Step one of the Power of Zero strategy is to realize that due to unfunded obligations for Social Security, Medicare, and Medicaid and interest on the exploding national debt, tax rates in the future are going to be dramatically higher than they are today.
Step two is to understand that in a rising tax rate environment there is an ideal amount of money to have in your taxable and tax-deferred buckets.
For your taxable bucket, that’s around six months of living expenses.
For your tax-deferred bucket, the amount should be low enough that your RMDs in retirement are equal to or less than your standard deduction and low enough that it doesn’t cause Social Security taxation. For married couples, that amount is around $350,000, and for single filers, it’s half that amount. If you have a sizable pension, the amount could be zero.
Step three is to calculate how much time it will take to shift your balances to tax-free in order to achieve those balances. Preferably slow enough that you don’t rise into a tax rate that will give you heartburn, but quickly enough that you get all the heavy lifting done before tax rates rise for good.
2030 is currently the target date.
Step four is to see if you qualify for the Life Insurance Retirement Plan. With the LIRP, it gives you a death benefit that counts as long-term care and it can greatly extend the life of your stock market portfolio.
One of the primary reasons you are paying for your LIRP is being able to access your death benefit if you need long-term care, but if you die peacefully in your sleep your heirs still get the death benefit.
Step five is calculating your income shortfall in retirement. Figure out your after-tax needs in retirement that subtract any sources of guaranteed income like Social Security or a pension.
Step six is to contribute a portion of your IRA to an annuity in the form of a fixed indexed annuity with the piecemeal internal Roth conversion feature. You want to contribute enough today so that by the time you have finished your Roth conversion it will produce enough tax-free guaranteed lifetime income that it will bridge the shortfall in your after-tax shortfall.
Mentioned in this episode:
David’s books: Power of Zero, Look Before You LIRP, The Volatility Shield, Tax-Free Income for Life and The Infinity Code
Come Back America by David Walker
PowerOfZero.com (free 3-part video series)
@mcknightandco on Twitter
@davidcmcknight on Instagram
David McKnight on YouTube
Get David’s Tax-free Tool Kit at taxfreetoolkit.com
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