Cut Years to Financial Independence with Geographic Arbitrage
Photo by Arek Adeoye on Unsplash
Reading time: 6 minutes
Disclaimer: I am not a financial adviser, and this content is for informational and educational purposes only. Please consult a qualified financial adviser for personalized advice tailored to your situation.
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Introduction
Our personal finance blog helps you build financial literacy and achieve early financial independence (FI) with smart planning strategies. 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 quit your job to retire early. Most people achieve financial independence by the traditional retirement age, relying on pensions, savings, and investments to fund their lifestyle. However, with strategic planning, financial independence can be achieved much earlier in life.
This blog presents numerous insights and strategies to achieve this and to make the journey easier. In a previous post, we covered how geographic arbitrage can fast-track your financial independence by moving to low-cost countries for early retirement. In a nutshell, by deciding to retire in a lower cost of living country you can target a smaller retirement portfolio number, allowing you to exit the workforce even sooner. Today we explore how many years you can save to reach financial independence by retiring in low-cost countries.
How to Choose the Best Countries for Early Retirement
In our last post, we proposed a methodology that allowed to identify a suitable country for geographic arbitrage. The methodology accounted for the cost of living, which is of course a key consideration, but also took into account other numerous desirable characteristics we would like to have in the country we move to: a strong healthcare system, a general sense of safety, a stable political, legal, and financial environment, acceptable levels of pollution, and a pleasant climate. Figure 1 below summarizes the outcome of the excercise. Ideally, we would choose a country that has a lower cost of living (Y axis in the graph) and a high Retirement Suitability Index (X axis), which reflects the above-mentioned characteristics. To address the main question of this post (assess the effect different cost of living countries have on your timeline to financial independence), I will select a few options across different geographies: Portugal, Mexico, Uruguay, Thailand, and Indonesia.
Figure 1. Cost of Living versus Retirement Suitability Index for 51 countries. The Y axis represents the cost of living, while the X axis is a composite Retirement Suitability Index that considers health care system, safety, political, legal, and financial stability, pollution, and climate. The three color categories reflects one of the variables included in the index, namely the country's safety. Dark green depicts the safest set of countries, while yellow depicts the least safe set of countries. Countries falling in categories 4 and 5 were removed from the selection process. See our previous post for a detailed overview of the methodology if you are curious to understand how we arrived at these 51 countries from an initial set of 121.
Impact of Geographic Arbitrage on Financial Independence
Let’s explore how moving to countries like Portugal, Mexico, and Thailand impacts your financial independence journey. Let’s assume you're currently living and working in Germany, starting your financial journey at age 30. With an after-tax household income of €80,000 and monthly expenses of €48,000, you would reach financial independence after 16.9 years at age 46, assuming a 7% return on investments and a 4% withdrawal rate in retirement. In this scenario you would target a retirement portfolio of €1.2M (25 times your expenses in retirement of €48,000). This scenario is depicted in Figure 1 below, which uses this commonly used FI calculator. This assumes you retire in Germany and that your expenses once you retire will remain roughly unchanged.
Figure 2. Baseline scenario. Timeline to reach financial independence: 16.9 years.
Now, let’s account for the lower cost of living in the different countries we’d consider retiring to. According to Numbeo, Portugal’s cost of living is 20.5% lower than Germany. Therefore, instead of requiring €48,000 per year in retirement, by moving to Portugal we could fund a comparable lifestyle for only €38,000. If we plug in this retirement expense number into our calculator, this means you could retire 2.1 years earlier through geographic arbitrage by lowering your cost of living. Our target portfolio would go down to €954,000. Table 1 below presents this analogous information for the rest of the countries considered. By choosing to retire in a lower cost of living country we could potentially exit the workforce between 2.1 years (Portugal, Uruguay) and 7.4 years (Indonesia). Following the example presented, this would mean retiring at age 44 or 39.
Table 1. Impact of Geographic Arbitrage on Financial Independence
| Country | Cost of Living Index | Cost Compared to Germany (%) | Monthly Expenses in Retirement (Euros) | Reduced Years to Financial Independence | Portfolio Target (Euros) |
|---|---|---|---|---|---|
| Germany | 44 | 100.00% | 48,000 | 0 | 1,200,000 |
| Portugal | 35 | 79.50% | 38,160 | 2.1 | 954,000 |
| Uruguay | 34.8 | 79.10% | 37,968 | 2.1 | 949,200 |
| Mexico | 28.4 | 64.50% | 30,960 | 3.8 | 774,000 |
| Thailand | 23.1 | 52.50% | 25,200 | 5.5 | 630,000 |
| Indonesia | 17.6 | 40.00% | 19,200 | 7.4 | 480,000 |
Enjoyed this post? Don’t miss our insights on reaching your first $100K investment milestone and mastering the 4% rule to achieve financial independence.
