Make use of geo-arbitrage to take years off reaching FIRE
Hello again everyone!
In today’s post I want to talk about the mystical super power that is geo-arbitrage.
Making use of geo-arbitrage in the first years of your retirement can make a significant impact to the amount of time required to reach financial freedom.
Geo-arbitrage or “geographic arbitrage” is essentially where you earn your money in a higher cost of living country and spend it in a lower cost of living country. The world is your oyster after all…
I have run a hypothetical example for the Mrs and I to see what is possible and how it might impact our FIRE number - which will ultimately impact how quickly we can reach FIRE.
Our example
So let’s get started.
To work all of this out, you need to break your FIRE life into yearly segments (or 5 or 10 year segments if it is easier). You then need to make assumptions on your budget for each of these segments.
For our assumptions, we split out FIRE life into the following segments (using my age for the timeline):
37 to 42: living in Poznan, Poland
42 to 47: living in Granada, Spain
47 to 100: living back in Newcastle, UK
70 to 100: living back in Newcastle, UK (reduction in cost of living)
Living in Poznan, Poland
The Mrs is from Poland so this is a realistic scenario and something we would both enjoy. The Mrs could also help me understand the way of living over there. I have been to a few places in Poland before (including Poznan) and really enjoyed it.
To calculate living expenses, we used the Expatistan website and searched for suitable flats to rent. For example, we found this place (a 2 bedroom flat) for PLN 2,500 (approx. £450) which looked reasonable.
The expected costs (based on our spending habits in the UK) are shown in the table below.
Living in Granada, Spain
The South of Spain is a place that both the Mrs and I really love. The style of living and weather is just perfect. We have always talked about the prospect of living somewhere around there.
Similarly to the Poznan example, we did the same - looked at places to rent and scaled our expected costs based on the Expatistan website and our current spending habits. As an example place to rent, we found this place (a studio flat) for EUR430 a month (approx. £365).
The expected costs are shown in the table below.
Living in Newcastle, UK
The assumption with living back in Newcastle is that we would rent a 2 bedroom flat. Obviously before moving to Poland in the beginning we would need to sell out house that we currently live in.
So again, we estimated our costs (predominantly based on our current budget) and looked to find a suitable place to rent. We found this place (a 2 bedroom flat) for £765 a month.
The expected costs are shown in the table below.
Living in Newcastle (from 70 to 100)
The assumption is that I will live until I am 100 (fingers crossed!).
The assumption here is that our cost of living will reduce by 1% per year during this time.
How do the numbers stack up?
OK, so now we have all the information we need. I have done some compound interest calculations which assume the above amounts will be withdrawn for the respective years. I assumed a conservative 5% annual rate of return for the investments (this is net of inflation and any fees incurred).
I also added 10% to each of the estimated costs to add some further conservatism into the numbers.
The figure below shows the outcome.
I found that an investment pot of £650,000 would be required to ensure the 4% withdrawal rate was not breached. If you continued living in a lower cost of living area for longer, then this number could be reduced further.
If we stayed in Newcastle from the FIRE age of 37, we would require an investment pot of around £787,000 (2,384 x 1.1 x 12 x 25). Therefore, by staying in lower cost of living places, I have reduced our required investment pot by £137,000!
However, the Newcastle assumption is not actually our current spending. Our current spending is around £2,970 per month (since we live in a 4 bedroom house!). This would indicate a required investment pot of around £892,000. So really, by making these optimisations, I have cut down the required investment pot by £242,000.
This just shows that you should think outside the box when planning for FIRE. It has the potential to reduce the time taken to reach FIRE significantly.
