can function as the best kind of bond, with higher rates of return and less risk, and can also allow you to take more risk in the rest of your stock market portfolio. As you are transitioning your money to your LIRP from the stock market portfolio and as long as you are increasing the risk in the stock market allocation, you are likely going to get a higher rate of return with less risk overall. You have to grow your money in retirement, this is not the time to go into hibernation mode.

The two single greatest threats to your retirement are tax rate risk and longevity risk. The Power of Zero paradigm is the unified approach to mitigating both of these risks. As of March 9, 2020, the stock market is down 19% from its peak in February which has erased a lot of the returns from 2019. The infections of the Coronavirus are doubling approximately every six days. Around mid-May that doubling interval should start to taper off. People over the age of 70 are at the most risk from serious complications. Everyone else practicing safe social distances and taking precautions will help. There is a lot of panic in the media at the moment. The main concern of the federal government is that the number of infections will overwhelm the nation's healthcare system. We are not going to avoid 90 million people getting infected, but the longer we can draw out the window of time we can give the US healthcare system the time to deal with the situation. One of the biggest drags of your retirement, it's not taxes or fees, it's emotion. Investors left to their own devices make horrible decisions when it comes to stock market investing. Emotion-driven investments could knock about 3% of your expected portfolio returns. The worst thing you can do is say "I know when the bottom of the market is, and I know when to get out and when to get back in." You can't predict the market, if you got out before the crash in 2008, you weren't prescient, you were lucky. Don't panic. This situation highlights the importance of being able to guarantee your retirement income adjusted for inflation, so you don't have to panic when the stock market goes up and down. The money in your stock market portfolio should be earmarked to cover your discretionary lifestyle expenses. The LIRP can be a great compliment to your stock market portfolio to cover lifestyle expenses. When you have your lifestyle guaranteed by a combination of social security, a pension, and a guaranteed lifetime income, you have the luxury of not having to worry about the stock market as much. If you are funding your lifestyle needs right now you are probably freaking out at the moment. A guaranteed lifetime income also allows you to take more risk in retirement. If you are retiring now, the vast majority of your money that you are planning on spending has not been earned yet. You have to be able to take some risk in the stock market in order to earn returns that will allow you to properly fund your retirement. The people relying on the 3% or 4% rule and the returns of the stock market to be able to pay for their lifestyle don't have the luxury of enjoying their retirement. They have to be in hibernation mode in retirement and tend to be more stressed and die earlier. For all intents and purposes, the guaranteed lifetime income becomes the bond portion of your portfolio. It allows you to invest the rest of your money in a more aggressive stock allocation which means your money lasts longer. Do your part to stretch out the window of coronavirus infections so the healthcare system has more opportunity to deal with the situation. Don't panic about the market. Studies have shown that panic will erode your returns. With a guaranteed lifetime income, you don't have to worry about where your next paycheck is coming from.

It's easy to forget how bad the fiscal situation of the United States actually is unless we are being constantly bombarded by experts telling us the truth of the matter. A recent article details a coming report from the Comptroller General. Come March 12, the Government Accountability Office is going to put out an assessment of the fiscal health of the federal government and unsustainability is the key takeaway. The Comptroller General put out a similar report in 2019 and not only has nothing changed since then, but the situation has gotten much worse. The debt is now over $23 trillion and it doesn't seem like the government is heeding its own warnings. Officials can't continue indefinitely spending more than the government receives in taxes without incurring staggering long term costs to borrow from China and other lenders. Due to the coronavirus, the Federal Reserve has just reduced interest rates .5%. Their speculation is that interest rates will stay low for the foreseeable future. The trouble is the expected interest rate for future debt will likely be higher than historic averages as the US becomes riskier to lend money to as time goes on and the debt to GDP ratio continues to increase. The imbalance between spending and revenue that is built into current law will lead to the continued growth of the deficit. The situation where the debt grows faster than the GDP of the US means the current federal fiscal path is unsustainable. Historically, debt compared to GDP has averaged 46%. We are now at 109%, which is worse than it was in the wake of World War 2. But that doesn't count the off the books transfers like Medicare, Medicaid, and Social Security as part of the debt that every other country in the world includes in their accounting. The true debt to GDP ratio is close to 1000%. We are going to pay the interest on our debt, which is money that is taken off the table from other programs. Interest payments are non-discretionary spending. If the US defaults on its debt it will have major economic impacts on every country on the planet. The growing interest payments are going to crowd out all the other expenses in the budget, but we have to pay it so ultimately we are painting ourselves into a corner. As the debt continues to grow and other countries start to believe that the US will not be able to pay that money back, the interest rates on the loans will only get higher and higher over time. For the second year in a row, the highlighted word in the Comptroller General's report is unsustainable. More skeptics are coming over to the Power of Zero way of thinking every day. We are at a period of historically low tax rates. Every year between now and 2026 is a window of opportunity to take advantage of that fact. Every year beyond 2026 is potentially a year will you be forced to pay the highest tax rates you will see in your lifetime. Never in the history of the US has there been a more appropriate time to adopt the Power of Zero paradigm. Mentioned in this episode:https://www.theepochtimes.com/comptroller-general-will-again-tell-congress-governments-financial-situation-is-unsustainable-but-will-anything-change_3257865.html

If you're between the ages of 50 and 65, there is a good chance that you have at least one parent or in-law that is going through a long-term care event. This may lead you to wonder how you are going to deal with your own long-term care events in the future. The government may be picking up the tab, but people in Medicaid-funded long-term care facilities tend not to live as long as at other facilities. A lot of people in that age range have a false sense of security around how they are going to finance their long-term care events, assuming they will be able to pay for everything out of their IRA or 401(k). The average stay in an assisted living facility is just over two years, but research shows that people receive some form of long-term care in their home for an average of three to six months. Sixty percent of those people in the assisted living facility will go on to spend up to an additional two years in a nursing home. When you add up the averages, you can expect to be in some sort of long-term care situation for four to five years, which is much longer than most people think is the case. Long-term care costs are not uniform across the country, but you can expect to spend around $100,000 after taxes per year of long-term care. There are other expenses that people don't think about known as shock expenses. These can include things like unexpected health care costs. All told, you can expect a total cost of somewhere around $400,000 a year. In order to net just $100,000 in distributions you need to figure out your effective tax rate, but you also have to keep in mind that since tax rates are going to be dramatically higher in the future those numbers are going to increase as well. People who will need long-term care in the future may have to deal with an effective tax rate of 40%, which means you would need $166,000 before taxes to cover your long-term care expenses. And that's assuming the costs of long-term care don't rise in the next twenty years, which is highly unlikely. Are you going to have over $1 million in your IRA's and 401(k)'s at the age of 85? Most people tend to spend the majority of their retirement money in the early years when they are still mobile. In a rising tax rate environment, it is not a smart move to pay for your long-term care out of your tax-deferred bucket. This is why the L.I.R.P. is something we recommend to cover your long-term care expenses. With an L.I.R.P., you can spend your death benefit in advance of your death in order to cover long-term care expenses. Instead of waiting and hoping you have enough money when you need it, why not proactively pay taxes on that money and position them in tax-free vehicles like the L.I.R.P.? That way, you can have guaranteed access to the cash when you need it. We have to remember that tax rates in the future are going to be much higher than they are today and long-term care costs are likely to be much higher as well. If we can pay taxes preemptively, we are going to be in a much better position to pay for these long-term care costs. If you are between the ages of 50 and 65, you are likely in a position to do something about your long-term care needs without the heartburn that a generation of Baby Boomers are likely to feel. Medicaid doesn't step in until you have spent all your money as a married couple down to $128,000 and is the least efficient way to pay for long-term care. You can literally burn through a lifetime's worth of savings in just a couple of years because you didn't plan ahead of time and are forced to pay for long-term care expenses out of your tax-deferred bucket.

