Your FIRE depends a lot on your location.
Geographic Arbitrage – Just a fancy economists way of saying, save money by moving to a cheaper location.
Well, it is not as simple as that but you get the general idea. Let me try and explain further to help you understand what I mean.
The intuition
Have you ever traveled to a different country than your own? If yes, then what is the first thing or one of the first things that you do when you plan your travel?
You will think about your sequence of actions after you land, stuff like paying for your taxi, buying a SIM card, paying for food, coffee, hotels etc. When you are doing your research the prices are indicated in a foreign currency, so, naturally you convert it back to your currency to find out what are the costs and help you better plan and budget.
I am sure you might have made a curious observation. Costs vary, sometimes more or less in a foreign country than in your home country for very similar products and services. The term from economics that is used in relation to this phenomenon is the PPP – Purchasing Power Parity.
This price difference is the idea that we will try to use to our advantage to achieve FIRE sooner.
The Big Mac
I love the Big Mac and I love the Big Mac Index even more. The Economist magazine used the price of a Big Mac across different countries to measure the differences in the purchasing powers.
The idea being that the Big Mac is something that is mostly similar across countries and the material and labour inputs that go into producing a Big Mac is a good indicator of the cost and hence the purchasing power.
For example, as of this writing a Big Mac costs 5.67$s in the US, and 2.4$ in Taiwan (It costs 2.65$ in India but it is not a fair comparison because McDonalds uses Chicken instead of Beef in India)
So, what does this mean? It means that your money goes a long way in Taiwan compared to the USA.
On the other extreme the Big Mac costs 6.7$s in Switzerland. So your money does not really last as long in Switzerland.
Implications to FIRE
For the sake of understanding let’s assume that based on your cost of living expectations in your home country you expect about 40,000$s per year, inflation adjusted, as the amount needed to FIRE.
This amounts to about 1Million$s in FIRE portfolio (A diversified portfolio of Stocks and Bonds) using the naive 4% rule approach.
Applying the Geo-arbitrage there are a couple of choices here.
Retire Earlier
Imagine you live in the USA and your target size of the retirement portfolio is 1Million $s with a lifestyle that costs 40,000$s in the post retirement phase.
Given your current amount and rate of savings, you expect to FIRE in the next 10 years.
Moving to a lower cost of living country like Taiwan implies that you could live a similar quality of lifestyle for 20,000$ (US Dollars). This implies that you need only 0.5Million $s to FIRE.
So, instead of retiring in the next 10 years, you can retire earlier, at around 6 Years (not 5 years, can you guess why? Hint: compounding is non-linear)
Lean to FAT
Imagine given your situation like family size, lifestyle needs etc. 40,000$ per year is only a lean FIRE. (See here to understand more about Lean and Fat Fire)
By moving to a lower cost country like Taiwan from a higher cost of living country like the USA, your lean FIRE can turn out to become a FAT Fire. The reason being that with the same 40,000$ per year withdrawal you can lead a lifestyle that is more akin to a 80,000$/year lifestyle in your home country.
More than just about the direct $s
By strategically moving to a different geography you could get benefits that go beyond the direct $ savings. Here are a few of them.
Financial Havens
There are several countries around the world that welcome retirees with open arms. Countries like the Philippines for example have entire parts of the government to facilitate the relocation of international retirees.
They often incentivize retirees with tax breaks and other benefits that can be quite compelling. In a few cases, the simple tax legislation differences can mean that you could save substantial amounts by moving to a different country or region.
Favorable Climate
It may be possible that the location where you have lived during your accumulation phase of FIRE is not the best in terms of climatic conditions. These not only include adverse weather but also man-made phenomenon like pollution, overcrowding, scarcity and competition for resources like water etc.
Post FIRE, it is possible to move to a location of your liking as you are not tied down to any employer. In fact the freedom to choose a place or several places to live is one of my major drivers to FIRE.
Unique Offerings
It is possible to access a few benefits that are more easily accessible in a specific geography. For example, if you like skiing and it is part of your post FIRE lifestyle plan. But, you happen to live in a climate where your only option is to make several trips to ski resorts far away. Then it makes sense to move to a place that is closer to skiing infrastructure.
This reduces your post FIRE expenses without compromising on lifestyle. Other examples include, stuff like learning to Surf, Dive, Sail, Farm etc.
Life experiences
Moving to a different geography can be stimulating and keeps the post FIRE life more interesting. Living in a different country or region other than your own pushes you out of your comfort zone and challenges you in ways that help you grow as a person.
Conveniences
Moving to a different location can provide features and conveniences that your own country or region does not provide. For example, if one needs a caretaker at all times due to health related issues, then it helps to move to a lower cost of living country where it is possible to hire assistance.
On the other hand, if your country is low on security and does not allow for the expression of you identity like sexual, political etc, then it helps to move to a country where you feel more secure and you have more freedom of speech and expression.
In Summary
Moving to a different geography is a strategic decision and should be part of your overall FIRE plan. It is not mandatory to move but you should consider the pros and cons of moving versus staying put.
It is also possible to create some sort of a hybrid approach where you live in a lower cost of living country during your early period of post FIRE life and then move back to your home country when you become eligible for senior’s pension and social security payments, or the other way around.
I will try to dive deeper into specific countries and regions in subsequent articles to highlight the geographic arbitrage opportunities.
The world is huge and diverse and has many things to offer, it is only prudent and rational to consider all the options available to you before making any decisions about your financial future.