Companion to The Power of Zero
The three ideas readers come back to me about
You read The Power of Zero. Most people finish it, nod, and put it on the shelf. These are the three my clients come back to me about most, with a little of what I have watched them mean in practice.
It is not how much you have saved. It is which bucket it sits in.
McKnight splits your money into three buckets: taxable, tax-deferred, and tax-free. Most successful savers have nearly everything in the middle one, the 401(k) and the IRA, and call it a retirement plan. The catch is that the middle bucket is the one the IRS controls, and they get to reset their share whenever they decide to. Two people with the same two million dollars can have very different retirements depending on how those dollars are split across the three.
Control comes from where the money sits, not just how much of it there is.
The withdrawal math is worse than your statement says, and a down market makes it brutal.
Say you need 100,000 dollars to live on, pulled from a tax-deferred account, at a 30% effective rate. Most people assume they withdraw about 130,000. The real figure is closer to 143,000, because the tax has to come out too. That bucket drains years faster than planned.
Now add a bad market. When prices are down and you still need the same amount to live on, you have to sell even more shares to cover both your spending and the tax on it. You are forced to liquidate a larger piece of the portfolio at the worst possible price, which locks in a far bigger loss than you ever intended to take. Taxes and a down market feed each other. That combination is what ends plans that looked fine on paper.
Today’s tax rates may be a limited-time sale.
By historical standards, top rates today sit near an 80-year low. With the country’s unfunded obligations and fewer workers supporting each retiree, the durable bet is that rates rise, not fall. Warren Buffett made the same case at Berkshire Hathaway’s 2024 annual meeting: he trimmed the enormous Apple position partly because he expects tax rates to be higher down the road to help close the deficit, and he would rather pay at today’s rates. When the person sitting on one of the largest stock positions in the world is choosing to pre-pay tax now, it is worth asking whether the rest of us should be thinking the same way.
The window is open now. It does not stay open forever.
None of this means act today. If the book left you with a question about your own situation, that question is usually the most useful place to start. Thirty minutes with Jun. No products, no pitch.