99.5% of all annuities are not in the right bucket. There are many reasons to use an annuity: they can be safe and productive, they safeguard against market risk while participating in the upward movement, and many people use them for a guaranteed stream of income. The alternative to annuities for creating a stream of income is the stock market but that approach comes with a set of rules including the previously discussed 4% Rule. When you factor in present conditions, the 4% Rule no longer holds true and it's now more like the 3% Rule. In order to live your target lifestyle with the stock market strategy, you would typically have five options: you can save more, spend less, work longer, die sooner, or take more risk in the stock market. Most of those options don't appeal to people, but there is an alternative with annuities. One of the more common ways of solving this problem is using a single premium immediate annuity. The appealing part of this option is that you don't need nearly as much money upfront to live your target lifestyle. The downside is that if you die early, that money is gone. Some people will use a fixed-index annuity, where the growth of the annuity is fixed to the growth of an index in the stock market. The trouble is that nearly every single annuity is in the tax-deferred bucket. Let's say you decide to draw an income from your annuity. It's going to feel like it's coming from a pension and that means it will be exposed to tax rate risk. If tax rates go up, the portion you get to keep goes down. The reason people are getting a guaranteed lifetime stream of income is they want a guarantee that it will cover their lifestyle expenses when coupled with their social security. If tax rates go up, and we expect them to, that stream of income will not cover your lifestyle expenses and that means you will have to spend down your other assets much faster than you expected Those spare dollars are meant to cover aspirational expenses or shock expenses and spending down this pool of resources will cause you problems down the road. Like a pension, if you draw from an annuity in your tax deferred bucket, it will count as provisional income and counts against the threshold that determines if your social security gets taxed. When your social security gets taxed, you run out of money 5 to 7 years faster. If most annuities are in the tax-deferred bucket, this will force people to pay tax on their social security in a rising tax rate environment. They are going to keep less of their income than they thought they would, and it's going to force them to spend down their non-annuity assets that much faster. There is a way to get the annuity in the tax-free bucket. When most people retire with 401(k)'s or IRA's and they roll them into an annuity, they typically get stuck. This is why it's crucial to use an annuity that allows you to use the Roth conversion option at your leisure. There are four companies that allow you to take advantage of an internal Roth conversion feature that allows you to shift your annuity over to the tax-free bucket. Having an annuity in the tax-free bucket is much closer to the idea of a guaranteed stream of income and it allows you to take much more risk in the stock market. You won't be as constrained and can allow the market to go up and down without being exposed to the same level of tax rate risk or sequence of return risk. There are a number of benefits to having your annuity in your tax-free bucket as opposed to being stuck in the tax-deferred bucket. If you're contemplating getting an annuity, ask your advisor if you're getting one that will have to stay in the tax-deferred bucket. Specifically ask if the annuity allows for internal piecemeal Roth conversions.

Historically, people who had large IRA's, and who didn't want their beneficiaries to squander their inheritance all in one year, could use a trust to make sure the funds were released over the course of their lifetime. However, due to the recently passed Secure Act, that beneficiary will be forced to spend down that money over ten years or less. The good news is that there is a way to control the flow of money in a similar fashion despite the legislation. Since it makes sense to pay taxes now while taxes are still currently historically low, Roth conversions are one way you can do that, but Roth IRA's won't solve the inheritance problem. This is where life insurance comes in. We know that life insurance can be owned by a trust, and this trust can be required by law to distribute those dollars per the language of the trust. The bottom line is life insurance gives us some flexibility in terms of passing money on to the next generation and being able to control how that money gets distributed. Instead of preemptively doing Roth conversions with a large IRA, you would instead pay taxes preemptively at historically low tax rates, and then contribute that money to a life insurance policy that is owned by a trust. Your beneficiaries will not get that money in any other way than the way the trust prescribes it. Life insurance trusts are much more flexible and simple, and you don't have to navigate a bunch of difficult tax laws. As great as this strategy is, it doesn't solve the problem of keeping the money growing tax free over the life of the beneficiary in the way it would with the previous form of the stretch IRA. The IRS is getting wise and is now requiring beneficiaries of Roth IRAs to spend that money down over the course of ten years. If a beneficiary inherits a huge IRA or Roth IRA, they will need a tax-free receptacle within which they can continue to grow that money tax-free over their