The Power Of Zero Show

In this episode, David McKnight addresses one of the biggest myths in retirement planning: once you retire, you need to dramatically reduce your exposure to stocks. The reason why most financial advisors recommend reducing stock exposure in retirement has very little to do with stocks and everything to do with sequence of returns risk. Sequence of returns risk is what happens when you're forced to withdraw money from your investment portfolio during a market downturn. If the market falls 30% and you're simultaneously taking withdrawals to pay for your living expenses, you're locking in losses and permanently impairing your portfolio's ability to recover. According to David, the way to solve this problem is by ensuring that your essential expenses are covered before you ever retire. When you're at least five years out from retirement, David believes that one of the most important decisions you can make is to create the so-called income floor. An income floor is a guaranteed stream of income that covers your basic living expenses regardless of what the stock market is doing. The volatility shield adds a second layer of protection that has to do with discretionary expenses (e.g., a trip around the world, taking the grandchildren to Disney World, etc.). Suze Orman has controversially recommended that retirees keep 3-5 years' worth of living expenses in a savings account, so they don't have to sell investments during a market downturn. While David agrees with the concept, he doesn't see savings accounts as the most efficient place to put that money in. Instead, he'd rather have retirees accumulate that money in a completely separate account (a volatility shield) – which, unlike a savings account, has the potential to grow 5-7% net fees over time. Looking for an alternative volatility shield? Look at cash value life insurance in the form of indexed universal life (IUL), says David. An Ernst & Young study found that retirees who included the volatility shield strategy and a guaranteed lifetime income annuity in the retirement plan were able to dramatically increase the sustainable withdrawal rate on their investment portfolio. Since the early 1990s, the gold standard on sustainable withdrawal rates has been 4%. The 4% Rule says that if you withdraw approximately 4% of your portfolio each year, there's a reasonably high chance that your money will last a full 30-year retirement. However, when retirees had access to a volatility buffer and could avoid taking distributions following market downturns, sustainable withdrawal rates increased dramatically (in some scenarios, up to 8%). David is a believer of the fact that the portfolio that got you into retirement can also take you through retirement – with a recommended 70% in U.S. stock market index funds and 30% in international stock market index funds. For David, the reason why this approach works well is that, with it, you solve the two biggest issues in retirement: income and volatility. Moreover, if you can position these assets inside tax-free accounts through strategic Roth contributions and Roth conversions, you gain protection against yet another threat, tax rate risk. David concludes by stressing that it is not that the buy-and-hold strategy doesn't work, it's that most retirees don't have the protection tools necessary to stay committed to the strategy when markets become turbulent. Mentioned in this episode: David's new book: The Secret Order of Millionaires David's national bestselling book: The Guru Gap: How America's Financial Gurus Are Leading You Astray, and How to Get Back on Track Tax-Free Income for Life: A Step-by-Step Plan for a Secure Retirement by David McKnight DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com Suze Orman Ernst & Young

David McKnight kicks this episode off by explaining how, for decades, conventional financial wisdom has been saying that, as you approach retirement, you should begin dialing down your stock exposure and increasing your bond allocation. A 60-year-old, for example, would have 40% of their portfolio in stocks and 60% in bonds. Historically, bonds served three primary functions: They provided income, they reduced portfolio volatility, and they protected retirees from so-called sequence of returns risk. David touches upon how the sequence of returns risk works. Retirees who get hit early often run out of money earlier – in some cases, even 15 years prior to life expectancy. The old approach to retirement planning assumes that bonds could provide meaningful returns while still acting as a stabilizer. However, recent years have shown that bonds are not risk-free. Back in 2022, for instance, the Bloomberg U.S. Aggregate Bond Index lost 13%. Long-term treasuries did even worse, as many lost between 25 to 30% due to rapidly rising interest rates. David stresses that an annuity can do something bonds cannot do: It can guarantee income that you cannot outlive. It's important to realize that whenever your basic living expenses are covered, something profound happens psychologically: You stop depending on your investment portfolio to solve every problem. Furthermore, you feel as if you now have permission to spend. Studies show that those who have guaranteed lifetime income spend 22% more than those who rely strictly on a stock bond portfolio. A properly funded IUL can create a pool of tax-free money that's insulated from stock market loss and available during downturns. David unpacks a strategy that can increase the sustainable withdrawal rate on your stock portfolio from 4% to as high as 8% with a 95% success rate. When you combine guaranteed lifetime income from annuities with a volatility shield in the form of IUL, you are no longer reliant on bonds, says David. He also touches upon why retirees who adopt the no-bond power of zero approach begin to take a lot more risk in their stock market allocations. David wraps things up by sharing insights on what retirees should think about and do to increase the likelihood that, in retirement, their money will last as long as they do. Mentioned in this episode: David's new book: The Secret Order of Millionaires David's national bestselling book: The Guru Gap: How America's Financial Gurus Are Leading You Astray, and How to Get Back on Track Tax-Free Income for Life: A Step-by-Step Plan for a Secure Retirement by David McKnight DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com Bloomberg U.S. Aggregate Bond Index

