Top Countries for Geographic Arbitrage and Early Retirement in 2024
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Introduction
This personal finance blog aims to increase your financial literacy and guide you on the path to achieving financial independence. Pursuing financial independence involves saving diligently and investing wisely so you can eventually reach the “crossover point”, where you can live off your investments and eliminate the need for paid employment. For many, financial independence happens at traditional retirement age, where retirees live off a combination pensions, savings, and investments. However, with strategic planning, financial independence can be achieved much earlier.
This blog provides tips and actionable strategies for achieving financial independence and retiring early. With this in mind, today we focus on a powerful strategy to shorten your pathway towards financial freedom: geographic arbitrage.
How Geographic Arbitrage Can Accelerate Your Path to Financial Independence and Early Retirement
In the context of financial independence, geographical arbitrage can be understood in two different ways. Firstly, if the nature of your job allows it, you can work remotely from a lower cost of living country, enabling you to substantially increase your savings rate and reduce the timeline to reaching financial independence. On the other hand, although you may be unable to relocate at present for different reasons, perhaps you can relocate upon retirement. Today, we focus on geographic arbitrage in the latter sense. Reducing the amount of annual expenses in retirement means you can target a smaller retirement portfolio, allowing you to exit the workforce earlier. In today’s post we aim to address the following questions: How can we identify the best countries for early retirement? What characteristics would make a country a desirable candidate for relocation?
The Top Countries for Geographic Arbitrage and Early Retirement
How to Find the Best Countries for Geographic Arbitrage to Achieve Financial Independence in 2024
There are numerous challenges for selecting suitable countries for geographic arbitrage. Firstly, the sheer amount of options for relocation can make the choice overwhelming–a clear case of paralysis by analysis. We don’t know where to start, so we just don’t consider seriously the option of geographic arbitrage itself. Secondly, we may already hold strong strong views–founded or unfounded–on certain countries, while we may be completely unaware of other countries that may be excellent matches to our specific circumstances.
Let’s try to keep the emotions aside for a moment and come up with a step-by-step, data driven approach that allows us to narrow down on potential top destinations based on variables we consider important.
Key Criteria for Selecting the Best Countries for Affordable Early Retirement Through Geographic Arbitrage
While identifying suitable country characteristics is to a large degree subjective and depends on your personal circumstances, my hope is that readers can reproduce this general process, adjusting for the variables that are critical to them. Below we find a comprehensive list of important quantitative and qualitative variables to consider. If I were to retire, say, in a decade or so to a foreign country, I would want it to perform strongly in the following areas. The subsequent Table 1 summarizes the available data to be considered to narrow down the scope.
Cost of living. This is one of the main variables we want to use for this analysis. By choosing affordable retirement destinations, we can fast-track our journey to financial independence while enjoying a higher quality of life.
Affordable housing. Affordable housing is also a critical variable to ensure a comfortable retirement with our available savings.
Health care system. Another important element to consider. We want to live healthy, long lives. While a large part of our health is determined by our lifestyle choices, it is still important to have a solid health care system supporting you when needed. Ideally, this should be both affordable and of high quality.
Safety. Moving to a safe country for early retirement is crucial for peace of mind. This variable should account for crime rates and the general sense of safety experienced in the country.
Political, legal and financial stability. We want to move to a politically stable environment with very low risk of civil unrest. Ideally, we also want to enjoy acceptable levels of governance and political stability.
Tax environment. This is a very relevant factor. If we plan to live off our portfolios, how our wealth is taxed determines to a certain extent how far we can stretch our retirement budget. When considering the tax environment of a country we should not only consider capital gains tax, but also potential treaties and benefits for foreign retirees. Property taxes and inheritance tax considerations may also be of importance, depending on your unique circumstances.
Environment. Environmental factors like favorable climate, low natural disaster risk, clean air and water, and abundant natural beauty are important when choosing the best countries for retirement.
There are certainly other relevant factors to consider that we won’t include for now in this quantitative dataset. After identifying the top countries for early retirement, consider these additional factors to make your final relocation decision. Consider for instance:
Proximity to friends and family. Consider proximity to your home country and ease of travel when selecting the ideal retirement destination abroad.
Cultural openness and attitude towards expats: Choosing expat-friendly countries with welcoming cultures ensures a smoother transition into your new early retirement life.This could be informed, for example, by the “Ease of settling in index” from InterNations.
Education: This may be a highly relevant category for early retirees with children.
Language. Consider the prevalence of English or other common languages, availability of language schools or immersion programs with local language, and general ease of communication for non-native speakers.
Retirement benefits and pension transferability. This doesn’t apply so much to early retirees (at least at first), but some factors to consider could be the ability to receive and transfer pensions to the country of residence or social security agreements between countries.
Local cuisine and dining options. Exploring countries with rich culinary traditions can enhance your early retirement experience, especially if you're a food enthusiast.
Travel options within country or region.
Cultural and social life: opportunities for cultural engagement such as museums, theaters, concerts, festivals. Opportunities for hobbies and activities (sports, clubs, etc.)
In today’s analysis, we consider the quantitative variables found in Table 1. These key factors help narrow down the best countries for affordable early retirement, though other considerations may also influence your choice.
Photo by Nick Karvounis on Unsplash.