lifetime. One of the things that we know about life insurance is that there is no limit on how much money that you can put into the policy. Ideally, the beneficiary is forced to receive these distributions from a IRA or Roth IRA, or from a trust that owns a life insurance policy, and once received that money is placed into another life insurance policy since life insurance is an excellent vehicle for assets to continue to grow in a tax-free way. We know that you can touch that money in the life insurance policy before age 59 and a half without a penalty. When you take the money out the correct way, it can be tax-free and there are no contribution limits. We also know that life insurance has been historically granted a grandfather clause. Life insurance seems to be immune to tax rate risk. If congress decides that someday in the future they want to change the rules around life insurance, existing policies will be exempt and continue operating under the old rules. Life insurance is the single greatest tax benefit within the IRS tax code. It gives you more flexibility, it allows you to pass money on to the next generation with more simplicity, and allows you to rule from beyond the grave. The fact that beneficiaries can use life insurance to continue to grow and compound their inheritance in a tax-free way is often lost in the conversation. We need to start thinking about using life insurance as a more efficient way to bypass the constraints of the Secure Act while also using life insurance as a way to grow and compound that wealth for the next generation. There may be two life insurance policies that need to be purchased, one owned by a trust that allows you to distribute that money at your discretion, and a second policy owned by the beneficiary for use as a receptacle for that money. The common denominator here is that we probably need to be using life insurance more in retirement planning, more in estate planning, and more in the lives of the beneficiaries of those estate plans. Life insurance is so flexible and offers so many benefits, that's why it's such a great tool in the Power of Zero strategy.

The 4% Rule originated with a man named William Bengen in 1994. He looked back and noticed that people were withdrawing from their portfolios at a very haphazard rate. Prior to 2005, a common way people used to determine how much they could withdraw was to look at the average return of the market at the time. When asked, 40% of retirees said that they could withdraw 10% annually from their portfolio starting from day one of their retirement without ever running out of money. William Bengen started running Monte Carlo simulations on the past 70 years and used a hundred thousand combinations of variables including length of retirement, rate of withdrawal, and stock mix. He found that the current rates of distribution of 7% at the time were completely unsustainable, and that the only way to give yourself a high probability of having your money last through life expectancy was to take out 4%, hence the 4% Rule. If you have a million dollars starting day one of retirement and wanted to keep up with inflation over time, the most you could take out was $40,000. Over a 30 year retirement, you would have a 90% likelihood of your money lasting your whole lifetime. This became the way that most people combatted longevity risk. As long as you only took 4% of your retirement portfolio adjusted for inflation, that gave you a very high probability of your money lasting through a 30 year time period. When William formulated his 4% Rule, he was using a 40/60 split between stocks and bonds, but bonds are no longer performing the way they did in the 90's. Many economists and retirement experts have revised the rule downwards primarily as a function of bond returns. Combating longevity risk is an expensive proposition, even if you use the 4% Rule. If you require $100,000 to live in retirement, once you factor in inflation you will need roughly $2.5 million by the time you retire. If you're not on track to hit that amount in your portfolio, you have five heartburn inducing alternatives: save more, spend less, work longer, die sooner, or take more risk in the stock market. It gets even worse with the new 3% Rule. With the 3% Rule, what was before a very expensive, cash intensive, high asset proposition is now even more expensive. You need even more money if you plan on using the stock market and the 3% Rule, even if you manage to acquire enough money it's not guaranteed. The second issue with the 4% Rule is you have to be able to stick to it even in erratic markets, which is the opposite of what most people do. In order for the Rule to work for you you have to keep your money invested in good and bad markets. Do you have the discipline to keep your money invested even when the market is going down? There is also the illusion of liquidity. When you have millions of dollars in your retirement portfolio, it looks like you have plenty of money that's easily accessible. The trouble is that every single dollar is already earmarked under the Rule and as soon as you take out any additional funds your odds of outlasting your retirement money sink rapidly. If your plan is to live by the 3% Rule, all your retirement money is already allocated and you won't have any room for unexpected expenses. If you want to be able to cover shock expenses or aspirational goals, you will need an additional fund set aside by the time you retire. We have to be clear about the shortcomings of the 4% Rule, and now the 3% Rule as well. They work in a vacuum, but we don't live in a vacuum. We live in the real world and unexpected things happen.