A recent landmark study from BlackRock caught David McKnight – he shares what it was all about and why you should care in this new episode of the Power of Zero Show. For decades, Americans were told that if they simply contributed faithfully to their 401(k) and avoided emotional decisions during market downturns, they would have enough money in retirement. According to the BlackRock study, retirees who incorporated guaranteed lifetime income in the form of an annuity into their retirement portfolio experienced an average increase of 22% in potential retirement spending. That number became approximately a 25% increase for lower income retirees! The increase came primarily from giving retirees greater confidence to spend money because a portion of their retirement income was guaranteed for life. David explains that, while 30 or 40 years ago retirees could rely on company pensions that provided predictable monthly income for life, the modern retirement system has shifted enormous responsibility onto the shoulders of ordinary Americans. Employers used to bear the responsibility for generating the income stream and ensuring that retirees did not outlive their money. Today, however, pensions have all but disappeared, and most Americans now rely on 401(k) or other tax-qualified retirement plans. One of the big problems is the fact that such tax-affirmed accounts can help you build wealth, but don't come with instructions on how to make sure your money lasts a full 30-year retirement. The BlackRock study echoes something that David has stressed several times on the show: retirees spend more when at least a portion of their retirement income is guaranteed. David clarifies that when he talks about guaranteed lifetime income, he does not suggest retirees place all of their assets into annuities or eliminate market exposure altogether. David talks about 100% stock allocation and why you can be much more aggressive in your stock market allocation once you create an income floor in retirement. The current status quo of the American fiscal system – and exploding national debt – appears to be painting a picture where future tax rates will be significantly higher than they are today. David is a strong advocate for tax-free investment accounts in retirement. In particular, he points to six different tax-free income streams: Roth IRAs, Roth 401(k)s, Roth conversions, RMDs up to standard deductions, certain types of cash value life insurance as a volatility shield in retirement and, if you can keep your provisional income low enough, your Social Security can be 100% tax-free. David touches upon a strategy that can give you guaranteed tax-free income for life. The old retirement model gave Americans confidence through company pensions. The modern model requires retirees to create their own personal private pension in the form of an annuity. It's important to understand that retirement isn't just about accumulating wealth, but also about creating a stream of lifetime income that's guaranteed to last as long as you do. David concludes by explaining what retirement planning should accomplish beyond merely maximizing account balances. Mentioned in this episode: David's new book: The Secret Order of Millionaires David's national bestselling book: The Guru Gap: How America's Financial Gurus Are Leading You Astray, and How to Get Back on Track Tax-Free Income for Life: A Step-by-Step Plan for a Secure Retirement by David McKnight DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com BlackRock BlackRock's paper Who Benefits From Guaranteed Lifetime Income?

