Rule #1: Everyone’s situation is different, and there is no cookie cutter approach. You can’t pick up the Power of Zero book and have the exact recipe for success. It will need to be tailored to your personal situation.
Rule #2: It is unlikely that you will be in a lower tax bracket in retirement. The closer you are to 2029, the less likely you are to be in a lower tax bracket. We know when the tax cuts will end and when tax rates will go up. When you look at the ten-year horizon, it’s really tough to make the case that tax rates won’t be higher. This turns conventional wisdom on its ear. We are marching into an uncertain future, and that doesn’t bode well for people that have the majority of their money in the tax-deferred bucket.
Rule #3: There is an ideal balance to have in your first two buckets in a rising tax rate environment. Your taxable bucket should contain around six months worth of expenses and your tax deferred bucket balance should be low enough that RMD’s are equal to or less than your standard deduction, as well as not cause social security taxation.
Rule #4: Anything above and beyond the ideal balance in those first two buckets should be systematically repositioned to tax-free. Preferably you don’t do it all at once but you do it quick enough to get all the heavy lifting done by 2026.
Rule #5: Anything with the word Roth on it is your best friend. These vehicles give you the ability to shift nearly unlimited money from tax deferred to tax-free.
Rule #6: Social security taxation is a big deal and you should do everything you can to get your social security tax-free. If your social security is taxed, you will have to spend down all your other assets even faster. In many cases, your money will run out five to seven years faster if your social security is taxed.
Rule #7: The best way to deal with long-term care in retirement is not through a traditional long-term care policy. An L.I.R.P. is a much better option. If you die peacefully in your sleep never having used the long-term care, at least someone is still getting a death benefit at the end. L.I.R.P.’s are great way to take the sting out of mitigating the long-term care risk.
Rule #8: You will need more than one stream of tax-free income in retirement. You never know when the IRS is going to legislate one of your tax-free streams of income out of existence. You need multiple streams of tax-free income working together.
Rule #9: You really want to get all your heavy lifting done before 2026. You have seven years before the tax cuts end and every year you wait to take advantage of these low tax rates, is another year you will have to pay more than you need to.
Rule #10: Know your magic number. Your magic number is how much you should be shifting each year from tax deferred to tax-free so that by 2026 everything is perfectly allocated. You only have so many retirement dollars, so you need to spend them in the most tax efficient way possible.
Rule #11: Never, ever annuitize your retirement in the tax deferred bucket. Annuities in your tax deferred bucket will count as provisional income and cause you all sorts of problems. When you annuitize your investment, there is no going back.
Rule #12: It is much better to have a guiding hand when you’re navigating the path to the zero percent tax bracket. The thresholds are always changing and there are a number of ways to get it wrong. Connect with a certified Power of Zero specialist who can help you avoid the pitfalls.