#44 | BONUS – David McKnight on The Power Of Zero in 2024

Guest Profile

David McKnight graduated from Brigham Young University with Honors in 1997.  Over the past 22 years David has helped put thousands of Americans on the road to the zero percent tax bracket. He has made frequent appearances in Forbes, USA Today, New York Times, Fox Business, CBS Radio, Bloomberg Radio, Huffington Post, Reuters, CNBC, Yahoo Finance, Nasdaq.com, Investor’s Business Daily, Kiplinger’s, MarketWatch and numerous other national publications.  His bestselling book The Power of Zero has sold over 350,000 copies and the updated and revised version was published by Penguin Random House. When it was launched in September of 2018, it finished the week as the #2 most-sold business book in the world.  For two consecutive years Forbes Magazine has ranked The Power of Zero as a top 10 financial resource in the country.  This book was recently made into a full-length documentary film entitled The Power of Zero: The Tax Train Is Coming.  When his follow-up book Tax-Free Income for Life launched in November of 2020, it finished the week as the #3 top-selling business book in the world. He and his wife Felice have seven children.

Social Media:
Instagram: davidcmcknight
Facebook: https://www.facebook.com/david.mcknight.752
LinkedIn: https://www.linkedin.com/in/thepowerofzero/
Youtube: https://www.youtube.com/channel/UCGxUwL7NvZUyLfgO18h3e2g
Twitter: @mcknightandco

Transcript

Speakers: Bruce Hosler & David McKnight

Jon Gay:  Welcome to a very special episode of Protecting and Preserving Wealth, I am Jon Jag Gay. I am joined as always by Bruce Hosler of Hosler Wealth Management. Bruce, I know you’re excited today. We have a great guest. I’ll let you introduce him and take it from here.

Bruce Hosler:  I am so excited today to have and introduce David McKnight, the author of The Power of Zero. I have been a follower of David for years. His work is truly leadership in this area. And David, welcome to the show. Thank you for being with us.

David McKnight: Well, thank you, Bruce. It’s an honor to be on with you.

Bruce Hosler:  Great. I have so many questions, but we only have so much time. But David, it’s been 10 years now since you’ve written your bestselling book, The Power of Zero. And I think our listeners would be interested in hearing what things of note have transpired in those 10 years, including be sure and include something about your movie, The Power of Zero, because what a thing that is.

David McKnight:  Sure. Let me sort of put the fiscal trajectory of our nation in perspective. I want to go back to 1999 when Bill Clinton stood before the nation in the State of the Union, and said, “Hey, look, I’ve got great news. We’ve got budget surpluses.”

There was about $5 trillion of debt back then. He says, “We got budget surpluses for the next 23 years. So, if we just keep on the same path, the debt should remain at about $5 trillion.”

Fast forward to 2014, and lo and behold, the debt did not stay at $5 trillion. In fact, it rose precipitously because of unfunded wars, because of an unfunded prescription drug program that was an $8 trillion unfunded liability.

And then, between COVID and more wars and bailouts and TARP and things like that, we now are to the point where in 2024 we have $34 trillion of debt.

And back in about 2010, a very important person, former Comptroller General of the federal government, David Walker, he was raising the warning cry about the fiscal trajectory of our nation.

And he wasn’t even anticipating all of the spending for the things that ultimately contributed to the debt. He was worried about three things: social security, Medicare, and Medicaid. He said there is a huge unfunded obligation for those programs alone.

So, what has happened since 2010 and ultimately 2014 when I wrote The Power of Zero is the debt has multiplied on orders of magnitude. And so, we are now at a point where we have $34 trillion of debt. We’re calculated to have $2 trillion on average of debt per year for the next 10 years. We’ll have $54 trillion of debt by 2033.

And that doesn’t include any of the problems that David Walker originally warned us about. We still have a 200 trillion plus fiscal hole in our economic outlook due to social security, Medicare, and Medicaid.

And so, what’s happened is really the country has just spent with reckless abandon and they have failed to shore up the single greatest shortfall in our country’s economic trajectory over the next 75 years. And that’s the unfunded obligation for social security, Medicare, Medicaid.

So, I think if you asked David Walker, he’d say, “Wow, I never dreamed that the problem would be so much worse in 2024 than it was back in 2010.” And we still haven’t put any fixes in place. And so, when we talk about the trajectory of the debt, it’s only going to get worse from here on out as we think about what we need to do.

Bruce Hosler:  And you haven’t even mentioned inflation causing the higher interest rates that we’re going through right now and the interest rates that we’re having to pay on that debt, David, as it renews and rolls over.

David McKnight:  The national debt is sort of, these are short-term loans that other countries give to us, and they have short renewal rates, which means that every couple of years we have to refinance them. And when we refinance all that debt, we do it under the higher interest rates.

And so, if all interest rates did was stay at historically normal levels like they are right now, the cost of servicing that debt, once all of that debt gets renewed under the current interest rates could double, triple, or even quadruple.

So, we’re fast approaching this point where the national debt is going to consume a greater and greater portion of the national budget, or at least servicing the national debt, which means that our country’s going to need huge infusions of cash, huge sources of new revenue, in the very near future to be able to just pay for all the interest on that debt.

Let alone just the cost of running the federal government, parks, programs for needy individuals, Medicare, Medicaid, social security. It’s just that problems are compounding as we move forward in time.

Bruce Hosler:  So, what do you see as you look forward over the next 10 years? Here we are in 2024. What can our listeners expect to happen over this next 10 years, David? I’m very concerned.

David McKnight:  Yeah. I think that you’re rightfully concerned, Bruce. I think that they can anticipate that the national debt will continue to grow in an unrestrained sort of a way. I think what we need to worry about is not so much how much debt we owe, it’s the debt to GDP ratio.

Experts have warned that when we get to the point where we have about 175% debt to GDP, and that’s slated to happen in about 2043, that no combination of increasing taxes or cutting spending will arrest the financial collapse of our country.

In other words, the debt will be so massive, and the cost of servicing will be so massive that it doesn’t matter what we do, we will have passed the point of no return at that point, and we will already have sort of entered into that death spiral from which there’s no deliverance.

I mean, this is a study by Penn-Wharton. These are not financial neophytes that are predicting this. So, it’s going to get pretty grim. And politicians aren’t all that interested in making the tough decisions to right the fiscal ship of state.

Bruce Hosler:  Oh, no, they’re not talking about that at all. However, it does seem to me in just the last six months that there have been many more voices. And when I say voices, I mean people of significance.

Ray Dalio was telling the Wall Street Journal that the U.S. is courting a debt crisis, and that the national debt will explode to more than 52 trillion in 2033, less than 10 years.

What are you seeing? Are you hearing these other voices coming up and talking about this national debt? Are you seeing that as a leader in this space?

David McKnight:  Yeah. It used to be that people would call me and David Walker and others that have been voicing these concerns. They would call us inflammatory and polarizing and fear mongering.

But you’re starting to see that more and more of those people are coming over into our camp because the math doesn’t lie. You can only have so much debt and you can only afford to service so much debt before it starts to put a major crimp in your economic growth.

And you’ll get to the point where you just can’t print your way out of these problems. You’re going to need huge infusions of new revenue. And most of the experts that I follow on this are predicting that tax rates will have to rise precipitously in the next 10 years to be able to afford the cost of servicing all this debt.

And so, yeah, I mean, a lot of the prophecies that David Walker made back in 2010 are being realized even as we speak, and it only gets worse from here on out.

Bruce Hosler:  So, in my new book, coming out at the end of the month here in March, MOVING TO TAX-FREE, I discuss how tax planning is such a challenge today because tax professionals are so busy preparing taxes that they don’t have time to do tax planning.

And a lot of financial advisors, they’re not really prepared to provide that tax planning even though there’s some new software coming out helping that.

What are some of the challenges that you are seeing in this area of the industry today trying to help people get ahead of the 0% tax bracket by putting a tax plan together so they can make that Roth conversion, or they can move to tax-free life insurance, retirement plans? What are you seeing that’s going on in the industry today?

David McKnight:  Yeah, basically what I’ve seen is that there’s three basic types of financial advisors who are trying to grapple with this type of planning. And only one of them really can do a comprehensive job and help shepherd people through the process of mitigating against the impact of higher taxes.

The first type of advisor is sort of this product salesman who thinks that, for example, I don’t know, life insurance is the end all be all, and it solves all of your problems. It’s a magic bullet. So, let’s put all of our money into there. It’s a very sort of, if all you ever have is a hammer, everything looks like a nail. And-

Bruce Hosler:  Yeah, they’re just hitting everything they can with one hammer, right?

David McKnight:  Yeah. It’s just not very comprehensive and frankly gives short shrift to a lot of the strategies that we talk about, you and I talk about day in and day out that really can help solve this problem for a lot of Americans.

The second type of advisor says, “Yeah, okay, I think I can entertain the idea of doing some tax-free strategies, but only if we’re really, really convinced that your tax rate in retirement is going to be higher than they are today.”

In other words, are you going to have much more income in retirement than you do during your working years? And so, in those scenarios, the Roth conversion and other tax-free solutions hardly ever come into play.

And the third type of advisor says, “Look, I am willing to take a look at the lay of the land, the fiscal landscape of our country. And I can see that even 10 years from now that tax rates are going to have to rise dramatically, even if your income remains exactly the same as it is today.”

Because of the unfunded obligations for social security, Medicare, Medicaid, the rapidly mounting national debt, the federal government will have no choice but to raise taxes and probably within the next 10 years.

And so, we are going to help our clients take advantage of every nook and cranny in the IRS tax code to help shield against those higher taxes down the road. And we’re talking Roth IRAs, Roth 401(k)s, Roth conversions, taking money out of our IRAs up to standard deductions, so that’s tax-free.

We talked about the life insurance retirement plan can play a role in that balance comprehensive approach to tax-free retirement.

So, that third type of advisor that says, “Look, let’s look at every nook at cranny in the IRS tax code. Let’s take a balance comprehensive approach, but let’s be very futuristic. Let’s be very proactive and recognize that there’s a tax-free train looming off in the distance, and we need to do some things today to get our hard-earned retirement savings off the tracks.”

Bruce Hosler:  So, those advisors are actually believing that the tax rates are going to be higher in the future, whereas the other two are not really even considering that. Right?

David McKnight:  Yeah. They think that, again, it’s alarmist, it’s inflammatory, they’ll say, “We have no idea what tax rates are going to do in the future.” Tax rates have a history of ebbing and flowing over time. I’m like, “Well, gosh, it’s not very hard to read the handwriting on the wall here because the national debt is such a predictable sort of a thing. And we can see that debt to GDP ratio creeping up consistently over time.”

And so, we are trying to get a sense for the lay of the land and then create strategies accordingly.

Bruce Hosler:  Well, when you’re joined by the likes of Ray Dalio, who is the founder of Bridgewater Associates, the world’s largest hedge fund, you have allies on your side now, David. You’ve been a lone prophet in the wilderness out there, and now you’re starting to get other voices that are sounding the cry of concern about this.

Now, on your podcast recently and in your YouTube channels, you seem like you’re receiving a lot of incoming resistance from the so-called “gurus” about the concepts of moving to tax-free and using the tools necessary to get to the 0% tax bracket. Please tell us about your new book and all of the interference you’re facing in trying to get The Power of Zero message out to the American people.

David McKnight:  Yeah, I do. I have a book coming out. I just actually finalized the deal with my publisher and it’s coming out probably in the fall. And it’s called the Guru Gap. And the subtitle, I think tells this whole story how America’s financial gurus are leading you astray and how to get back on track.

Now, there’s quite a few gurus that I talk about. I talk about Dave Ramsey. He’s one of the stars of the show. We talk about Suze Orman. I have almost a whole chapter dedicated to our friend Ken Fisher. I talk about Ramit Sethi from Netflix, “I will make you rich.”

So, one of the major themes is that most of these gurus believe that tax rates in the future are likely to be higher than they are today. But when you go to their websites, there is very little practical strategy on exactly how you should arrange your assets, so as to best shield yourself from the impact of higher taxes.

For example, you go to Suze Orman’s website, you take a look at Roth conversions, all of the important information you would need to execute a Roth conversion is missing. You need to know how much of your IRA should you convert and what installments over what time period, what tax bracket should you stay in, when should you get a completed by? These are all very, very important things.

So, they give short shrift to the entire strategy, even though they’ve done a good job of coming around to the fact that tax rates have to go up.

But one of the other things that they do is they tend to wax fairly black and white when it comes to the types of solutions that can help mitigate risk in your retirement plan. For example, they are uniformly against any sort of annuity.

And frankly, Bruce, as you know, an annuity can do something that no other vehicle can do. Namely guarantee that your money will last as long as you do. And give you higher distributions than you would if you were just relying on a stock portfolio where the most you could take out on any given year is 4%.

Bruce Hosler:  You take away that longevity risk and people worry about outliving their money. So, that portion of their portfolio that has a guaranteed income stream for life. That is powerful for many people.

David McKnight:  That’s right. And if you can arrange it within the right types of annuities that have what I call piecemeal internal Roth conversions, you can get those annuities repositioned to the tax-free bucket by way of a Roth conversion so that then you can have guaranteed tax-free income for the rest of your life, which is a pretty powerful thing in the face of rising taxes.

They also uniformly reject … David Ramsey for example, uniformly rejects any sort of permanent life insurance. He says that it’s — I think his famous quote is it’s a hundred percent crap, a hundred percent of the time. It’s a steaming hot pile of garbage,

Which frankly flies in the face of all of the math-based studies around permanent life insurance. Ernst & Young recently did a very compelling study on how to use cash value life insurance as a volatility shield in retirement.

Bruce Hosler:  Yeah, that’s a great article.

David McKnight:  Basically, what you do is if you can pay for your lifestyle out of your cash value life insurance in the year following a down year in your stock market portfolio, it gives your stock market portfolio a chance to recover before you take further distributions.

And that act alone can increase your sustainable withdrawal rate on your stock portfolio from 4 to 8%, which is huge because that means that you have twice as much efficiency and can distribute twice as much money out of your portfolio in retirement. So, your money has an increased likelihood of lasting as long as you do. And that’s the name of the game.

Bruce Hosler:  Sell high, don’t sell low. It gives you that flexibility to do that. David, I have loved your thought leadership in trying to help people understand that they need to create multiple streams of tax-free income from multiple sources. There’s not just one thing that can do this and solve the problem of having tax-free income.

So, Roth IRAs, Roth 401(K)s, conversion Roth IRAs, life insurance retirement plans, a traditional life insurance policy where the RMD’s covered by the standard deduction and certainly keeping your social security benefits tax-free by keeping your provisional income below the thresholds that create the taxability of social security.

Now, are you starting to see some traction in the financial industry from other tax and financial professionals starting to understand the importance of these concepts of having multiple streams of tax-free income?

David McKnight:  I see it a little bit. Frankly, Bruce, I’m not seeing a lot of it. And I just think that number one people, particularly financial advisors, are not educated enough around the reality of future higher tax rates. And I think if they were, they would be more familiar with the ways to mitigate against rising taxes down the road.

So, it’s a fairly unique strategy to The Power of Zero approach. We want multiple streams of tax-free income. None of which show up on the IRS’ radar, but all of which contribute to you being in the 0% tax bracket.

And Bruce, you quoted all of them. You’ve got your Roth IRA, Roth 401(k), Roth conversion, taking money out of your IRA up to standard deductions. So, that’s completely offset. You’ve got your LIRP and if you can keep your provisional income low enough, you’ve got your social security tax-free as well.

So, these are six different streams of tax-free income. I mean that’s the very definition of a balanced approach to tax-free retirement. And the thing that’s interesting, Bruce, is that every single one of those streams of tax-free income does something a little different than what the other one does, that has a unique quality that sets it apart, that makes it an integral part of the entire plan.

Bruce Hosler:  Yes. No, I agree with that. And David, you teach in some of your retirement workshops the disincentive that the industry has because if we pay taxes to make our Roth conversions, now the advisor has less money to manage so they’re making less money.

So, there’s a conflict of interest. These fee-based advisors are not admitting that they have a conflict of interest against moving to tax-free because the client has to pay that money and now, they have less money invested with the advisor. And so, the advisor is disincentivized financially from helping the client to move to tax-free. What a thing that is.

David McKnight:  That’s right. I mean, yeah, that’s never been more of the case than, I mean, we’ll come back to Ken Fisher. Ken Fisher manages over a hundred billion dollars. He is one of the single largest RIAs in the country.

So, you would think that he would be really motivated to help his clients ring the most after-tax distributions out of their retirement savings. And so, you would naturally think that you could do a Google search with Roth conversion and Ken Fisher or Fisher Investments and have all sorts of articles pop up.

Bruce, I would challenge your listeners to actually do a Google search on Ken Fisher and Roth conversions and see how many hits you get. And I will give you a plot spoiler here. There’s only one mention of it in all of cyberspace.

And in order to see that mention, you have to give Ken Fisher your name, phone number, and email and get his I think it’s a hundred pieces of retirement advice or whatever.

And I’m like, “Well, clearly the Roth conversion is so important that it’s going to be in the first 10 or first 20.” Well, it didn’t even make the top 50. You have to go all the way up to the number 92, number 92 piece of retirement devices. You may want to consider a Roth conversion. Talk to your advisor.

So, that is the single lone reference to Roth conversions. And you have to ask yourself, why would Ken Fisher be disincented to tell his clients about Roth conversions? Well, this is an example you and I talk about all the time.

If you’ve got a million dollars in your IRA and you do a Roth conversion, let’s say you got pay 30% tax, now you got $700,000 sitting in your tax-free bucket. Well, if Ken Fisher is making 1% off of you, I know he makes more, but just to make your math easy, he went from a scenario where he was making $10,000 per year off you to only $7,000 per year.

So, didn’t he just get a pay cut for persuading you that tax rates in the future are likely to be higher than they’re today. And for that reason alone, most of these money managers, major money managers like Ken Fisher, don’t want to touch this conversation with the 10-foot pole.

Bruce Hosler:  Yeah, that’s very insightful. David, the Medicare Trust Fund is scheduled to run out of money as soon as 2028. Do you think we will see dramatic changes to benefits or tax rates increasing as soon as 2028 as the federal government tries to wrestle with dealing with these shortages caused by the underfunded Medicare system?

David McKnight:  Yeah, it’s possible. I think that in the short term, they’re probably going to deal with that by maybe increasing those IRMAA surcharges. But you can only increase those so much to make a dent in the problem.

When you consider Bruce the unfunded obligation for social security and Medicare and Medicaid. By the way, Medicare is five times bigger a problem than social security over time. When you add up the shortfall for Medicare versus social security, Medicare is just a sticky wicket. It’s just much harder to fix than social security.

Social Security may be moved back some retirement ages or what have you. Medicare is tougher because it’s very, very difficult to tell 65-year-olds and older, “Look, you’re not going to get as much Medicare as you thought.” And inflation on Medicare, it’s all tied to inflation by law, and inflation on Medicare is much greater than it is in other areas of our lives.

So, this is a sort of intractable sort of a problem. And they’re going to need massive infusions of revenue to be able to pay for Medicare over the next 75 years. We’re talking in the $150 trillion range, and we just don’t have that type of money just lying around.

And we’re going to have to dramatically raise taxes, and do it before we get to the point where we’re at that 175% debt to GDP ratio. Because remember, once you hit that point, it doesn’t matter. It’s too late. It’s a fait accompli. You can’t raise taxes at that point because the death spiral’s already begun.

Bruce Hosler:  Right. David, this has been a fantastic conversation today. Thank you so much for taking the time. I’m sure our listeners are going to love this conversation that we have. Thank you so much for being my guest, and I look forward to seeing you again in the future.

David McKnight:  Thank you, Bruce. Thanks for having me.

Jon Gay:  Securities and advisory services offered through Commonwealth Financial Network, member of FINRA/SIPC, a registered investment advisor.

Forward-looking commentary should not be misconstrued as investment or financial advice. The advisor associated with this podcast is not monitored for comments and any comments should be given directly to the office at the contact information specified.

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