This review is for the 2018 update of the original 2013 book The Power Of Zero by David McKnight. The subtitle is How To Get To The 0% Tax Bracket And Transform Your Retirement.
McKnight makes a case that federal tax rates will double from current levels due to spending on social security, Medicare, Medicaid, interest on the national debt, and future projections for those spending categories. Based on that conclusion he states that the retirement goal is to get to the 0% tax bracket.
I disagree. IMO the framing should be ‘how do I maximize real after-tax lifetime income?’
Given the 0% goal, McKnight recommends
McKnight does understand that the desirability of tax-deferred and tax-free money depends on the tax situation when the contributions are made vs. the tax situation when distributions are taken. This is mentioned on p.28 and p.46. But he talks about tax brackets instead of effective tax rate. P.46 “In what circumstances should you contribute to an IRA? The answer depends on whether or not your will be in a higher or lower tax bracket when you take the money out in retirement. That’s it. End of story.” The answer depends on the effective tax rate in withdrawal, not a bracket.
I assert that the fixation with 0%, in particular keeping below the SS threshold, obscures better strategies. I’ll examine that idea with examples in another post in this thread.
There is a SS tax example in Chapter 3. I’ll examine that in detail in another post in this thread.
Chapter 5 is The LIRP (Life Insurance Retirement Plan). This is where all the remaining tax-free money goes after Roth contributions and conversions. Permanent life insurance, including Whole Life, Variable Universal Life, and Indexed Universal Life are mentioned on p.57 (although the specific names are not used). McKnight touts secondary benefits such as long-term-care (with a rider on the policy) and tax-free death benefit in addition to using the LIRP for retirement income (through loans against the cash value of the policy, which are not income and therefore not taxed; they also do not count as provisional SS income).
I am not categorically against using permanent life insurance as part of a retirement/LTC/legacy plan. The benefits McKnight cites are real and can make sense for some retirees. It is a long-term plan and, if employed, should be integrated into a comprehensive retirement strategy. I do think that McKnight oversells insurance as part of the retirement plan. As a side note, he claims back-tested historical results of 7-9% for IUL. Without digging deeper into that subject here and making this review even longer, it is likely that IUL will produce more bond-like than stock-like returns.
Chapter 7 has a case study of a married couple who are 50 and want to retire at 65. The recommendations include funding Roth accounts at $13k / yr and LIRPs at 23.5k / yr. Yes, the LIRP gets 64% of the tax-free money and the Roth gets 36%.
Chapter 9, The Tax -Free Road Map, tells you that you need a financial advisor, particularly for this complicated 0% tax strategy. And pp. 123-124 have the big reveal, “Begin your search by having a discussion with the advisor who gave you this book.” On page 123 of 140 it’s revealed that the book is a marketing tool for a financial advisor (the one “who gave you this book”). Who is presumably licensed to advise you for AUM fees and is also licensed to sell you the high-commission permanent life insurance. And who is also presumably part of McKnights Power Of Zero agent network. I did some searching and was unable to find any details, but I’m certain McKnight gets a cut of the FAs cut.
McKnight makes a case that federal tax rates will double from current levels due to spending on social security, Medicare, Medicaid, interest on the national debt, and future projections for those spending categories. Based on that conclusion he states that the retirement goal is to get to the 0% tax bracket.
I disagree. IMO the framing should be ‘how do I maximize real after-tax lifetime income?’
Given the 0% goal, McKnight recommends
- Taxable: 6 months income (emergency fund).
- Tax-deferred: no more than for RMDs to stay below the SS taxable threshold.
- Tax-free: everything else.
McKnight does understand that the desirability of tax-deferred and tax-free money depends on the tax situation when the contributions are made vs. the tax situation when distributions are taken. This is mentioned on p.28 and p.46. But he talks about tax brackets instead of effective tax rate. P.46 “In what circumstances should you contribute to an IRA? The answer depends on whether or not your will be in a higher or lower tax bracket when you take the money out in retirement. That’s it. End of story.” The answer depends on the effective tax rate in withdrawal, not a bracket.
I assert that the fixation with 0%, in particular keeping below the SS threshold, obscures better strategies. I’ll examine that idea with examples in another post in this thread.
There is a SS tax example in Chapter 3. I’ll examine that in detail in another post in this thread.
Chapter 5 is The LIRP (Life Insurance Retirement Plan). This is where all the remaining tax-free money goes after Roth contributions and conversions. Permanent life insurance, including Whole Life, Variable Universal Life, and Indexed Universal Life are mentioned on p.57 (although the specific names are not used). McKnight touts secondary benefits such as long-term-care (with a rider on the policy) and tax-free death benefit in addition to using the LIRP for retirement income (through loans against the cash value of the policy, which are not income and therefore not taxed; they also do not count as provisional SS income).
I am not categorically against using permanent life insurance as part of a retirement/LTC/legacy plan. The benefits McKnight cites are real and can make sense for some retirees. It is a long-term plan and, if employed, should be integrated into a comprehensive retirement strategy. I do think that McKnight oversells insurance as part of the retirement plan. As a side note, he claims back-tested historical results of 7-9% for IUL. Without digging deeper into that subject here and making this review even longer, it is likely that IUL will produce more bond-like than stock-like returns.
Chapter 7 has a case study of a married couple who are 50 and want to retire at 65. The recommendations include funding Roth accounts at $13k / yr and LIRPs at 23.5k / yr. Yes, the LIRP gets 64% of the tax-free money and the Roth gets 36%.
Chapter 9, The Tax -Free Road Map, tells you that you need a financial advisor, particularly for this complicated 0% tax strategy. And pp. 123-124 have the big reveal, “Begin your search by having a discussion with the advisor who gave you this book.” On page 123 of 140 it’s revealed that the book is a marketing tool for a financial advisor (the one “who gave you this book”). Who is presumably licensed to advise you for AUM fees and is also licensed to sell you the high-commission permanent life insurance. And who is also presumably part of McKnights Power Of Zero agent network. I did some searching and was unable to find any details, but I’m certain McKnight gets a cut of the FAs cut.
