Using Domestic Geoarbitrage to Retire Sooner
Tim Ferriss popularized the term geoarbitrage in his book “The 4-Hour Workweek.” Geoarbitrage sounds complex, but the principle is easy to understand and apply.
Different geographic areas have different costs of living. Geoarbitrage is simply taking advantage of these differences. This can be a powerful tool during your wealth building years, and it can make your money go further in retirement.
Ferriss wrote of global geoarbitrage enabling mini-retirements in places like Argentina, Panama, or Thailand. Quality of life is high and cost of living is low in these places compared to the United States.
There are many globetrotters in the financial independence, retire early (FIRE) community who are utilizing geoarbitrage to experience lives full of adventure and world travel. Retire Early Lifestyle, Go Curry Cracker, and Millennial Revolution are popular blogs built around the stories of early retirees traveling the world.
You may find these stories interesting, but desire a more traditional lifestyle. You can still utilize geoarbitrage.
Within your country, state, and city are opportunities for domestic geoarbitrage. As we plan our upcoming cross country move, I realized this had been one of the most powerful and practical tools enabling my early retirement.
Multiple Factors Affect Cost of Living
A quick web search will reveal many articles comparing cost of living in different cities and states. It’s easy to think of cost of living in terms of cost of housing. Others focus on reducing taxes.
Geoarbitrage is most impactful when starting with your wants and needs to build an individualized plan. The process starts by identifying what stage of life you’re in and determining what you want your life to look like. Where do you want and need to spend your time? What people and activities are most important to you?
The second thing you need to know is how much money you’re currently spending. Many people don’t take the time to budget or track their spending. It’s difficult to improve, and impossible to quantify improvements without a baseline reference point.
Finally, it’s important to realize that situations change over time. Geoarbitrage is a concept that can be customized to meet your needs through different stages in life.
Factors to Consider With Geoarbitrage
Geoarbitrage accelerated my path to retirement while improving my quality of life. The factors that you need to consider to improve your life through geoarbitrage are:
It’s not a secret that housing costs vary greatly in different locations. According to Kiplinger, median house prices in the hundred largest metro areas range from a low of $84,250 in McAllen, TX to a high of $1,160,000 in San Jose, CA. These massive differences in housing prices equate to massive differences in the ability to save during your working years.
We started our professional lives in Pittsburgh, PA, the eighth least expensive city on the Kiplinger list. We then moved to our hometown about two hours outside Pittsburgh, where housing costs are even lower.
While saving for early retirement, we lived in a 2,200 square foot new construction. We paid off our mortgage in only seven years, enabling us to build equity with plenty left to invest. This would have been impossible without sacrificing lifestyle if we lived in a more expensive area.
Housing costs were also a point of emphasis when considering our retirement location. We were committed to living close to our favorite outdoor activities, particularly skiing. Ski towns are notoriously expensive. This quickly narrowed our national search.
On the local level, we considered Ogden and Salt Lake City (SLC), Utah. These cities are about an hour apart, with similar features that attracted us. The median home price in Ogden at the time we were looking was about $200,000 compared to $300,000 in SLC.
The house we ultimately chose in Ogden enabled us to buy more house, have better outdoor access with less crowds, and pay far less than would have been possible in SLC.
Geoarbitrage is typically thought of as a way to lower your cost of living, making money go further. Geoarbitrage becomes especially powerful if you can simultaneously earn more. Our examples demonstrate how this can work.
I went to college at the University of Pittsburgh and fell in love with the city. That love wore off when I realized the glut of physical therapists in the city meant starting salaries were well below the national average.
After starting my career near Pittsburgh, I was able to substantially increase my income by moving away from the city, where supply and demand shifted in my favor. By moving to my hometown, I nearly doubled my salary in just two years. The low supply and high demand for health care providers in rural areas creates excellent opportunity for workers in the medical field willing to go where they’re needed.
There’s also great opportunity for those who work remotely to utilize geoarbitrage. According to the Bureau of Labor Statistics, 24% of working people do at least some of their work from home. The trend of more people working from home continues to grow.
