Ahh, early retirement.
The stuff dreams are made of.
No more waking up early. No more dealing with a boss we don’t like. No more mundane tasks, workplace drama, or endless quotas.
Now, let me be clear about something: work is great. I genuinely enjoy working – that is, when it’s on my terms (work I choose and want to do, when I like doing it, with people I like working with).
But a job is no fun at all. And it’s unlikely I’d ever like to have a job again.
In my experience, after writing about FIRE for years and coaching many clients toward FIRE, it’s the strong distaste for a job that tends to drive someone toward early retirement. It’s that initial impetus. It’s the “spark” that leads to a… well… fire.
Indeed, I think it’s the collective desire to live life on our own terms (which often doesn’t include continuing to show up to our jobs) that drives the bulk of the entire FIRE movement.
However, there’s a big hurdle that must be cleared in order to quit your job and live the life of your dreams.
If you don’t yet have enough passive income to cover your bills, you can’t just go and quit your job.
Or can you?
This is where geographic arbitrage comes in.
Geographic arbitrage can cut your journey to early retirement in half.
Perhaps even more.
Generating passive income is only half the battle.
Cutting expenses is the other half.
And the less you spend, the less you need to earn in order to be free.
Geographic arbitrage is essentially earning in a strong currency and spending in a weaker currency. It’s taking advantage of a cheaper location’s low cost structure, all while still earning as if you live in a more expensive location.
So you might live and earn in the US, building your portfolio, passive income, and freedom one buck at a time, just like I did. Or maybe you live in a country like the US.
Living in a place with a high cost structure means you consequently need quite a bit of passive income in order to cover your lifestyle and pay your bills within that framework.
However, if you take those same dollars you’ve saved up – that portfolio and the passive income it’s generating – and spend them in a place with a much lower cost structure, you effectively increase your purchasing power in local terms. Said another way, you could double or triple the value of every dollar you have in terms of what those dollars can now buy you when everything (from rent to food to healthcare) costs substantially less.
I mean, imagine taking 2018 dollars and spending them as if things were priced like they were back in the ’50s. That supercharges the value of your money without actually increasing the amount of your money.
Living In Thailand – A Real-Life Example
See, I earn north of $1,300 per month in passive income, the bulk of which is the growing dividends I collect from my six-figure FIRE Fund.
Most of that FIRE Fund, by the way, was built in six years.
Now, I could live on that in the States. I know because I did it.
But it’s a pretty tight lifestyle. And when I’m using so much energy to live on that little, money is this omnipresent cloud that hangs over my life. If I’m not free from money itself, I’m not very free at all.
However, that same $1,300 per month goes very, very far in many other parts of the world that aren’t as expensive as the United States.
In fact, it’s bought me a millionaire lifestyle here in Chiang Mai, Thailand.
That’s because I live in a place that’s roughly 1/3 as expensive as the average equivalent option in the US.
As such, my passive income suddenly increases by three times in terms of local purchasing power. The cost structure is simply much lower here. To add some color to this, the minimum wage over here is about $10/day (not per hour).
For me to live this same lifestyle, and to have this freedom from money, back in the States, I would have to have passive income (and thus a portfolio) that is three times as much, which translates into many more years of plugging away at saving and investing.
Instead, I’m retired in my 30s, living the life of my dreams.
The “Big Three” Abroad
Much of the savings that one will realize by living to a low-cost locale will be across the “big three” expenses: housing, food, and transportation.
I say “big three” because these three budget line items usually account for most of one’s monthly expenditures.
Indeed, living abroad allows me to dramatically save on all three.
First, let’s look at housing.
I live in a furnished, luxury, one-bedroom apartment that’s located in the nicest, most desirable, and most walkable part of my city. (Chiang Mai reminds me a lot of Portland, Oregon. My neighborhood would be the equivalent of living in the Pearl District of Portland, for reference.)
This apartment includes access to a pool, a gym, and a sauna. Cable, wifi, and water are wrapped in. It has maid service. It’s gated with a 24-hour guard. There’s fingerprint access and an elevator. This is top-notch stuff.
It runs me under $500 per month after you factor in electricity.
That’s for everything.
This would cost at least three times as much in the States. Most likely more.
If we assume three times as much, that’s a difference of $1,000 per month. At a 3.5% yield (approximately my own portfolio’s yield), you’d need an extra ~$350,000 in your portfolio to pump out that much income.
Just think about how long it would take you to come up with that extra capital. That’s years of your life dedicated to working, earning, saving, and investing toward, essentially, the same thing. And this is just for housing.
To be honest, though, I’d be willing to bet the equivalent accommodation (based on quality, size, location, amenities, etc.) in the US would actually cost about five times as much.
Food works the same over here.
My lunch spot costs about a dollar per meal.
