Financial Plan

← Back to Kevin's homepagePublished: 2020 Jan 4Last updated: 2020 Jan 19

High-level financial plan/advice for myself, an American citizen in my 30’s, software consultant, no kids or large financial obligations (illness, real estate, etc.). Writing for my own reference and sharing in case there’s any overlap, though of course your mileage may vary.

Retirement Math

This article outlines how long one must work before they’ve saved enough money to retire:

Savings rate (%) Years until retirement
0 You will never retire
10 51
30 28
50 17
70 9
90 3
100 You’re working for fun!

I like the framing of “savings rate” (1 - expenses / income) because it makes clear that there are two variables to play with. Lets look at both.

Here are my rough expenses from 2019, which felt like a typical year for me — I was fortunate enough to not have to think at all about money, I just bought the things I wanted, ate out whenever I felt like it, etc.

$17k business expenses:

$28k personal expenses:

In total, that’s $45k of expenses.

Conservatively, lets round up to $50k and assume that in retirement the business expenses will remain the same (shifting from supporting income-generating activities to, uh, those drinks with little umbrellas in ‘em). Then, assuming a 4% safe withdraw rate (i.e., post-inflation annual return; details, skepticism), I’d be able to cover these expenses with a $50k / 4% = $1.3M portfolio.

Say I stopped traveling and eating out — that’d save me $10k annually and reduce my minimum portfolio to $40k / 4% = $1M. However, that’d be a significant negative lifestyle change; I’d much prefer to focus my efforts on the other factor, income.

Focus on income

If you’re reading my website, you probably computer, and in the current macroeconomic climate computerists are getting paid very well. Look at levels.fyi and read Dan Luu’s Startup Tradeoffs and Options v. Cash articles for an overview of industry compensation.

Given the high compensation and variance, it’s probably easier for a computerist to increase their savings rate by earning more rather than spending less.

To increase compensation, you may need to switch employers and/or move to San Francisco, New York, Seattle, etc.

While it’s comforting to rationalize the status quo — thinking “I like my current job!” and “San Francisco is an expensive dumpster fire!” (both true!) — it’s worth doing back of the envelope calculations.

E.g., my friend switched careers from a designer in Portland, OR making $90k to a junior software dev at some dinky SF startup making $160k. Although her rent went from $1k/month to $3k/month, she’s still coming out ahead $46k in the first year (undoubtedly more as her new career progresses, given the relative salary ceilings between both the cities and industries).

Think about opportunity cost

For my friend, the extra $46k and growth potential of moving to SF outweighed the extensive downsides (human poo on the sidewalk! entitled boomers!).

For me, I’m happy to effectively “pay” $100k+ annually (i.e., postpone retirement by several years) to work remotely on my own schedule (to collaborate with friends, exercise/nap mid-day, etc.) instead of working at FAANG.

This is of course all quite personal — I’m just suggesting you do research (ask peers about their salaries, interview occasionally, etc.), run the numbers, and actually make an informed decision for your own situation and preferences.

Minimize tax liability

A major way to reduce expenses without making any lifestyle changes is to minimize tax liability. This liability can be reduced both in the present (by reducing taxable income, which saves that reduction times your marginal tax rate) and in the future (via tax-advantaged savings, which won’t be taxed when withdrawn).

None of this is very difficult, you just need to know about it and have the stomach to do the paperwork (or find a good accountant to do it for you). However, beware the danger of pursuing infinitely documented, endlessly researchable tax liability optimizations to the detriment of more lucrative financial efforts (negotiating higher salary/fees, pursuing new business opportunities, etc.)

Again, all this is specific to my situation and is not tax or legal advice. The following details assume a single filer in the penultimate tax bracket ($200–500k, 35% marginal rate) working for their own business with no other employees.

Paperwork calendar

Similar info as above, but in playbook form. I use Tax Bandits to file all business forms (except 1120S, which I have to mail), pay business taxes via EFTPS, and file my personal return via TurboTax.

For prior tax year:

For current tax year:

Asset allocation

Past decade I’ve been putting my savings into low cost index funds and not thinking about it much. Mostly it just goes into Betterment (sign up via referral code if you want to save me some fees).

At some point this year I’ll do some more thinking, which will probably involve: