After indefinitely relocating abroad in late 2017 in order to become a dividend expat and live out my early retirement dreams, I’ve discussed my experience with geographic arbitrage quite a few times.
The plane ticket out of the US was easily the best financial investment I’ve ever made. It’s not even close.
And so it’s no surprise that geographic arbitrage is offered up as an answer to the early retirement dream.
In fact, my most recent best-selling book on how to retire early, 5 Steps To Retire In 5 Years, advocates using geographic arbitrage to retire decades earlier than most people.
However, much of the content that exists on geographic arbitrage – including my own content here – discusses the concept from a very limited point of view.
That is, geographic arbitrage is usually discussed as a permanent lifestyle change, where one moves to a cheaper and more dynamic locale for the rest of their life.
Or perhaps they travel around full time. Or whatever, really. It’s a lifestyle shift that’s accepted as a lifelong decision.
Thinking about this a bit, I wanted to take some time today to discuss the concept of geographic arbitrage from a different point of view.
It’s possible to take advantage of geographic arbitrage over a temporary period of time and still use it to achieve FIRE much earlier than you otherwise might be able to. In addition, you could end up a much happier, complete, and more experienced human being as a result.
My Perspective On Geographic Arbitrage
Before we get into this idea, I want to make sure that my perspective on geographic arbitrage is clearly laid out.
First, I don’t think geographic arbitrage is solely, or even mostly, about the cost savings.
The lower COL is wonderful, because it sets you up for a cascade of positive changes in your life. The more options and flexibility you have, the more authentically you can live your life. And the more time you have (which requires money to buy), the more free you are to holistically improve your life and “buy back” the things that otherwise cannot be purchased.
However, I would say living in Thailand, for me, has become far more about the non-financial aspects.
With that in mind, I do see this relocation abroad as a permanent move. At the very least, it’s a long-term lifestyle choice for me.
That’s not because I cannot afford to live in the US. It’s simply a lifestyle call. My quality of life is higher over here. If I thought I’d be happier in the US, I’d live there. But I know I wouldn’t be happier over there, so I don’t live there. One should live where it’s most advantageous for them to carry out their preferred lifestyle, not necessarily where they were born or grew up.
A New Perspective
That all said, I do think there’s room for a very different approach to the idea of geographic arbitrage. This is for someone who would prefer to live in the US but still wants to take advantage of geo arb in order to achieve FIRE more quickly.
That approach would be to relocate abroad temporarily so that they can quit their job earlier, allow compounding to take over, experience new cultures, and later come back to the US refreshed, richer, and more worldly.
Now, I’m not necessarily advocating this. It’s just an idea that I’m throwing out there.
I’ll break this concept down with some old-fashioned math.
Let’s say you’re 5-10 years out from FIRE and worn out. You want to quit your job, but you can’t do so out of financial concerns. Based on the communications from thousands of people over the years, this is a pretty common situation to find oneself in.
Well, temporary geographic arbitrage could allow you to significantly, or even completely, bridge that gap and move that job-free timeline from 5-10 years to 0 years.
I’m just going to shoot some numbers out there to show you how this might work. These numbers could scale up or down, or otherwise change, to suit your needs. So could the amount of time you live abroad. This is just an example.
Let’s assume you’re generating dividend income of $10,000 per year from your dividend growth stock portfolio. And let’s say you have a relatively frugal lifestyle that runs $20,000 per year.
Not a bad situation to be in at all. 50% of the way there is fantastic.
This is a very solid base of passive income; however, it’s probably not enough to live off of in the US.
Basic expenses like rent and food are just too high in most quality places to make that reasonably feasible. One could get super creative and squeeze the numbers enough to maybe make things fit. Whether or not that would be an acceptable lifestyle for a lengthy period of time is another question altogether.
Furthermore, since up and quitting the job might not be possible for this person, they have less time to develop their life and persona outside of the grind, meaning their ability to build a side hustle is limited.
So let’s say this person acknowledges the difficulty of living in the US on $10,000 per year, but still can’t take the idea of having a boss any longer.
Well, you can live a comfortable (but not luxurious) lifestyle on $10,000 per year in quite a few places throughout the world.
I’ve already shared how that would work in Thailand when I discussed the idea of retiring in Thailand on $200,000.
If this person decides to pack their bags and move abroad, they instantly cut their 50% expense coverage deficit to 0%.
But they’re only FIRE insofar that they’re an expat. If they move back to the US, particularly on an apples-to-apples lifestyle comparison, the deficit reemerges.
