The Power of Zero occasionally gets a negative review. Today’s episode is going to deconstruct and rebut a recent one-star review and go through the different perspectives.
The first claim is the book is based on a misleading assertion regarding taxes in retirement. They are basically subscribing to the idea of tax diversification and the idea that we don’t really know what taxes will be in the future, and in that case we should hedge our bets against all possibilities.
This would be a fine approach if we didn’t have any data to base a decision on. That’s not the case. The current fiscal trajectory can not sustain the current level of taxation and number of prominent experts in the financial world agree.
Absent a dramatic cut in spending, tax rates will have to go up and we will go bankrupt as a country. Tax rates will have to go up or eventually the interest on the debt will consume the entire federal budget.
Most people believe that tax rates will go up in the future, but they also have most of their money positioned in the tax-deferred bucket. This means there’s a massive disconnect between what people think of the future of tax rates and what people are doing about it. If you believe that tax rates will be higher in the future, tax diversification is not the right solution.
There is a mathematically perfect amount of money to have in your tax-deferred bucket and it’s rarely a fifty-fifty split.
The second claim had to do with the LIRP and Roth IRAs. An LIRP costs an average of 1.5% of your bucket per year over the life of the program, which is undoubtedly more expensive than an index fund. You have to remember that the LIRP and an index fund are not designed to do the same thing. If low fees were the only thing we were after we would simply put everything into a savings account.
The LIRP is providing a death benefit that doubles as long term care in exchange for that 1.5%.
The other thing to keep in mind is that an index fund doesn’t provide long term care or a death benefit. Dave Ramsey is guilty of this comparison by not taking all the variables into the calculation.
The LIRP is not a replacement for the Roth IRA, it’s meant as a complementary strategy. It’s not a one or the other choice which is how the review frames it.
There is a cost that comes with low fees as well. Vanguard did a study that found people with a financial advisor had a 3% greater return over time because the advisor is there to make sure you are following through with your investment objectives.
There are insurance companies that guarantee their 0% loans. David breaks down the way this works and why the review is incorrect on how the loan process works.
When the Power of Zero was written the Roth 401(k)s were not that available, but since then David has spoken and advocated for those plans. The choice is not either/or, having a Roth IRA and Roth 401(k) is a good way to create more than one stream of income.
The reviewer also doubts that taxes will rise across the board in the near future. If we confiscated all the wealth of the 2500 billionaires in the US it would be enough money to fund the government for 7 months. We can’t just tax the rich to solve the US debt problems. We have to broaden the tax base and this means taxes will go up for every American or the country will eventually become bankrupt.
Mentioning the tax brackets of the 1960’s is not to say that those are the tax rates of the future. It’s to take people out of the belief that tax rates are low today and will always be low in the future. Tax rates ebb and flow over time. They are artificially low right now but that should not give us any false sense of security. We will likely soon see the types of tax rates we see in Scandinavia or Canada where the effective tax rate is 50%.
There is no cap on interest on the national debt. Defaulting on the debt results in a global depression which is something we definitely want to avoid. A sovereign debt crisis could be the result of not reigning in spending.
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