There are five takeaways from the Power of Zero paradigm. This paradigm is based upon the belief that taxes will be higher in the future. The best way we can insulate ourselves against the time of higher taxes is to do appropriate planning now, so we can eliminate tax rate risk in the future.
When I teach the power zero paradigm for the first time to most people, the process usually goes something like this. During the first 20 minutes or so of the presentation, they seem to have this deer in the headlights look. Then, as I get into the middle of the presentation, the deer in the headlights look goes away, and I start seeing a few heads nodding—they start to understand what I’m talking about. Then, by the end of the presentation, logic kicks in, and not only are people nodding in agreement, but they’re starting to question why they’ve never heard of this before.
Because I’ve thought about this experience, I’ve concluded that the main reason most people haven’t heard of the Power of Zero paradigm is because for advisors, it’s just much easier to ignore the effect of future tax rate than planning for a tax-free retirement.
Tax free planning takes work. And unfortunately, it’s work most advisors aren’t willing to put in. Power of Zero planning requires an advisor to take the traditional retirement plan people have created during the working years and completely turn it on its head. You have to be willing to take the time to move all that money that is sitting in the taxable and tax deferred bucket and move it into the tax-free bucket. This can take years to do and can be a very time consuming process for the advisor. It also takes the ability to think outside the box, which many advisors aren’t interested in doing either. You have to be willing to look at products, such as permanent life insurance and annuities as possible options to help solve the problem.
At this point, I’ve trained about 30,000 CPAs and EAS on tax free and risk-free retirement, and during this time, I’ve gotten a lot of testimonials. But I’ve also gotten some complaints. I’m sure it’s nearly impossible to do this amount of training and not get some complaints during the process. What I find interesting is between 80-90% of the time, the complaint is that permanent life insurance sucks and that annuities are of the devil. These aren’t the exact words, but I’m sure you get the drift.
Because the way our training is done, I get to see where these complaints come from. And guess what, 100% of the time these complaints come from one group of people, can you guess who they are? Yes, financial planners, who don’t sell insurance and annuities.
Just because you don’t sell a given product or service, it doesn’t mean it is not right for someone else’s retirement. In fact, what mainstream financial planners who’ve been against insurance annuities for years are finding is that these products may be the only way to eliminate some of the risks facing current retirement plans because of our longevity and how long we’re living.
I’m going to share with you five main takeaways from the Power of Zero paradigm. But before I do, one last reminder, if you don’t understand what the Power of Zero paradigm is, I suggest you sign up for my free Power of Zero webinar here where I talk about the Power of Zero in detail.
Let’s go through the takeaways.
Number one: Tax rates are likely to be dramatically higher in the future than they are today. Right now, we’re enjoying a period of historically low tax rates. The top marginal tax rate is only 37%, and we have bigger income tax brackets than we’ve ever had in the history of America.
A married couple can earn over $300,000 in taxable income, and still be in the 24% tax bracket.
But it’s not going to stay this way forever. We have two big issues facing us when it comes to future tax rate risks. The first issue was caused by soldiers who came home from World War Two and started doing something that had never been done in America’s history. And that is, they started having babies. There are 78 million baby boomers, and they’re signing up for Social Security and Medicare at a rate of about 10,000 people per day. But they’re only about 6000 people per day who are leaving the programs. This means the costs are going up and will continue to do so for decades to come.
The second issue is the ever increasing national debt. We are currently sitting on about $26.7 trillion in current national debt. Yeah, it seems almost unbelievable, doesn’t it? If this amount continues to grow, there will come a point where we can no longer pay the interest on the debt. When this happens, the government will have no other option but to raise taxes. Right now, they have a second option, and that is to cut spending. But all you have to do is turn on the news to realize that cutting spending is not going to be the current option. So it will only leave one option in the future because the debt will already be incurred, and that is going to be increasing taxes.
Number 2: The only way to insulate yourself is to get to the zero percent tax bracket. The great thing about the zero percent tax bracket is that even if taxes double, you’re sure in great shape because two times zero is still zero. However, getting to the zero percent tax bracket is not easy because right now, 95% of you have all of your retirement assets saved up in tax deferred accounts such as 401Ks, 403Bs, and traditional IRAs.
This means you have to be willing to pay the entry fee if you want to make the transition from tax deferred to tax free, and that fee may cost you hundreds of thousands of dollars. What is the entry fee? The entry fee is you must be willing to pay your taxes now, for some of you, this is going to scare you away, which may be the reason other advisors don’t talk about this issue, because they’re afraid to lose you as a client. For those of you who believe tax rates will be even 1% higher in the future, there is no other option but to bite the bullet now, so you can enjoy a more safe and secure retirement.
Number 3: You will need multiple streams of tax free income to get to the zero percent tax bracket in retirement. When most people think about what a tax free retirement might look like, the first thing that comes to mind is Roth accounts, Roth IRAs, Roth 401Ks, or maybe even Roth 403Bs. But for most people, these accounts don’t allow a high enough annual contribution rate to provide all the needed income and retirement.
Therefore, we have to look at other options. One of my favorite options is the life insurance retirement plan. It is treated differently than any other retirement asset available to retirees. You can take distributions out of this investment pre age 59 and a half without any penalties from the IRS. They’re also no 1099s being issued to the IRS each year because the income in this investment grows tax free. There are no contribution limits or income limits, which means you can put as much money as you want into these plans—anytime you want to do it. They’re tax free distributions, which means you can use these funds during retirement without having to worry about tax rate risk.
There’s also very little if any legislative risk. The government’s made changes to these plans three times in the past, and each time they have grandfathered in those who already have these plans in place. You also want to get the right amount of money into your tax deferred bucket. If you do this, then this income will become tax free as well your Social Security income.
Another option of tax free income that isn’t talked about as frequently is a Roth annuity. This allows you to have inflation adjusted guaranteed lifetime income. You can match up with your Social Security to cover your monthly living costs and be able to do it in a tax free environment, taking away much of the worry that many people have, or they’ll have enough monthly income.
Number Four: We know the exact day taxes are scheduled to go up. This is January 1, 2026. On this date, tax rates will roll back to what they were in 2017. When this happens, the top bracket will only go up about 2.6%. But if you’re in the top end of the 24% bracket, your tax rate will go up 9% overnight. Right now, we have a lot of uncertainty in the government. People often comment that taxes could go up sooner than January 1 2026, especially if administrations in the government change. And they’re correct. But all that does is prove our point that you need to stop wasting time and put in the effort to create a tax-free interest free retirement.
Number 5: Is all good news. I told you in the beginning, we were going to end with good news. This is all good news because we have time to prepare. I’ve been a CPA for almost 25 years now, and I’ve never seen the opportunity like we have today. We know taxes are going up. We know the best option is to get into the zero percent tax bracket. We also know there are advisors out there who understand what we need to do and can help us develop multiple streams of tax-free income.
During this time of historically low tax rates, we know the exact day taxes are going up January 1, 2026. What more could we possibly want or need? Knowledge is power.