Episode 34: Jonathan Krueger from Living a Richer Life By Design, interviews David McKnight

Hello and welcome to The Power of Zero show. This is your host, David McKnight. I'm the best-selling author of The Power of Zero, sold over 185,000 copies, as well as Look Before You LIRP, and my most recent release came out a few months ago called The Volatility Shield. You can get all of those books in bulk at powerofzero.com

Mark: Welcome to Living a Richer Life by Design with host Jonathan Krueger, and I'm you're contributing host, Mark Ralfs. Join us as we dive into a variety of subjects including fulfilling relationships, vibrant health, community engagement, social impact, and of course, the stewardship of your finances.

David, thank you for joining us on the show. We are glad that you're here and look forward to this podcast.

Jonathan: Yes, Sir. Before we get started, David, could you tell us a little bit more about yourself, your family, and your background?

Mark: That's a great background, David, and we appreciate that, and yes, kudos to your wife. Many of us have married up and we know that so congratulations on furthering all those children too.

Mark: Let's get down to it, tell us what your primary motivation was for writing both the book and then subsequently having the film documentary produced.

There's another personal hero of mine, a guy named Larry Kotlikoff, he's a professor out of Boston University. He pioneered a concept called fiscal gap accounting which basically says that our real debt is not what the publicly-stated debt is, which is $22 trillion, our real debt is the difference between what we have promised and what we can afford to keep, and he does a present value calculation of what we would have to have sitting in a bank account today earning Treasury rates to be able to deliver on all those promises and he says that number is $239 trillion. There's all of this math and corroborating evidence that demonstrates that we are on a very, very shaky fiscal path moving forward, we've made promises that we can't deliver, yet here we are 10 years later after David Walker had filmed his movie and nobody's talking about this stuff anymore it seems like except for me and a handful of financial advisors who believe the math. Part of my reason for writing The Power of Zero is I noticed that not a lot of people are aware that tax rates in the future are likely to be dramatically higher than they are today, or if they are aware of it, they haven't tweaked their retirement plan approach to coincide with what they believe. Currently, there's $22 trillion in the cumulative IRAs and 401(k)s of Americans, there's only about $800 billion in the cumulative Roth IRAs and Roth 401(k)s, and Roth conversions of Americans. Even if Americans believed that tax rates are going up, they haven't done much about it, they haven't changed their approach to retirement yet, so I took it upon myself with the book and then ultimately with the movie to try to get the word out on, “Hey, if tax rates really are going to be higher in the future and dramatically so, we should probably start changing the way that we approach retirement plan.

David: I do about 70 to 80 of these presentations per year, I could do more, I suppose, but I want to have a life and I do have seven kids and I have a wife as we mentioned previously, so I could probably do a little bit more but I obviously want to strike a balance in my life. But I'll tell you, in each of those presentations that I do, people seem to recognize that we are in tough fiscal straits that the federal government has a knack for making promises that it can't afford to deliver on. All you got to do is look at the field of presidential candidates and they're making these outrageous promises like universal health care, we're going to forgive all student debt, and college is going to be free, these are all things that are just absolute pipe dreams. If Americans truly understood the fiscal straits that we're in right now, they would obviously reject all of these proposals out of hand. I think that once people truly get educated, they recognize that math doesn't lie and they also recognize that the math and the numbers don't lie. If they want to be prepared for retirements and the impact of higher taxes, they have to dramatically change the way they're approaching retirement.

David: Because their number one job is to get elected or get re-elected. President Trump, famously, during his election campaign prior to his 2016 election, he said, “Look, I can guarantee this, as president of the United States, I will not touch Medicare, I will not touch Medicaid, I will not touch Social Security.” Why? Because the biggest voting block in the United States, the one that elects every single politician each and every year, baby boomers, one sure way to either not get elected or get voted out of office is to modify those existing programs. If your number one job as a politician is to get elected and you recognize that talking about cutting spending is going to get you voted out of office, then that's what we call the third rail of politics. If you go to the subway in any major city, you see the two rails that the subway runs on, then there's the third rail, it says, “High voltage. Do not touch,” they call Medicare, Medicaid, Social Security politics because if you try to touch it, you get zapped right out of office. It's just not convenient, it's easier to not touch it, it's easier if you're a congressman that has a two-year reelection window, it's easier to just say, “Hey, we're okay for the next two years, why touch something that's not going to go bankrupt in the next two years? My job is to get reelected.” Unfortunately, maybe if we had some term limits that people make some more courageous stands, but unfortunately, as long as the politician's number one job is to get reelected, they're not going to be very courageous in trying to tackle these really thorny issues when it comes to writing the financial ship of state.

David: Yeah, if you watch our movie, The Power of Zero, Tom McClintock who is a congressman out of Sacramento, he's a US congressman, he's on the Republican Budget Committee—he was one of the most impressive figures in the movie, by the way, because he has a command of the numbers that really seemed to shine through—and basically he says that you can get to a point of no return because if your debt goes too high, you can reach what's called a sovereign debt crisis. A sovereign debt crisis is just a fancy way of saying, “Hey, other countries are going to stop loaning you money because they don't believe you can pay it back.” When it comes to that, we really start to run out of options in terms of how do we solve this problem because if people aren't going to loan us money, then the only other two ways are you can print money or you can raise taxes. You can't really print money because Social Security, Medicare, and Medicaid are all pegged to inflation, meaning that if we print a lot of money to be able to pay for Medicare, then we basically inflate the money, it increases inflation, that will increase the cost of a doctor's appointment commensurately, and these are all services that people on Medicare are going to have to have is just basic services during their waning years of retirement. You haven't really solved the problem by printing the money. If people will no longer loan us money and we can't print our way out of the problem because all of these programs are pegged to inflation, then what does that leave us with? It leaves us with dramatic and draconian increases in tax rates, the likes of which we probably haven't seen since World War II.