Temporary Geographic Arbitrage
If they don’t want to permanently move abroad (which they might change their minds on once they see how great life outside the US actually is), they could still use that deficit elimination to their advantage for as long as it exists in order to let their passive income grow and allow themselves time to build out their new life.
Let’s roll that snowball for just five years and see where this person comes out at.
I’m going to assume this dividend growth stock portfolio is constructed in a similar manner to my own FIRE Fund, which should demonstrate annual organic dividend growth of at least 7%. If this person is now using their dividend income to fund their lifestyle, there’s no dividend reinvestment. So it’s straight organic dividend growth they’re relying on for the increasing of their passive dividend income.
Their $10,000 grows to $10,700 after year one of living abroad. Then it becomes $11,449. Then it turns into $12,250. That grows to $13,107. The fifth year of living abroad sees the annual dividend income grow to $14,024.
Meanwhile, this person has five years to live their life without a job. This time frame certainly presents a long runway and plenty of opportunities to find their passion(s) and build out a side hustle, which is, in my view, instrumental to the long-term feasibility and enjoyment of FIRE (and not just solely, or even mostly, for financial purposes).
Over that five years, they’re probably going to get a firsthand view of a totally different culture, meet all kinds of unique people (which leads to its own serendipity), learn new skills, adapt, sharpen their edge, and become more optimistic and educated about themselves and the world around them.
This means they may have left the states with $10,000/year in dividend income, no side hustle, no known life outside of the rat race grind, and a limited worldview.
But they could come back with $14,000/year in dividend income, a side hustle generating at least a few hundred dollars per month, a robust life outside of the rat race grind, and an ample worldview.
These are two totally different people – and not just in terms of their financial capabilities.
New Person, New Possibilities
Now, inflation means their $14,000+ per year isn’t as much five years on as it would have been when they left.
But low US inflation means their purchasing power should have increased markedly.
And that’s before factoring in any side hustle income, which should surely be at least a few hundred dollars per month.
Plus, they have the experience and adaptability (which is honestly priceless) they didn’t have before.
This is a more complete and less fragile person.
Again, I think this person will find themselves uninterested in returning to the US after they leave. It’s not even a financial question.
But just in case they are determined to come back, they’re setting themselves up to have far more options when they come back – all while not even having a job in the interim.
Sure, $18,000 to $20,000 per year isn’t live a grand life of luxury in the US, but there are some possibilities there that weren’t available for this person before they left. Based on the frugal lifestyle they were living before they left, they’re almost certainly FIRE (or very close to it) in the US.
And they accomplished this all while taking a far more enjoyable and interesting path (compared to sticking it out at the job over the same five years).
That’s a win-win, in my opinion. Because the money is just a means to an end anyway. If you can start living something closer to your dream life right away, that’s an opportunity worth taking. Time is quickly slipping away from all of us. There’s no point in being the richest guy in the cemetery.
This is something I actually keep in mind for myself. I know that just in case I were to ever change my mind and decide to move back to the US, I would be bringing back a Jason who’s in far better shape (financially, mentally, and physically) than the one who would have otherwise existed had he stayed in the States over that same period of time.
By the way, temporary geographic arbitrage is also a lever one could pull if they were pretty close to receiving certain benefits (like, say, Medicare) but didn’t want to continue working any longer. That wouldn’t be FIRE, per se, since this would be a person in their late 50s or early 60s, but this idea doesn’t have any kind of age requirement.
Lastly, the different dating dynamics should be considered.
If you move abroad as a single male, you’re almost certainly going to have the opportunity to meet a lot of women. So you could very well return to your home country with a significant other on top of the financial, physical, and mental gains. Coming back much less alone and much less poor than you left would be a win-win.
I personally think geographic arbitrage is an extremely powerful lever for someone to pull and take advantage of.
And it’s such a phenomenal and enjoyable concept – not just for financial reasons – that I find it bewildering as to why or how anyone would or could see it as anything less than a permanent shift in one’s mentality and lifestyle.
However, I also admit that my viewpoint is limited by my own perspective and experiences.
As such, geographic arbitrage could still be a very powerful lever to pull, even if you only plan on pulling it for a temporary period of time before returning to the US (or wherever you originally came from).
That’s because that temporary period of time abroad could allow you to significantly improve the financial and non-financial aspects of your life, meaning you would come back to your homeland as a wealthier and more complete person who has far more options.
What do you think? Could temporary geographic arbitrage work?
Thanks for reading.
Image courtesy of: bplanet at FreeDigitalPhotos.net.
P.S. If you’re interested in taking advantage of geographic arbitrage, even temporarily, check out some great resources that I personally used to become financially free at 33 and permanently relocate abroad!