Table 1: Variables considered for the identification of suitable locations for geographic arbitrage and financial independence.
| Variable | Comment | Source |
|---|---|---|
| Cost of living | Considers rent | Numbeo (2024) |
| Health care system | Considers healthcare professionals, equipment, staff, doctors, and costs. Provides assessment of healthcare infrastructure, services, and resources | Numbeo (2024) |
| Safety | General sense of security | Numbeo (2024) |
| Political, legal, and financial stability | 6 key indicators included: Voice and accountability; Political stability and absence of violence; Government effectiveness; Regulatory quality; Rule of law; and Control of corruption | World Bank indicators |
| Pollution | Air pollution is given strongest weight, but other factors also considered: water pollution, garbage disposal, cleanliness, noise and light pollution, green spaces, and comfort in relation to pollution | Numbeo (2024) |
| Climate | Estimation of climate likability | Numbeo (2024) |
Analyzing the Best Countries for Affordable Early Retirement through Geographic Arbitrage
Using the six key variables from Table 1, Figure 1 illustrates how countries compare in cost of living and retirement suitability, helping you find the ideal location for early retirement. These suitable conditions are represented by an index (Retirement Suitability Index, x axis), which accounts for 5 variables of Table 1: health care system; safety; political, legal, and financial stability; pollution; and climate.
The initial dataset contains 121 different countries. Different cut-off criteria are proposed for the different variables, since ideally we don’t want our retirement location to be too dangerous, offer a poor health care system, or have extreme levels of air pollution. The methodology section presents more information on how the retirement suitability index is derived and how we arrive at the set of 51 countries in Figure 1 based on different cut-off criteria. For now, keep in mind that 70 countries have already been removed from Figure 1 for not meeting different suitability criteria.
From this point on, narrowing down further on a smaller set of candidate countries depends a lot on your starting point. For example, if you live and work in Switzerland (top right corner of Figure 1), congratulations, the world is your oyster! You will be doing geographic arbitrage literally in any location you choose to retire to. If you choose to retire in relatively expensive Denmark your expenses may still be roughly 40% lower than you are used to. Of course, this is a very extreme case, but you get the idea. Similar opportunities will also exist for those living and working in high cost of living countries, e.g., Iceland, United States, Australia, Norway, Luxemberg, etc.
As observed in the figure, there is a positive (moderate) correlation between the two variables. For the purposes of our assessment this means we should consider the obvious trade-offs of our choices. For example, if we live in Austria, we can look at the chart and start going down vertically (searching for lower cost of living countries). However, notice that the further down we go, our search inevitably takes us “to the left” towards countries with lower retirement suitability scores. Spain, Portugal, or Croatia may be very strong initial choices for someone based in Austria. If we go further down the cost of living ladder we may find Mexico or Turkey, but Mexico scores poorly on pollution and just barely makes it into safety group #3 (instead of #4, see methodology section below). Turkey also scores poorly on pollution and on political stability. The takeaway here, I think, is too be mindful of the tradeoffs and to come up with a middle ground.
Figure 1. Cost of Living versus Retirement Suitability Index for 51 countries. Y axis represents the cost of living, while the x axis is a composite Retirement Suitability Index that includes 5 variables from Table 1. The three color categories reflects one of the variables included in the index, namely the country's safety. Dark green is safest, yellow least safe. Countries falling in categories 4 and 5 were removed from the selection process. See methodology for details on selection criteria on how we arrived at 51 countries from an initial set of 121.
I am aware that this chart won’t immediately solve your relocation decision. But my hope is that it serves as a useful first step in mapping and evaluating where your country stands in relation to others, both in terms of cost of living and other desirable retirement location characteristics. Perhaps it encourages you to make your own Retirement Suitability Index based on the factors you consider important.
Of course, as mentioned previously, once you identify a set of 5-7 possible countries, you should then account for other important factors in order to make a balanced choice. Consider, for example, proximity to friends and family, cultural openness and attitude towards expats, language, retirement benefits and pension transferability, local cuisine, travel options, and cultural and social life.
In upcoming posts, we'll delve into how geographic arbitrage can significantly reduce the time to achieve financial independence and the impact of tax regimes on your early retirement plans.
Methodology
We start out with 121 countries in our dataset
We consider the cost of living of these countries and their suitability for retirement, depicted by the Retirement Suitability Index. This index averages scores across health care system; safety; political, legal, and financial stability; pollution; and climate. Sources in Table 1.
All variables in the dataset are normalized (0-100) prior to combining in the index. The Retirement Suitability Index is the average score across the five categories.
Additionally, for each of the five variables, we categorize countries as 1-5. For example, if you score 84 in safety you are in group 1 for safety (the best), whereas if you score 33 in healthcare you are in group 4 for safety (the second worse group).
We reduce the scope of countries from 121 to 51 through the following steps:
If there is two or more NAs across the five variables of the index, the country is removed from the dataset (28 countries removed)
Countries from safety groups 4 and 5 are removed (15 further countries removed)
Countries from health care system groups 4 and 5 are removed (22 further countries removed)
Countries from political, legal, and financial stability group 4 and 5 are removed (2 further countries removed)
Countries from pollution 5 group removed (3 further countries removed)
Final 51 countries considered: Australia, Austria, Belgium, Bulgaria, Canada, Costa Rica, Croatia, Czech Republic, Denmark, Estonia, Finland, Germany, Hong Kong, Iceland, India, Indonesia, Israel, Italy, Japan, Kazakhstan, Kuwait, Latvia, Lithuania, Luxembourg, Malaysia, Mexico, Netherlands, New Zealand, Norway, Oman, Panama, Philippines, Portugal, Qatar, Russia Saudi, Arabia, Singapore, Slovakia, Slovenia, South Korea, Spain, Sri Lanka, Sweden, Switzerland, Taiwan, Thailand, Turkey, United, Arab Emirates, United Kingdom, United States, Uruguay.
Enjoyed this post? Don’t miss our insights on reaching the crossover point for financial independence or the importance of taxes in retirement destinations for early retirement.
