Geographic Arbitrage: Moving to a Low Cost of Living Area to Retire Early
Have you heard of the term Geographic Arbitrage? It’s one method to retire early. Geographic arbitrage uses location price differences for financial advantage. For instance, if you are a nurse and the wage for your position is often fairly standard from city to city. However, the cost of living varies wildly from city to city.
A lower cost of living can help you retire earlier.
In the high cost of living city a single family home that you like would cost $700,000. In the small town it would be $300,000. Daycare is $2000/month in the coastal city and just half of that in the midwestern small town. Oh, and your commute time is quadrupled in the city, increasing your commuting costs and wear and tear on your vehicle.
Add all the numbers up and if you take the job in the mid-Western small town you will save 50% of your income and retire in fifteen years at the age of 40. The coastal big city job gets you to retirement in closer to 30 years.
Physician on Fire explains Geographic Arbitrage well in this post.
Using Geographic Arbitrage to retire early makes some assumptions like:
You’re pretty happy to live anywhere. Not true for many people, especially if you have family ties to a place or weather preferences.
Salaries in your profession are the same regardless of where the job is located. Not true for many professions.
There are jobs in your field in most places. If you work in a location specific industry you are tied to a region. Sure, there are disruptors starting tech hubs outside of Silicon Valley, but many people have jobs at a certain level in a certain industry and those jobs are mostly in one place. This is very true for resource based jobs like the oil industry or forestry.
Geographic Arbitrage as a method for early retirement doesn’t work for everyone. But it can work for some. My husband and I used Geographic Arbitrage when we moved from an expensive coastal city to a small mountain town. Our house in the small town was 40% of the sale price of our city condo. Childcare is 30% less here. There are lifestyle spending wins here: no easy and cheap sushi two blocks from my home.
Would you move to a cheaper town or city for financial advantages? I loved city life so I understand why many people won’t choose to move. Add in family and a great network of friends and this is a hard no for some people. But for others… it’s a real possibility. If you have a highly portable job – think teacher, nurse – you have many options for where to live. Work for yourself/remote/telecommute? You’re probably a good candidate for moving to a low cost of living area.
Geographic arbitrage is just one method people use to create financial independence / retire early. I’ll explore other avenues for how to retire early and how much you need to retire early (Mr. Money Mustache would tell you it’s not as much as you think) in future posts.
Early Retirement Resources:
Millionaire Teacher: The 9 Money Lessons You Should Have Learned in School: Confession: my husband made me read this book so I would have a better understanding of our investing strategy. And then I was really surprised to find that I liked this book. I liked it a lot. Highly recommend it if you want a better understanding of the investing methods most of these early retirees used. It’s also a pretty fun read: he really was a teacher that retired early due to smart investing and frugality.
Best Early Retirement Blogs: So many blogs! I guess when you don’t have to go to the office you can start a blog.
Did cost of living affect where you chose to live? Have you ever moved to a different city or town to reduce your cost of living?
We just did this, but I had no idea it had a technical term! LOL. We used to live in the Denver area where housing and daycare were outrageous. After we simplified our homes and our lives, we were no longer victims of consumerism and buying more. We no longer thought we NEEDED a bigger home. So I quit my corporate career, we moved to a very small town in the mountains of Colorado, and my husband commutes only twice a month. I now get to stay home and work and be with my kiddos. Living somewhere cheaper has made it possible to live without a significant income that was coming in previously. We were the lucky ones who got to live somewhere they love that is also way cheaper!
We’ve loved being in a smaller town, for those exact reasons. Retirement seems like a long ways off still, but our costs are still much lower than the big city. My husband took a job here with a serious pay cut, but it doesn’t matter as much as we thought it might. Our happiness is way high, while our stress is way low. It’s a good mix. We miss our big one-stop-shop stores a little, but that’s about it. We even have good sushi! 😉
I’ll look up the resources you listed! Sounds great!
Yeah! So nice to hear that you guys are enjoying your new city. The pictures are beautiful. Jealous of the sushi!!
I loved this article and I read the link to PoF – all of it. So clever and yet so obvious. Seriously, if you are saving 50K a year by living somewhere else, you can easily justify e.g. a long weekend in the big city once a quarter to eat at your favourite restaurants, see a show, go to the museums, have breakfast, lunch and dinner with different friends…. Most of us don’t go to the theatre four times a year even when we live in the heart of the city. And all those friends would probably jump at the chance to spend a weekend with you in the country once in a while.
So true re: you can spend some of those savings on big city cultural experiences and travel. We literally never left the city when we lived in the centre of it. Now that we’re in a rural area we road trip at least once a month to bigger towns for events or activities that we don’t have here.