Restaurants routinely run at least 2/3 cheaper than what you’d typically find in the States, especially if we’re talking about local food. And you’ll need to enjoy the local food if you plan to live abroad.
I’m spending ~$400 per month on food for two people – and that’s after literally eating at markets and restaurants for every single meal, every single day. Just try that in the States (or any other expensive location).
Transportation is also incredibly cheap.
While living in the States without a car is almost unheard of in all but a small handful of places, it’s pretty easy to get by without a car over here.
Thailand is very dense relative to the States. It’s not hard to walk everywhere if you live in any urban area.
In addition, ride sharing services charge much less (labor costs are much lower over here) to go the same distance. So hailing a car to get you across town, when the occasion arises, is very cheap. I can spend a dollar or two to get across town.
But because I’m living in a phenomenal location (since my apartment is so cheap), I’m able to walk just about everywhere I’d ever have to go: restaurants, coffee shops, the gym, malls, the movie theater, bowling, etc.
If I spend $40 on transportation in a month, that’s an expensive month.
Meanwhile, according to the BLS, the average consumer unit in the US spends over $9,000 per year on transportation.
And the average American spends 17,600 minutes per year driving.
That’s just a ton of time and money going down the drain.
Of course, this is all because a lot of Americans are commuting to jobs. One is working to make the money necessary to pay for the things to keep the job. It’s the type of insane merry-go-round that makes me dizzy just thinking about it.
But if you’re able to cut decades off of your early retirement time line, that all goes by the wayside.
The “Big Five” Abroad
You could go ahead and add two other major expenses to the above list and round it out to an even “big five”.
I’m talking about taxes and healthcare. The dreaded stuff of nightmares for your average American.
Well, both of these problems are also largely solved with a move abroad.
For example, I don’t have health insurance. This alone is saving me north of $500 per month (based on what my bronze premium likely would have been for 2018).
That’s almost a couple hundred thousand dollars I don’t have to have working on my behalf in order to cover that expense passively.
And since healthcare is ludicrously cheap where I’m at, I’m not endangering myself (or exposing myself to potential bankruptcy) through this choice (which is the complete opposite of what would be true if I tried that move in the US).
One’s tax liability could potentially be cut to nothing, largely through the amazing benefit that is FEIE. So any side hustle (a passion you pursue that you monetize) you might be building, which is almost a necessity for any early retiree, becomes much more valuable when you’re able to reduce or eliminate your tax concerns.
Making $100,000 abroad and paying zero in federal income tax?
I actually believe that most of the benefits of living abroad as a dividend expat have nothing at all to do with finances.
The lower cost structure ends up being the (delicious) icing on the cake.
However, if we’re talking about straight up using geographic arbitrage as a method to cut decades off of one’s journey to early retirement, the financial advantages are substantial.
For perspective on what this might look like across individual spending categories, you can look at this direct comparison between Portland, Oregon (the closest thing to CM I’ve seen in the US) and Chiang Mai, Thailand.
Of course, Thailand is but one of many, many options out there for geographic arbitrage.
Frankly, one could even commit a version of it (albeit a less effective version) domestically, moving from one higher-cost city/state to a lower-cost city/state. I did this myself when I relocated from Michigan to Florida back in 2009 in order to take advantage of a better economy, a higher-paying job, lower expenses, and more favorable taxation.
Finally, I think there’s a misconception that geographic arbitrage ends up in some kind of major compromise to one’s quality of life; I’ve found the opposite to be true, as being able to live outside of the rat race mentality that permeates the US is such a huge weight that’s been lifted off of my shoulders. It’s a big difference in mentality that served as a major reason why I decided to move abroad in the first place.
Early retirement might be a dream for most people.
But I think geographic arbitrage can not only make that dream come true, but it can make that dream a reality that’s better than anything the imagination might come up with.
I’m living like a millionaire in my 30s, even though I earn ~$1,300 per month in passive income. To think I spent just six years of my life aggressively saving and investing toward FIRE, yet I’m free to spend the rest of my life however I wish, is really pretty amazing to me.
If that’s not a dream come true, I don’t know what is.
Geographic arbitrage made my early retirement dream come true. And it can perhaps make yours come true, too.
For more on retiring extremely early, especially in the sense of using geographic arbitrage to accomplish that feat, check out my most recent best-selling book: 5 Steps To Retire In 5 Years (also available in paperback).
What do you think? Have you used geographic arbitrage to your benefit? Plan on doing so? Why or why not?
Thanks for reading.
Image courtesy of: poinzettia17 at FreeDigitalPhotos.net.
P.S. If you’re looking for more information on early retirement and geographic arbitrage, check out some great resources that I’ve personally used to achieve financial freedom at 33 and retire abroad in my 30s.