The whole Power of Zero paradigm is predicated on tax rates being much higher in the future than they are today. If you don’t believe that, the Power of Zero paradigm is not one you’re likely to warm up to. Step one is to recognize that taxes will be higher in the future than they are today. The fiscal gap is an estimated $239 trillion. That’s the difference between what we have promised and what we can deliver. Step number two is to recognize that in a rising tax rate environment, there is a perfect amount of money to have in your taxable and tax deferred buckets. The perfect amount for your taxable bucket is six months of basic living expenses. Any amount above and beyond that is costing you money. For the tax deferred bucket, the balance should be low enough that required minimum distributions are equal to or less than your standard deduction and also low enough that it doesn’t cause your Social Security to be taxed.
Anything above and beyond those ideal amounts in the first two buckets should be systematically shifted to tax free. You should do it quickly enough to get the heavy lifting done before tax rates go up for good but slowly enough that you don’t rise too rapidly in your tax cylinder. Once you recognize your magic number (the amount of money you need to shift to tax-free in a given year), you have to recognize that that money is probably going to be allocated to three different places. The first is the IRS, you may not enjoy it but you have to pay the piper first. The second is the Roth conversion, and the third is the Life Insurance Retirement Plan. If you’re between the ages of 50 and 65, someone you know is likely dealing with a long-term care issue. People aren’t opposed to having long term care insurance, they’re just opposed to paying for it. The LIRP is a good option to protect yourself from a long-term care event while at the same time growing your money in a similar risk environment as your savings account.
The average expense per year with the LIRP is 1.5%, but in exchange for that, you are getting a death benefit that doubles as long-term care. The LIRP covers the risk that 70% of Americans will be confronted with at some time in their retirement. You want a meaningful and impactful amount of long-term care insurance. That’s somewhere between $400k and $500k in coverage. If you have too little coverage, then the LIRP can be a little like rearranging the deck chairs on the Titanic. The four steps are: 1. recognizing that tax rates are going to be higher than they are today, 2. recognizing that in a rising tax rate environment there is a mathematically perfect amount of money to have in your taxable and tax deferred buckets, 3. repositioning the surplus balances and contributions into the tax free bucket, and 4. funneling the money into the appropriate places which may include Roth IRAs, Roth Conversions, Roth 401(k)’s and the LIRP.