The Power Of Zero Show

Most retirees are told to spend one account at a time, but a smarter retirement planning strategy treats every account as part of a single income system.  David McKnight shows how to use the quiet early years of retirement to your advantage, and why the order you draw your income may matter less than you think. Show Notes One of the most common pre-retirement questions is which account to spend first: brokerage, IRA, or Roth IRA. Conventional advice says spend taxable money first, then tax-deferred, and Roth last – David agrees with the first part, but not for the usual reason. If you retire at 62, your paycheck disappears, Social Security hasn't started, and RMDs are years away. That's what David calls the "Retirement Income Valley". David recommends to fund your lifestyle from your brokerage account so that you can use your lower brackets to convert your IRA to Roth. You're using your brokerage account to buy tax bracket capacity, typically a five-to-eight-year window before Social Security and RMDs fill those brackets for you. David's advice differs from other experts in that he doesn't want you to convert every last dollar, since drawing your IRA to zero isn't the goal. Even though your working-year deductions vanish in retirement, the IRS still gives you a standard deduction ($32,200 if you retire today). The goal is to keep your IRA/401(k) balance low enough that RMDs stay at or below $32,200. By doing that, you'll be able to benefit from the "holy grail" of financial planning: a tax-free IRA distribution.  David shares an analogy: you should think of retirement income as a control panel of faucets: traditional IRA, Roth IRA, Social Security, and a volatility shield. Your job each year is to decide how much to draw from each faucet to fund your lifestyle… all while staying as close or in the 0% tax bracket as possible. The so-called volatility shield, in particular, matters when markets have a bad year. Financial planning guru Suze Orman advocates for keeping five years of living expenses outside the stock market, so that a potential downturn doesn't force you to sell at the wrong time. This is an idea David loves, he explains why you should avoid the sequence of returns risk and opt for living off your volatility shield during down years instead. This approach, he points out, can raise your sustainable withdrawal rate from 4% to as high as 8%, with a 95% success rate. However, David and Orman differ on where to hold that money. His pick is a properly structured, funded Indexed Universal Life insurance (IUL). The reason for David's choice is that, by following this approach, cash value isn't exposed to market losses, has averaged 5-7% net of fees, and can come out 100% tax-free. The overall idea can be boiled down to this: take normal distributions when markets are up, switch to the volatility shield after a downturn – then resume once your portfolio recovers. The finished strategy: live off your brokerage account during the so-called Retirement Income Valley while converting IRA dollars to Roth at comfortable tax rates. You can subsequently coordinate withdrawals across traditional IRA and Roth accounts, and manage RMDs alongside Social Security taxation rather than separately. The result of what David suggests are multiple tax-free income streams that keep you in or near the 0% bracket… and off the IRS' radar. Remember: the best withdrawal strategy isn't an order, it's coordination: deciding each year which faucets to open, throttle, or shut off. Given the national debt's trajectory, David advocates for maximum control over your taxable income before the government needs more of it. Mentioned in this episode: David's national bestselling book: The Guru Gap: How America's Financial Gurus Are Leading You Astray, and How to Get Back on Track DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free video series) @mcknightandco on Twitter  @davidcmcknight on Instagram David McKnight on YouTube Suze Orman

Financial planning expert Rob Berger says the biggest challenge in retirement planning is one that no one can solve, since nobody knows how long retirement will last.  David McKnight shares his disagreement, and explains why a financial product designed for exactly this problem – annuities – may be the answer. Show Notes In this episode, David McKnight responds to Rob Berger's video The Retirement Problem No One Can Solve. Rob compares retirement to entering a race without knowing how long it is, how fast you can safely run, or when someone will tell you that you've reached the finish line. David thinks Rob did an excellent job of identifying the problem, but he strongly disagrees with the premise that no one can solve it. The fundamental challenge for every retiree is that you don't know whether your savings will need to support you for five, twenty-five years, or longer than that. David shares a different analogy, inspired by retirement economist Michael Finke: a birthday party with one large cake and no idea how many children will show up. The cake is the pool of money you've accumulated, the children are the years you'll live after retiring, and the slices are your annual retirement income. If you cut the cake into thirty tiny pieces just in case, and only five children show up, everyone gets an unnecessarily small piece and most of the cake goes uneaten – that's traditional retirement planning. You ration your savings as though you might live to 95, 100, or beyond, and if you die earlier than expected, you leave behind a very large portfolio because you were afraid to spend your money. According to David, Rob is wrong in saying that no one can solve this problem, as annuities were literally invented to solve it. Imagine a bakery promising to keep delivering more cake if you run out. You've transferred your longevity risk to the bakery, which is what an insurance company does. An insurance company doesn't need to know how long you personally will live, it only needs to estimate, with reasonable actuarial accuracy, how long a large group of people will live. An annuity doesn't tell you how many children are coming to the party, it guarantees that you won't run out of birthday cake. This isn't a new or controversial concept, economists have been studying it for at least six decades, including in Menahem Yaari's 1965 paper. Annuities can support more retirement income than a portfolio alone because of risk pooling and mortality credits. If you rely exclusively on a stock and bond portfolio, you have to self-insure against the possibility of living to a hundred. Ernst & Young compared investment-only retirement strategies with strategies that integrated permanent life insurance and deferred income annuities, using 1,000 Monte Carlo scenarios. They found that strategies combining investments with deferred income annuities produced more retirement income than investment-only approaches. One integrated strategy produced 5% more retirement income and 19% more projected legacy than the investment-only strategy. Critics often assume an annuity must reduce what you leave to your heirs, but if guaranteed income prevents you from selling investments at the wrong time, you can end up passing more to your children and grandchildren. Sounds interesting? Start by identifying your essential retirement expenses (housing, food, etc.), then subtract reliable income like Social Security and pensions. If a gap remains, use an annuity to fill it with guaranteed lifetime income, and the remainder of your assets can stay invested for growth, discretionary spending, emergencies, and legacy. The 4% Rule tries to solve the same problem without transferring longevity risk. In other words, you may live 10 years and could have enjoyed larger pieces, or you may live 35 or 40 years and the framework becomes increasingly uncertain. That's why retirees with portfolio-only strategies often underspend: they experience their portfolio as one finite cake instead of spendable income, while an annuity gives them permission to spend because another check is coming. Ken Fisher has argued that whatever an annuity can do, a conventional portfolio can do better.  David disagrees, asking: "Really? Then why are we calling longevity an unsolvable problem?". A portfolio can provide growth, liquidity, dividends, and legacy, but it can't guarantee that your income will continue for the rest of your life, regardless of market performance and how long you live. You don't solve longevity risk by predicting how long the birthday party will last… you solve it by guaranteeing that the cake never runs out. Mentioned in this episode: David's national bestselling book: The Guru Gap: How America's Financial Gurus Are Leading You Astray, and How to Get Back on Track DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free video series) @mcknightandco on Twitter  @davidcmcknight on Instagram David McKnight on YouTube Rob Berger The Retirement Problem No One Can Solve video by Rob Berger Michael Finke Ken Fisher Ernst & Young Uncertain Lifetime, Life Insurance, and the Theory of the Consumer by Menahem Yaari Menahem Yaari

Viral TikTok "finfluencer" Tyler Gardner claims his 76-year-old father can stay 100% in stocks. David McKnight breaks down exactly where that approach falls apart. Additionally, he reveals the retirement planning strategy that actually makes a 100% stocks allocation safe, so a market downturn doesn't force you to sell at the worst possible time. Show Notes In this episode, David McKnight fact-checks a viral TikTok video from "finfluencer" Tyler Gardner explaining why his 76-year-old father is still invested 100% in stocks. David stresses that he doesn't have a problem with being invested 100% in stocks under the right circumstances, and that a retiree can absolutely have 100% of his portfolio in stocks. However, Tyler's explanation for why this works is where David says we have some problems, and he breaks down his rationale. Tyler claims that by investing in dividend stocks, he can get about 3.5% return from dividends alone, then sell 4% of his stocks and live off 7.5% per year – all while still having his portfolio grow at 4%. David points out a mistake Tyler made in his calculations: if you take out 3.5% in dividends and sell another 4% of the portfolio, you've removed 7.5% of an 8% total return, leaving roughly 0.5%, not 4%. Tyler predicts his portfolio to be worth three times the initial investment in just 15 years… but David notes that you don't get to spend most of the return and simultaneously compound as though you didn't spend any of it. One thing Tyler forgets to mention in his approach is sequence of returns risks, something that's heavily impacted by the order in which you experience returns whenever you're withdrawing money from your portfolio in retirement. Tyler concludes that even if the market had its worst 20 years in history and returned only 4% a year on average, he'd wind up in the same scenario as if he'd invested 100% in bonds.  However, "Average returns aren't a predictor of whether or not your strategy will survive", says David. Two retirees with the exact same return over 20 years, without taking withdrawals, would have identical ending values…unless what considers withdrawals too. If a retiree is forced to sell shares while their portfolio is down, permanently removing shares from the portfolio and preventing them from participating in the eventual recovery, they would find themselves in a very different situation. Despite pointing out various flaws in Tyler's video, David agrees with the moral of the story: before you listen to anyone about your appropriate allocation strategy, crunch the numbers yourself and figure out what's right for you and your risk tolerance. David doesn't think there's anything inherently crazy about a 76-year-old being 100% invested in stocks – what he wants to know is how much of his dad's lifestyle depends on that portfolio. If Tyler's father receives enough Social Security, pension income, or guaranteed lifetime income through annuities to completely cover his basic living expenses, that changes things entirely. If the stock market falls 40%, and your basic living expenses are already covered, you don't have to sell stocks to pay for them.  You can give your portfolio a chance to recover before you take further distributions. David is a big believer in creating an income floor in retirement: cover your basic living expenses with reliable lifetime income, create a separate volatility shield for discretionary spending, and then invest the rest of your money in a pedal-to-the-metal, high-octane stock portfolio. David's strategy addresses sequence of returns risk through guaranteed lifetime income, a volatility buffer, and a 100% stock allocation. Mentioned in this episode: David's national bestselling book: The Guru Gap: How America's Financial Gurus Are Leading You Astray, and How to Get Back on Track DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free video series) @mcknightandco on Twitter  @davidcmcknight on Instagram David McKnight on YouTube Tyler Gardner TikTok 

The five years before retirement are what David McKnight calls the Retirement Danger Zone, a window where a stock market crash could trigger Sequence of Returns Risk and even derail a well-designed plan. In this episode, he breaks down the retirement planning strategies that build an income floor, create a Volatility Shield, and protect your tax rate before it's too late. Show Notes In this episode, David McKnight talks all things "Retirement Danger Zone", the 5-year time window that precedes your retirement.  When you're 20 years from retirement and the stock market crashes, it stings but you still have time to recover. If you're only a few years from retirement, on the other hand, a stock market crash may force you to take distributions from a portfolio that just lost 30 or even 40%. That move may send your portfolio into a death spiral from which it never recovers, also known as Sequence of Returns Risk. Even a well-designed retirement plan can be devastated by that risk. If you're five years from retirement, the first step is to establish an income floor: figure out how much income you'll need each year to cover your essential living expenses. Your essential living expenses may be completely covered but you're still going to have discretionary expenses – which fall into two categories. Those can be so-called shock expenses (e.g. a new roof, an unexpected medical expense, etc.) or aspirational expenses (e.g. vacations, hobbies, etc.). Normally, you would pay for those expenses by taking money from your stock portfolio… but what if the market is down when one of those expenses arises? "This is why, by the time you retire, you should have 3-5 years of discretionary expenses accumulated in a properly structured, properly funded Indexed Universal Life Insurance Policy", stresses David. David explains how a so-called Volatility Shield can help you when the stock market takes a tumble. The strategy shared by David can increase the sustainable withdrawal rate on your stock portfolio from 4% to as high as 8% with a 95% confidence rate. And there's one more critical step to consider during your final five years before retirement: protecting yourself against higher taxes. Mentioned in this episode: David's national bestselling book: The Guru Gap: How America's Financial Gurus Are Leading You Astray, and How to Get Back on Track DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free video series) @mcknightandco on Twitter  @davidcmcknight on Instagram David McKnight on YouTube  

If you've built up $1M in your IRA and $1M in taxable investments, David McKnight has a warning: every year that money stays put, the IRS gets to vote on your tax rate.  He breaks down a retirement planning strategy for gradually converting your IRA to Roth – fast enough to beat rising rates, slow enough to avoid painful brackets. In this episode, David McKnight looks at what you should do if you have accumulated $1M in taxable investments, and $1M in traditional IRAs and are concerned about the possibility of higher taxes in retirement.  He stresses that having money in IRAs is like going into a business partnership with the IRS – every year they get to vote on what percentage of your profits they get to keep… The solution to the IRA problem is relatively straightforward: start doing Roth conversions.  True, by doing so, you'll pay taxes on the conversion today, but you'll be doing so at near historically low tax rates. Remember: the key is to convert money slowly enough that you don't rise into a tax bracket that gives you heartburn, but quickly enough that you get all the heavy lifting done before tax rates go up for good. David predicts that, given the trajectory of the American national debt, the window of time to execute that strategy is about ten years. Beware: just because you believe taxes are going to increase, it doesn't mean that you should reflexively convert all your money to tax-free. You want to leave enough money in your traditional IRA to take advantage of your standard deduction in retirement. If you're married and retiring today, your standard deduction is $32,000. Single? Then, it's half that amount. David shares a couple of strategies that can help you skinny down the $1M in your taxable bucket. The first and most efficient way to shrink this bucket is to use it to pay the taxes on your Roth conversions. The second strategy, which applies if you're still working, is to fully fund your Roth 401(k) or Roth 403(b). One challenge with this approach is that those contributions must come out of your paychecks, which may lead you to have less money available to cover your monthly lifestyle. The next strategy comes into play once you retire and it's about living out of your taxable account during the first few years of retirement (which may be the lowest income years of your adult life). Furthermore, you may want to consider repositioning a portion of your taxable account into a properly structured cash value life insurance policy – such as an indexed universal life policy or IUL. David warns that IULs are not for everyone, as they require a sufficient funding period, careful design, and ongoing policy management. However, when structured correctly, IULs can serve as a volatility shield in retirement. The idea is, in the year following a down year in your stock market portfolio, to pay for your living expenses out of your IUL. Doing so gives your portfolio a chance to recover before you take further distributions. That act alone can increase the sustainable withdrawal rate of your stock portfolio from 4% to as high as 8% with a 95% confidence rate. Mentioned in this episode: David's national bestselling book: The Guru Gap: How America's Financial Gurus Are Leading You Astray, and How to Get Back on Track DavidMcKnight.com DavidMcKnightBooks.com PowerOfZero.com (free video series) @mcknightandco on Twitter  @davidcmcknight on Instagram David McKnight on YouTube