A Summary of The Power of Zero
Synopsis of David McKnight's book on how to get to the 0% tax bracket in retirement.
This is a wonderful book that will open your eyes to things you’ve definitely heard before, but maybe not in this particular order. This is a brief synopsis of some key points that David makes in his book.
This newsletter should not be viewed as investment or financial advice.
A Gathering Storm
David McKnight starts off his book quoting someone named David Walker, a former Comptroller General for the United States from 1998-2008. Walker claimed, and still does, that our tax rates could likely double in the future if the government doesn’t get its act together. He said that there’s a single four-letter word that explains why. That word - MATH.
Side note on David Walker. He recently published a book called “America in 2040: Still a Superpower?” This is another great book to read. A lot of things in the economy you’re hearing in the news currently are fairly well written about by David Walker in this book. I will probably do a summary of this book at a later date.
The Math
Digging deeper into the math problem of our economy, both Davids explain that the funding of Social Security is a huge issue. Let’s take a sidestep into a brief history of Social Security. David McKnight does a great job in telling this, but I find that it’s helpful to have updated info as The Power of Zero was last updated in 2018.
Social Security was created in 1935. By 1940, there were 159 workers for every 1 beneficiary of Social Security. When the program began, you would have had to have been 65 before receiving benefits. The catch was that the average life expectancy back then was only 62. You see the issue? You were more likely to die before even receiving Social Security benefits. McKnight states, “Social Security was never intended to be a retirement program [like it is today]. It was merely insurance against living too long.”
At the time of this writing, Social Security costs the US government about $1.27T per year. Our total proposed budget is $6.37T for FY2024. That means Social Security takes up about 19.9% of the federal budget if it stays at its current level. Medicare costs even more.
Today there are less than 3 workers for every 1 beneficiary. The age to request benefits has also decreased to age 62 instead of 65. The average life expectancy today is 74 for males and 79 for females. I’ve heard David McKnight ask this question before: “Do you think Social Security today is just a little bit different than when it first started?” You should be nodding in agreement because the rules are very different.
In his book, David goes even deeper to explain that this is really just scratching the surface of the math problem.
The Tax Sale of a Lifetime
Another quick history lesson - this time on taxes. The highest marginal federal tax rate our country has ever seen was back in 1944. It was 94% for anyone making above and beyond $200,000. And the lowest tax bracket at that same time was 23%. Those tax rates stayed fairly constant for the next 20 years. By the 70s, the highest marginal tax rate was 70%. Today, the highest marginal tax rate is 37%.
Again, David makes a great case in his book that tax rates are at historical lows and we might as well be in the biggest tax sale of our lifetime right now.
Wile E. Coyote - Super Genius
David makes a quick reference to the Looney Tunes character of Wile E. Coyote. In this clip he likens our country’s looming tax bill to the freight train and our tax-deferred savings as Wile E. Coyote working in his shed.
He aptly named his documentary “The Power of Zero - The Tax Train is Coming.” I highly recommend watching his documentary if you aren’t much of a reader.
Three Tax Buckets
Throughout the remainder of his book, David teaches about the three different types of tax buckets you can be putting money into. He quite easily names them the “taxable, tax-deferred, and tax-free” buckets. I’ll leave you to read his book to learn more for yourself on the ideas and concepts that David writes about.
More About David McKnight
The Power of Zero podcast - a great first episode to start on → The ABCs of POZ
This newsletter should not be viewed as investment or financial advice.