“Retirement is like a long vacation in Las Vegas. The goal is to enjoy it to the fullest, but not so fully that you run out of money.”
- Jonathan Clements
I have always had a keen interest in finance and have explored how we as physicians can be smarter about our finances. Especially with regards to taxes, our single biggest lifetime expense in aggregate. This led me to obtain my series 65 license and ultimately found my own tax consulting business to help my colleagues with true proactive structuring and tax planning.
One of the books I share with clients that had a big impact on me and my decisions regarding retirement is The Power of Zero by David McKnight. I first listened to this short book on Audible. The book is succinct and compelling and I will try to do it justice in this review.
What It’s All About
The POZ begins with the premise that taxes are historically low, and that taxes have to go up. The simple reason is math:
as you can see from the graph, taxes have been much higher in the past. Our current situation is simple, our debt is 108 percent of our GDP (we averaged 62 percent from 1940 until 2017). It is only going up. We need to pay for the ever-growing burdens of Social Security and Medicare. There is no way out unless we drastically cut or change these programs and raise taxes.
Why Is This Important?
POZ recommends that physicians must strive to be in the 0 percent tax bracket in retirement. Think about it for a minute: Do you really want to be paying taxes in retirement? Especially when you have fewer deductions? Your house will likely be paid off, your children have grown up, and you won’t have active businesses to reap all of the deductions that we strategically use in your revenue generating years to offset tax burden. If you are paying taxes in retirement, you are rolling the dice with your hard earned money.
Do You Trust Your Business Partner?
Imagine you have a business partner. This partner and you decide that at a certain date, the money that you earn will be split up based on a percent that your business partner decides on that date. Oh, and your business partner is a spendthrift who owes more than they earn. How does that sound? Scary, right?
Welcome to government-sponsored retirement plans. Yes, pretty much all non-Roth retirement plans are basically this arrangement. This truly has the ability to ruin your dreams of retiring wealthy.
The Three Buckets
David McKnight describes three buckets for your money: Taxable, tax-deferred, and tax-free.He argues that you always want to keep about six months of cash on hand (taxable bucket) for emergencies. I don’t completely agree with him here when it comes to physicians, but that is a topic for another article. The tax-deferred bucket is all of your deferred investments in government-sponsored retirement programs such as 401k, IRA, 403b, etc. He argues that you should convert all of this money to Roth, LIRP (Life Insurance Retirement Plans), or other tax-free bucket strategies. The best approach here is to make sure you are matched (free money), but anything beyond that, put into a Roth, LIRP, or other tax-advantaged product. You can convert money deferred into Roth via 72T or other conversions, and your tax solution team can help.
The reason you want to be in the tax-free bucket in retirement is simple: planning. If you know you are in a tax-free situation, you can control how you spend your money and know how much you need to retire comfortably. If you have a few million dollars in deferred plans, you are at the whim of your unsavory business partner, Uncle Sam. Your taxes could be 70 percent in the highest bracket easily! How can you accurately choose a retirement goal in this scenario?
It may not be as important for us physicians, but most of us pay into Social Security. POZ also argues that since 80 percent of SS can be taxed in retirement if your taxable income is over the standard deduction (currently $24,000 joint for 2018). That’s a double tax! Ostensibly, you will get your SS in retirement if you can mostly be in the zero percent tax bracket (minus potential program changes).
Life Insurance Retirement Plans
McKnight wrote a follow-up book called Look Before You LIRP, which breaks down the “Rich-man’s Roth” aka a LIRP. Although there are some vociferous and influential blogger opponents to any permanent life-insurance products across the board, I use them in my own financial toolkit for tax-free income in retirement that I control (and I get long-term care and life insurance for a similar cost to mutual funds).
While I don’t sell these products, I am a proponent of them. The sad truth is that most of these products are “designed to be sold, not bought” and there are a lot of predatory behaviors and bad actors out there. Be smart, read Look Before You LIRP and see if this strategy makes sense for you.
Overall, POZ is a quick read that is very cogent and at times entertaining. It is well-written and carefully conceived. I suggest to all of my clients and physician colleagues to read it (and its sequel) if they are interested in protecting and growing their money. I believe that physicians should have more agency over their hard-earned money and I also think that partnering up with the government for retirement — the default — is not the smartest move and that there are great alternatives for savvy physicians.
Dr. Noah Kaufman is an emergency physician who co-founded Physician Tax Solutions, LLC - a company partnered with tax attorneys, CPAs, and Tax Coaches designed to provide tax strategies and solutions to physicians. Visit them at www.physiciantaxsolutions.com
Illustration by Yi-Min Chun