Inflation Reduction Act Impact on Tech Workers
How could the Inflation Reduction Act of 2022 change FIRE plans for tech workers?
The Inflation Reduction Act has passed the US Senate and is slated to pass in the house. In its earlier form as the “Build Back Better” plan there were many significant impacts to tech workers seeking FIRE. What about the Inflation Reduction Act?
Recap of Major FIRE Implications from the prior BBB:
Death of the Mega Back Door Roth
Added Limits for Back Door Roth
Required Withdrawals on High Retirement Balances
SALT Cap Increases
Inflation Reduction Act FIRE Implications
The good news is that every one of the above changes ARE NOT included in the Inflation Reduction Act, although most reading this would have liked to see SALT cap increases. All flavors of backdoor roths live on! Reading through the plans I am not seeing much that will directly impact high earning tech workers pursuing financial independence.
Potential impact
Increased IRS auditing of those earning >$400k (I anticipate this being minimal for most W2 tech workers who have fairly straight forward returns). The IRS would be able to hire an additional 80,000 full time employees. I pulled the data from the IRS factsheets to help visualize the change in employees and the ratio to the US population. The result would be a doubling of IRS employees or a quick spike up in the ratio to .48, much closer to where they were in the early 90’s.
For those close to FIRE counting on the Affordable Care Act subsidies to reduce insurance premiums, they have been extended through 2025 (not very confidence inducing to rely on this over the long term).
Most of the other credits incentivizing different energy efficient or electric vehicle adoption focused have income limits so they wouldn’t benefit those earning >$200k.
What About Corporate Tax Changes?
Two big changes to corporate taxes are a 15% minimum rate and a 1% tax on stock buybacks. So while there are no immediate financial implications directly to FAANG employees. An increase in corporate taxes could have an impact on company earnings (and as a result total comp).
I don’t believe the 15% minimum will impact any of the FAANGs other than Amazon and maybe Netflix. Meta’s most recent earnings mentioned “Absent any changes to U.S. tax law, we expect our full-year 2022 tax rate to be above the second quarter rate and in the high teens.” I am on the look out for updated current estimates.
Bonus Book Review: “Buy This, Not That”
Sam Dogen, better known online as “Financial Samurai” is a true OG of the Financial Independence Retire Early community. He has been writing on FIRE since 2009 and unlike many who write about FIRE he has actually been living Financially Independent since 2012. He can now add published author to his list of accolades as his new book “Buy This, Not That” just hit bookshelves. I just finished it and can just go ahead and recommend it as an actionable guide to how to become financially independent.
This book doesn't follow the classic set of FIRE formulas (if you do want that, I would recommend JL Collins’s “The Simple Path to Wealth”). Sam approaches things in his own unique way. The results of which are a large collection of rules and frameworks for how you should approach life decisions in the most optimal way on your path to financial independence.
He kicks off the book with what he calls the Happiness Equation to financial independence. This is a central theme of the book, he pushes you to think in terms of probabilities of success and focus on making decisions where a positive outcome will happen at least 70% of the time while still being humble enough to accept failure 30% of the time.
The book challenged me a lot in the first section. Sam’s advice on how much you should target to FIRE is extremely different to the more common calculations and those I personally use to calculate my “How much is Enough” number. Where I recommend using 33x your expected spend, Sam pushes back and wants you to think more in terms of income.
His recommendation is to push for a net worth equal to 20x your average annual gross income. Or if you insist on using spending he pushes to at least utilize a range of 25x spend through to his upper bound of 20x gross income.
Example of someone earning $300,000 per year gross while spending $100,000:
My personal “enough” number based on 33x spend: $3,300,000 ($4M if you include the house + college)
Sam’s 20x Gross Income= $6,000,000
To be fair in my own calculations for reaching an “enough” number, I excluded a paid off house and pre-funding college. So perhaps we are not as far off as my original gut reaction led me to believe (only a cool $2M).
But he doesn’t stop there. He adds additional criteria where your investments should generate enough passive income to cover your annual expenses. This doesn’t drastically change how much money you need, but it does drastically change how your money is allocated. An index fund heavy portfolio would very very rarely satisfy this criteria unless you were pushing an absurdly conservative <2% withdrawal rate.
This is a common theme where the income based recommendations push the reader to find more ways and opportunities to increase their income both through very practical career advice, side hustles, as well as multiple chapters dedicated to housing (both as investments and as a roof over your head).
At this point you might be wondering why I am recommending a FIRE book that I am not fully aligned with? I have two reasons for that.
I like reading books that offer me a different way to think about a problem. I know the core of a Bogle Head or Mr. Money Mustache type FIRE approach. Reading another book about this wouldn’t incrementally add to how I already think. This is also why I also loved “Die With Zero”, I am naturally frugal so the frameworks provided in Die With Zero helped me think about experiences in the same way I think about investments. Sam does the same thing here. If you strictly follow his advice you will end up with way more money than I think you would ever need… but that’s not exactly the worst outcome in the world. He also has me thinking harder about my own Real Estate exposure (nearly 0% at the moment) and other options at generating passive income vs just relying on a portfolio withdrawal rate in FIRE.
Everything I have covered thus far is not even 1/3rd of the book. The rest of the book goes deep into thinking about where to live throughout your life, how to approach your career, job hopping vs sticking around (has a really good analogy of being like Nick Saban and not John Wooden), severances, side hustles, education, love, children, stealth wealth, and so much more that I really learned from.
I think the readers of this newsletter will resonate with many of Sam’s experiences and approach. Sam writes from the experiences of someone who FIRE’d at the tail end of The Great Recession. For those in Tech there are a lot of parallels to what Sam went through in his finance career in 2008-2012 and what is happening in 2022. I was also able to relate even more since he actually lived (lives still) in San Francisco after working in New York and talks from experience the benefits these VHCOL locations can have on your career. Plus he is currently raising children while FIRE IN SF! I really enjoyed reading about the frameworks he plans to use to raise them.
If you are a Meta employee be sure to check out the workplace FIRE group. We will have a special opportunity to chat live w/ Sam about his book at the end of the month. Great opportunity to pick up the book now and then get your burning question immediately answered by the author himself!