The Power Of Zero Show

This episode sees David McKnight look at Suze Orman, who, despite being one of the most widely recognized financial voices in America, shares what appears to be incomplete advice.

David believes that Orman has done a lot of good for a lot of people thanks to her financial discipline-centered approach (in addition to being a big proponent of Roth IRAs).

He agrees with Orman: "Roth IRAs are powerful, no doubt about it. You contribute after tax dollars, your money grows tax-free, and, provided you meet the requirements, you can withdraw those funds in retirement 100% tax-free".

The U.S. is currently at historically low income tax rates and, thanks to the One Big Beautiful Bill Act, they have been permanently extended.

However, David shares that, when it comes to the IRS tax code, there's no such thing as a permanent extension.

David's pet peeve with Orman: getting money into Roth IRAs now (while tax rates are low) isn't something that will truly protect you from rising tax rates in retirement.

That's because a Roth IRA by itself isn't enough.

In his book The Power of Zero, David advocates for a balanced, comprehensive approach to tax-free retirement that draws from six different streams of tax-free income.

David goes through the six strategies and explains why you need each and every one of them if you want to land in the 0% tax bracket in retirement.

Mentioned in this episode:

David McKnight addresses three key questions you must be able to answer before executing a single Roth conversion.

Too many people go for Roth conversions without a game plan – this is something that can lead to overpaying taxes and running out of money sooner than anticipated.

David points out that if you can't answer the three key questions, you should stop and reevaluate because guessing here can cost you big.

"What's the total amount I should convert from my IRA or 401(k) to tax-free?" is the first and most critical of the three questions.

Remember, the goal of a Roth conversion isn't to get your tax-deferred bucket to zero at all costs. It's to get to the right amount of tax-deferred dollars shifted to tax-free, the amount that allows you to stay in the 0% tax bracket in retirement.

"How much should I convert each year?" is the second question and is about pacing your conversion so as to avoid unnecessary exposure to higher tax brackets.

The goal is to convert to Roth slowly enough that you don't rise into a tax bracket that gives you heartburn.

"Over what time frame should I complete my Roth conversions?" is the third question you should address before executing a Roth conversion.

Addressing each of the three questions helps you shift from Roth conversion guesswork to Roth conversion strategy.

Be careful. Most financial gurus will say "Roth conversions are great, just pay the tax and move on!"

Mentioned in this episode:

David McKnight busts some of the most common Roth conversion myths that are costing retirees hundreds of thousands – if not millions – of dollars over the course of retirement.

The "Don't worry about Roth conversion, you'll be in a lower tax bracket when you retire" myth is based on two flawed assumptions.

The first one is that your lifestyle will drop significantly in retirement, while the second is the one related to future tax rates being the same or lower than they are today.

David points out that, in retirement, people want to maintain their lifestyle. In some cases, they even spend more in early retirement (think travels, healthcare and helping with kids or grandkids).

Let's remember that the U.S. national debt is projected to hit $63 trillion by 2035.

The country has unfunded obligations in Social Security, Medicare, and Medicaid that total over $200 trillion, and interest on the debt is going to crowd out most of the national budget items by the mid 2030s…

The primary value of a Roth conversion is that it pre-pays taxes at historically low rates to avoid paying them later when rates are likely to be higher.

Roth conversions not being binary, and the fact that you can get massive tax benefits without having to convert your entire IRA is another big myth David debunks.

David explains why you should voluntarily pay taxes instead of delaying that decision.

Ever heard of "If you don't have cash to pay the tax, you shouldn't convert"? It's another myth David addresses in this episode.

For the millions of Americans who have most of their savings in tax-affirmed accounts, strategic conversions are one of the best ways to insulate yourself from the tax freight train bearing down on America.

Mentioned in this episode:

Today's episode revolves around one of the biggest financial debates among pre-retirees and retirees: When should you take Social Security?

Host David McKnight touches upon the recent debate of two of the smartest voices in the field – Dr. Laurence "Larry" Kotlikoff and Dr. Derek Tharp – on this exact question.

Dr. Tharp, out of the University of Southern Maine, notes that economists commonly recommend delaying social security benefits until age 70.

Boston University's Dr. Kotlikoff agrees and explains that delaying can give you a 76% higher monthly benefit compared to taking it at age 62.

Since Social Security is inflation-adjusted and guaranteed for life, it acts as longevity insurance.

Hence, Dr. Kotlikoff thinks that waiting doesn't only help you but your loved ones too.

Dr. Tharp isn't convinced: he points out that only about 10% of workers actually wait until age 70 to claim benefits.

Overall, he sees studies that recommend delaying rely on overly conservative assumptions – they assume that retirees earn returns similar to Treasury inflation-protected securities.

With this line of thinking, if your portfolio is earning 5% real returns instead of 2%, then delaying your benefits might not look as attractive mathematically…

Dr. Kotlikoff cites Menahem Yaari's 1965 paper, which suggests looking at delaying social security like buying insurance. It protects you from the catastrophic risk of living too long and running out of money.

The debate continues with Dr. Tharp talking about the sequence of return risk.

If the market drops early in retirement and you're forced to withdraw more from your investments to delay Social Security, you can permanently damage your "nest egg".

Even though he acknowledges Dr. Tharp's point, Dr. Kotlikoff points out that most retirees have options, such as continuing to work longer, cutting spending, downsizing, or borrowing temporarily instead of taking benefits early.

Plus, he adds, the people most affected by sequence of returns risk are, generally, wealthier households…

Dr. Tharp concludes the debate by citing a study showing that retirees tend to spend about 80% of predictable income streams like Social Security or pensions, but only about 50% of portfolio income.

He also brings up Bill Perkins' book Die With Zero into the conversation.

Perkins believes that Americans often focus too much on lifespan and not enough on health span.

Dr. Kotlikoff responds by stressing that some people underspend, while others overspend… and that's exactly why there's a need for good planning software.

For David, both Dr. Kotlikoff and Dr. Tharp make valid points, and it all boils down to a key question: how long are you going to live?

If you're likely to die at 63, then you should probably take Social Security at 62. If you're going to live to age 100, it makes sense to wait until you're 70.

While there's no accurate way to determine that, there's currently a group of people who are in the business of figuring that out: life insurance actuaries.

David shares two reasons why you may want to consider the additional benefits of life insurance, especially Indexed Universal Life (IUL).

Mentioned in this episode:

David McKnight looks at what happened when NASCAR legend Kyle Busch reportedly lost $8+ million in what was supposed to be a tax-free retirement plan.

The plan Busch relied on was built around an indexed universal life insurance policy.

According to Kyle and Samantha Busch's lawsuit, they paid more than $10.4M into several IUL policies issued by Pacific Life Insurance between 2018 and 2022.

While these policies were pitched as a safe, self-funding, tax-free retirement plan, things didn't go as promised…

Poor design, unrealistic expectations, a delayed 1035 exchange, and poor oversight are the key reasons why the Busch's retirement plan ended up belly up.

"If you're going to do a 1035 exchange, make sure you do it at the start of the policy, not years into it", warns David.

David goes over the lessons that can be drawn from the Busch's case.

For instance, you should never enter into a contract that you don't understand, nor should you do an IUL if you can't overfund it from day one.

David believes that you shouldn't rely on the IUL alone…

In his opinion, the Busch case is a cautionary tale about what happens when one strategy is positioned as a silver bullet retirement solution.

In a balanced, comprehensive approach to tax-free retirement, which includes Roth IRAs, Roth 401(k)s, and Roth conversions, the IUL's purpose is not to carry the whole load, but rather to act as a shock absorber.

A recent Ernst & Young study demonstrated that a retirement income strategy that incorporates IUL provides far more income than a strategy that calls for investments alone.

David shares a few tips on how to avoid the IUL trap that the Busches unfortunately fell into.

Mentioned in this episode: