David McKnight’s book – The Power of Zero, asks a very interesting question:
Most of would us never ask ourselves such a question because we don’t think we have much influence over it. But that thinking can expose us to the most significant financial risk we face in retirement – open-ended tax rates.
Imagine what would happen to your lifestyle if you planned on a retirement tax rate of X – and congress decided to raise taxes to 2X. There is no other option than to significantly reduce your lifestyle – which is not what retirement is supposed to be about.
When we think of financial risks of retirement, three tend to leap off the page:
1. Will I outlive my money?
2. Can I handle a large medical or care need?
3. How exposed is my money to market risk and the impact a large drop could have on my retirement lifestyle?
All completely legitimate. But they’re also questions that have answers that we can implement with a little thinking and planning.
· We can minimize the risk of outliving our money by putting at least some of our money into guaranteed lifetime income products – like annuities.
· We can insure against the risk of large medical bills, assisted living, or nursing home expenses with medical, and long-term care insurance.
· We can adjust our investing strategies to minimize or eliminate or exposure to market risk.
But this we can neither control nor mitigate our tax risk. So McKnight suggests that our goal should be to end up in the zero percent tax bracket in retirement.
He lays out a compelling case for exactly how we can accomplish that goal – but warns that planning must start well in advance of retirement. After 55 – it’s too late to adjust; and based on what we’re facing as a country, 25 isn’t too early to start.
Best of all – contrary to conventional wisdom – we don’t have to sacrifice return as a tradeoff to tax-free. In fact – it is often just the opposite. Ping me back for more information on how to put yourself in the zero percent tax bracket.