Today's episode of The Power of Zero Show revolves around a question host David McKnight gets asked all the time: "Should I still be doing Roth conversions in my 60s, even if I'm already retired?" In short, David believes that you should not only do a Roth conversion in your 60s, it's actually one of the most optimal times in your entire life to do it. When doing a Roth conversion, you're choosing to pay the IRS its portion of your IRA now, on your terms, instead of paying it a much larger portion later, on their terms. That's why Roth conversions don't only make sense for younger people but for retired folks too. Remember: with Roth conversions, you're not catching up because you're not behind. You're locking in a lower tax rate today to avoid a much higher tax rate down the road. David explains why the so-called "retirement income valley" is a strategically perfect time to do a Roth conversion. The 32% tax bracket is David's least favorite tax bracket, which he recommends avoiding at all costs when doing Roth conversions. David touches upon the Penn Wharton Budget Model and why 2040, or so, will be the do-or-die date for these matters. What if you don't have extra cash sitting around? Would you still need to pay the taxes on your Roth conversion out of pocket? David illustrates what you can do if you find yourself in that situation. David goes over why you should want to get as much of your IRA into Roth as you possibly can – and what's the beauty of doing that in your 60s. Mentioned in this episode: David's new book: The Secret Order of Millionaires David's national bestselling book: The Guru Gap: How America's Financial Gurus Are Leading You Astray, and How to Get Back on Track Tax-Free Income for Life: A Step-by-Step Plan for a Secure Retirement by David McKnight DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com Congressional Budget Office Penn Wharton Budget Model

David McKnight unpacks the five most common objections to Roth conversions and why they simply don't hold up under scrutiny. The first objection has to do with people not wanting to voluntarily pay taxes before the IRS requires them to. While on the surface, postponing this may sound logical, it ignores a fundamental aspect: the state of the U.S. national debt. It has just passed $39 trillion, and it's slated to grow by $2 trillion per year for the next 10 years, and $3 trillion after that. In other words, interest on the national debt is becoming one of the largest line items in the federal budget. That means that by refusing to pay taxes today, you're making an insanely risky bet that taxes in the future will be lower than they are right now. All, while your IRA keeps growing and compounding over time. Thus, 10 years from now, not only could tax rates be higher, but your required minimum distributions could be dramatically larger. The second most common objection to Roth conversions revolves around people saying, "If I do Roth conversions, that additional income will force me to pay increasingly higher levels of IRMAA or cause my Social Security to be taxed." David points out that Roth conversions do increase your taxable income, which can trigger those additional expenses during the conversion period. However, while it's true that you'll pay IRMAA and Social Security taxation in the short term, you'll get rid of those additional expenses for the rest of your life once your conversion period is over. Objection #3 is "There's too much opportunity cost, I won't have time to make up for the taxes I paid". David explains that, despite sounding sophisticated, this objection is based on a flawed premise. Your IRA is a "business partnership" with the IRS – and every year they get to vote on what percentage of your profits they get to keep. So, when you do a Roth conversion, you're not losing money. You're simply buying out your "silent business partner" at today's historically low tax rates. David highlights that, if taxes double in the future, you'll be glad you bought them out while taxes were still on sale. The fourth objection – "In retirement, I'll be in a lower tax bracket" – is actually one of the most dangerous assumptions in all of retirement planning. People assume that when they retire, their taxes automatically go down. For many Americans, the exact opposite happens, though. Once required minimum distributions kick in, they can force huge amounts of taxable income onto your tax returns. David touches upon an additional issue almost nobody talks about: the so-called widow's penalty. The fifth objection to Roth conversions revolves around the question, "Won't the federal government tax Roth IRAs sometime down the road?" People don't realize that the government loves Roth IRAs because they generate tax revenue today – unlike traditional IRAs, which delay tax revenue. That's why, every time Congress needs money, they tend to pass legislation that makes Roth accounts even more attractive. Remember: Roth conversions are about taking advantage of the tax sale of a lifetime before catastrophic levels of debt force tax rates higher. Mentioned in this episode: David's new book: The Secret Order of Millionaires David's national bestselling book: The Guru Gap: How America's Financial Gurus Are Leading You Astray, and How to Get Back on Track Tax-Free Income for Life: A Step-by-Step Plan for a Secure Retirement by David McKnight DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free video series) @mcknightandco on Twitter @davidcmcknight on Instagram David McKnight on YouTube Get David's Tax-free Tool Kit at taxfreetoolkit.com