My wife falls into this category. When we decided to move to our hometown, her employer was faced with the decision of accommodating her or losing her services. She was allowed to work from home. She later found her current company, based in the Washington D.C. area, that allows employees to live and work anywhere in the country.
Working for big city firms, with commensurate salary, while living and spending your money in lower cost areas is another excellent arbitrage opportunity to make those dollars go further.
Taxes are a hot button political issue. The reality is your single vote at the ballot box will have little to no impact on your tax bill. However, if you vote with your feet, you can greatly affect your tax burden.
There are state and local income tax, property tax, and sales tax. The key is to determine what taxes most affect you and choose a location accordingly.
Someone earlier in their careers may benefit by locating somewhere with low income taxes, while income tax is less concern for a retiree. If you value a large home, property taxes will be important, while they are a lesser concern for those looking to downsize in retirement.
When deciding where to live during our careers, we used geoarbitrage at the most local level. Homes on one side of our town have lower selling prices but much higher taxes. Homes on the other side of town have significantly higher prices and lower taxes.
Annual costs are roughly the same to rent or buy in either location, after factoring both price and tax. We chose to move to the area with lower taxes.
Many homebuyers look only at monthly housing payments without considering where their money goes. Choosing a higher housing price meant more of our payment was applied to building our net worth, while choosing higher taxes would have meant that money going to the government.
Utilizing geoarbitrage at this micro level, moving only a few miles, meant a difference of thousands of dollars in net worth every year.
Child Care and Education
For those with young children, childcare can be a massive expense. Living in a low cost area can provide access to quality low-cost child care. Moving closer to family can also help defray costs.
We were originally planning to move west when we found out my wife was pregnant. Staying close to family enabled us to utilize my parents during our daughter’s formative years. This saved us substantial money while creating a close bond between them.
We also had high quality daycare and preschool options in our area. We loved her preschool and were completely satisfied with it. This factored into the timing of our move, waiting until she was ready to transition to kindergarten before making our move.
As children get older, their education is a major expense. Living in an area with quality public schools can save thousands of dollars each year compared to sending a child to private schools.
Saving for college is another expense that can conflict with saving for retirement. Some states are far more expensive than others. Looking at potential expenses down the road, moving from Pennsylvania to Utah takes us from the state with the third highest in-state tuition to the state with the fourth lowest.
Access to Regular Activities
When determining where to live, it makes sense to focus on where you will be spending most of your time.
During your career, that unfortunately means work. It makes sense to choose a location that allows you to maximize the difference between earning and spending. At a local level, living close to your work can save you substantial money and time on commuting costs.
Cutting my commute in half was another benefit of moving away from the city early in my career. Compounded over a decade, saving this money and time substantially improved my net worth, health, and happiness.
In retirement, your daily activities will have a different focus. Proximity to activities you’ll do regularly can save substantial traveling costs while improving quality of life.
Related: Where Should You Retire?
Look at the Big Picture Before Considering Geoarbitrage
Domestic geoarbitrage is one of the most powerful tools you have available to save for retirement. It can also drastically change the equation in retirement, enabling your money to go further. Geoarbitrage enabled my early retirement, and it will allow us to live better for less in retirement.
Domestic geoarbitrage is powerful and practical, but it requires thought and effort to choose the location that makes most sense for you. Step back and look at the big picture when considering all the factors affecting your decision. Then get moving.
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This post was originally published March 19, 2018 and was most recently updated on October 8, 2021.
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[Chris Mamula used principles of traditional retirement planning, combined with creative lifestyle design, to retire from a career as a physical therapist at age 41. After poor experiences with the financial industry early in his professional life, he educated himself on investing and tax planning. Now he draws on his experience to write about wealth building, DIY investing, financial planning, early retirement, and lifestyle design at Can I Retire Yet? Chris has been featured on MarketWatch, Morningstar, U.S. News & World Report, and Business Insider. He is also the primary author of the book Choose FI: Your Blueprint to Financial Independence. You can reach him at firstname.lastname@example.org.]
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