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The math behind financial independence is simple: you need 25 times your annual expenses to never have to work for money, ever again.
This calculation comes from the thorough Trinity Study, which defines the safe withdrawal rate based on historical returns, that will allow your portfolio to never dry out. That safe withdrawal rate is 4% per year.
What Does This Mean For You?
If you are a 25 year old recent graduate making $50,000 a year, and are willing to live lean for some years, saving half of your income, you can achieve early retirement at age 42. The assumptions behind the math are that your savings generate a 7% annual rate of return, and you can withdraw 4% of your nest egg to live in retirement.
You can use Networthify to determine your retirement date, based on your income and savings rate. For a more detailed analysis of your retirement goals, you can also try Personal Capital’s Free Retirement Planner
The truth is that saving half of your income is hard. Let’s say you are only able to save 20%, or $10,000 per year. Financial independence is now 37 years away. That is a long time to wait.
But here is the thing: what if you could retire years earlier, by moving to a place where your dollar stretches even further?
How To Retire Early Via Geo-Arbitrage
Our retirement calculations here are based on annual living expenses of $40,000 in retirement. If you are willing to use geo-arbitrage and relocate to a cheaper state, or even country, you could quit your job much earlier – without sacrificing lifestyle.
Financial independence has always been a goal of mine, and I was working in the UK, saving aggressively, with a retirement target at age 40. I was miserable at my job, and counting the days that seemed too far away.
Then it hit me.
What if I went back to Guatemala, a country I had lived in previously, that I loved, and live a simple life over there? I needed around $1,000 a month to cover my basic living expensive, and the cost of a flight back home every year.
Based on the safe withdrawal rate of 4%, I could retire on a $300,000 nest egg instead of the $1,000,000 or so I would need if I remained in Europe. Six month later, I sent my resignation letter. I was 29.
And I am not alone. A lot of US retirees have chosen Guatemala for its mild climate, low cost of living, and natural beauty. The cost of living in Guatemala is about 50% less than in the US.
Here is a sample monthly budget:
- Rent: $500 that will get you a nice furnished little house, sometimes with all bills included. Most include at least water and condo fees for gardening and garbage collection.
- Utilities: $100 electricity should be around $30-40, a gas tank for cooking costs $10, internet is around $30 (more if you live in remote areas), phone around $10-20, and you don’t need heating but you can buy wood if you have a fireplace.
- Food: $100 that’s for one person. You can buy street food for $2 a meal, local fruits, vegetable and meat are delicious. Expect to pay more for imported products.
- Travel: $300 You can fly to most US cities for under $500. I am accounting for two flights back home ($1,000/year), and around $200 a month to explore the country. You can travel well on $50 a day per person.
- Staff: $300 A housekeeper charges around $10 a day. If you are older, you can find a nurse for under $40 a day. This is a top reason people choose to move down here in retirement.
- Transportation $50 I have already accounted for travel costs around the country, and in town you can get tuktuk rides for $2-5. You don’t need a car.
- Entertainment $50 again, some of the restaurant costs will go under travel and food. A nice dinner costs $25pp and up.
That monthly budget comes to $1,400 for one person. $1,100 if you split the rent and bills with a significant other. And as you noticed, I included a full-time staff and quite a bit of international travel. You can comfortably live for under $1,000 a month in Guatemala.
Where Can You Move To Enjoy Financial Independence Sooner?
Check out Expatistan for detailed cost of living in several countries, and to compare these with the cost of living at home. Mexico and Central America are popular destinations for their geographical proximity to the US, quality of life, and because learning Spanish is much easier than Asian languages.
If developing countries are not your thing, you may consider Portugal, Spain or Italy. Your budget should be about the same, for a simple life without the luxuries mentioned above.
According to Numbeo, the cost of living including rent in Guatemala is 51.84% cheaper than in the UK where I was previously living, and 50.96% cheaper than in the US. That means if you are living in the US on $2,000, you can make it work in Guatemala on $1,000.
Shave Years Off Your Target Retirement Date
Let’s get back to our financial independence savings. If you are saving $10,000 per year on your $50,000 salary, instead of retiring 37 years from today on $1,000,000, you can achieve a $317,312.46 net worth at the end of year 19, and live on $12,000 a year in a cheaper country (calculator used). That is 18 years of your life you won’t have to work to finance your retirement.
Is Geo-Arbitrage Right For You?
On the other end, geo-arbitrage for earlier financial independence can come at a cost.
Most retirees I meet in Guatemala have left their kids back in the US so they can pursue higher education. Communication is made much easier these days thanks to Skype and Whatsapp, but still, seeing your kids won’t be as easy as dropping by for Saturday burgers.
If you move to a foreign country, there may be a language and cultural barrier. While I feel at home in Guatemala, and speak Spanish fluently, I sometimes get a reminder that I am not 100% integrated.
Look Before You Leap
While geo-arbitrage can be a great way to achieve financial independence sooner, I always recommend you take an extended trip to your dream destination. Rent a place for a couple of months (AirBnB has affordable properties in over 191 countries available for short-term lease), explore around, meet other expats, and see how you like it. Inquire about taxes, immigration laws, the price of real estate.
Some early retirees even make it a lifestyle, changing countries with the seasons. It doesn’t make their life much more expensive, as the price of a ticket from say Guatemala to Panama is pretty much the same as a flight to the US.
In the end, it all boils down to personal preferences. To me, escaping the rat race a decade earlier was well worth it.