David: David Walker famously said—and by the way, you'll see that I like to rely on third parties that know a lot more about this than I do, experts like David Walker and Larry Kotlikoff, I'm not an economist but I like to study economist and I like to understand the landscape because 75 million baby boomers are making a bet by putting money into their 401(k)s and IRAs, they're making a bet, whether they realize it or not, that they believe that tax rates in the future are going to be lower than they are today. If they thought that they were going to be higher than they are today and they felt that in their heart of hearts, they would not be putting money into 401(k)s and IRAs, they'd be putting it into the tax-free vehicle. I rely on these third-party experts to really make the case for me, and I think we've done a fairly good job of assembling the case for higher tax rates—David Walker has famously said in a CNN op-ed, I believe it’s in 2009, why your taxes could double. This is the d-word, this is what I call the d-word, double, you'll see we interviewed a lot of people in academia from the most prestigious colleges and universities all across the country, from Northwestern to Boston University, to Berkeley, we interviewed George Shultz, we interviewed the governor of Utah, we interviewed David Walker, all of these people are looking at the same numbers and they’re singing the same song, a lot of them think the tax rates have to double the next 10 years, at the very least, all of them agree that tax rates will have to rise dramatically in the next 10 years and we can't grow our way out of the problem, people aren't going to loan us the money to be able to get out of that problem, that was one of the overwhelming conclusions of the chief global economist from Vanguard, he says, “The one thing I'm very certain of is we’ll never reach $53 trillion or $60 trillion dollars of debt because we would never be able to pay the interest on all that debt.” Something's going to happen to be the straw that breaks the camel's back before we get that much debt simply because, first of all, no one's going to loan us that money, and even if they did loan us the money, we wouldn't be able to afford the interest on it, especially if interest rates return to historically normal levels. We're talking about doubling in tax rates over the course of the next 10 years if we don't start cutting these programs in a dramatic way. It's not like, “Let's shave off a few dollars here and there,” we're talking for every year that we don't cut Social Security, Medicare by a third, the fix on the back end becomes all the more unsolvable. It's pretty dire.

In your book, you talk about three different tax buckets, you talk about the taxable, of course, the tax-deferred, and then also the tax-free, could you tell us what those are and in which ones most American wage earners tend to collect their assets over the course of their lives? Why most trusted advisors in their lives are still teaching them to put money into those buckets?

I don't see too many Americans that have lavish amounts of money in that bucket. I occasionally we'll see someone shuffles into my office and they live through the pressure, they say, “Dave, I got nine CDs for nine different banks for $100,000 each and I think I may be paying too much in tax,” and of course they're paying too much in tax because they have way too much money in that bucket. We just have to be sensitive that we utilize this bucket only for emergency funds and really short-term opportunity.

The last bucket is tax-free, it's one of my very favorites—I like all of the buckets, I think they all have a purpose, just only in very constrained and particular amounts—the last bucket is the tax-free bucket where you basically choose to pay the tax today, you say, “Hey, look, I think taxes today are going to be lower than they are when I take this money out.” If you believe that in your heart of hearts, you have no business growing and compounding your wealth in the text-deferred bucket. Pay the tax at today's historically low tax rates, get it into the tax-free bucket, and once it's in there, it will grow tax-free and you can take it out tax-free, in other words, you, at that point, have divorced yourself from the IRS. You basically own that money and you have paid the tax on that money, you've divorced the IRS from the whole proceedings, and regardless of what tax rates do down the road, you're always going to have that money.

Mark: David, in part two of our podcast, we're going to come back and talk more about that second and third bucket, the tax-deferred and the tax-free. For now, for just a minute, let's talk a little bit more about that taxable bucket. What are your general recommendations for how much someone should have in that category? I think you've already talked about the problem of having too much in that category, but maybe just go back over that again too, please.

Jonathan: David, thank you. We have a lot more to talk about on this topic in the second part of our podcast and so we're excited about recording that with you. For now, what does Living a Richer Life by Design mean for you?

Jonathan: Absolutely, one of our folks at LionsGate Advisors says, “How can we recapture and redirect funds that were normally being directed to, in our opinion, the most corrupt charitable organization in the world and how to be able to repurpose that for legacy or for tax-free income?” We look forward to our next podcast with you, David. I know that we'll be recording that shortly. Thank you again for listening to Living a Richer Life by Design. For those of you who have joined us today, our goal is to provide our listenership with real-world practical solutions so they can care for the ones they love and also serve those in need. We'd like to give a special thanks again to our today's guest, David McKnight, who will be joining us for part two of this topic on The Power of Zero, we look forward to you joining us for our next episode of Living a Richer Life by Design.

David: It's been a pleasure, thanks so much for having me.