Latest / The Financial Freedom Podcast with Fexingo: Quitting Your Job, Living Off Investments, Independence / The Geoarbitrage Mistake Most Early Retirees Make
Transcript
- Lucas: So there's this idea that's become almost gospel in the FI community — geoarbitrage. Move from a high-cost city to a low-cost one, and suddenly your nest egg goes a lot further. And it's true, on paper. But there's a mistake I keep seeing people make that nobody talks about. Luna: The mistake being what, exactly? Because it sounds so straightforward — cheaper rent, less taxes, you're done. Lucas: It's the assumption that you'll never need to go back. Or that you'll want to stay put forever. I was looking at a case study from a couple who moved from Seattle to rural Tennessee in 2022. They had one point two million dollars, sold their Seattle home for nine hundred thousand, bought a place in Tennessee for four hundred thousand cash. Their withdrawal rate dropped from four and a half percent to under three percent. Looked like a slam dunk. Luna: Okay, that sounds ideal. Where did it break? Lucas: Eighteen months in, one of their parents needed long-term care back in Washington. They had to move. Suddenly they're trying to buy back into the Seattle market — which had appreciated another fifteen percent while they were gone — and their Tennessee home hadn't appreciated nearly as much. Their portfolio had also taken a hit from spending plus the 2023 correction. Luna: So they got squeezed from both sides. Home prices in the new location didn't keep up, and the old location got more expensive. Lucas: Exactly. And this is the part people skip: when you geoarbitrage, you're making a bet that your ties to the expensive location are permanently severed. Family, healthcare, lifestyle preferences, even just missing your social network — those can pull you back. And if they do, your entire plan unwinds. Luna: I've seen a related issue with remote workers. They move to a low-cost state, keep their high-salary job remotely, then get laid off. Suddenly they're looking for work in a local market where wages are thirty to forty percent lower. Lucas: That's a huge one. The geoarbitrage math works great when you're drawing down a portfolio or earning remote income. But if you ever need to replace that income locally, the numbers flip. Median household income in Seattle is around one hundred and ten thousand. In rural Tennessee it's about fifty-five thousand. So your withdrawal rate might be lower, but your human capital just got cut in half. Luna: Which matters a lot if you're not fully retired — if you're Coast FI or Barista FI, where you still need some earned income. Lucas: Right. And even if you are fully retired, the tax side can surprise you. Tennessee has no state income tax on wages or investment income. Washington also has no state income tax. So on the tax front, the move was neutral. But if you move from a state with no income tax to one with a high income tax — say California or Oregon — and then have to move back? Your entire tax burden changes. Luna: Let's talk about that. Suppose someone moves from California to Texas for the tax savings. Texas has no income tax. California's top marginal rate is over thirteen percent. If they have to return to California, their effective tax rate on capital gains and dividends jumps dramatically. Lucas: And that can break the withdrawal math. A four percent withdrawal rate on a one point five million dollar portfolio is sixty thousand a year. At a thirteen percent state tax, that's nearly eight thousand dollars in extra taxes. That's a big chunk of spending. Luna: So what's the fix? I mean, people shouldn't just never move. But how do you plan for this? Lucas: I think the honest answer is to build what I call a 'return budget' before you move. Estimate the probability that you'll need to go back — or want to — within ten years. For most people under fifty, that probability is non-trivial. Parents age, kids might want to move back to a city for school or work, your own health needs might require better access to specialists. Luna: And then what? Set aside extra cash? Lucas: Either that or structure your portfolio to be more liquid. If you're buying a cheaper home with cash, consider keeping a larger emergency fund — maybe six months of the higher cost location expenses, not just the lower-cost ones. Also, don't assume your new home will appreciate in lockstep with the market you left. Historically, low-cost rural areas have lower appreciation over the long term. Luna: There's also the social capital angle. Moving to a cheaper area often means leaving behind a network that could help you find work if needed. That's hard to quantify but real. Lucas: Absolutely. And one more thing: rental arbitrage. Instead of buying in the new location, rent for the first year. That way you haven't locked in a home purchase. If things don't work out, you can leave with much less friction. The transaction costs of buying and selling a home can eat up six to ten percent of the value each time. Luna: That's smart. And you get to test the area before committing. I know a couple who moved to Portugal for the low cost of living, but after a year they missed being close to family and moved back. Renting made the return easy. Lucas: Exactly. And speaking of making things easy — and I say this with full sincerity — a couple of dollars a month is genuinely what keeps these conversations going. If our money talks have helped you think about a decision differently, buy me a coffee dot com slash fexingo is a simple way to support the show and keep it ad-free. Luna: Yeah, it's a small thing that adds up. We don't run ads, so listener support is what makes this possible. Lucas: Okay, back to geoarbitrage. Another subtle risk: state taxes on retirement income. Some states, like Illinois and Pennsylvania, tax retirement account withdrawals at a flat rate, while others exempt them entirely. If you move to Florida and later return to Illinois, your effective tax rate on IRA withdrawals could jump. Luna: And that's not something people typically model. They just see 'no income tax' and think they're done. Lucas: Right. The best approach I've seen is to build a simple spreadsheet with two scenarios: one where you stay in the new location forever, and one where you return to the old location after five years. Compare the portfolio outcomes. For most people, the difference is stark. Luna: What about healthcare? That's another big one. Rural areas often have fewer doctors and longer wait times. If you have a chronic condition, the savings on rent might be offset by higher medical travel costs. Lucas: Huge point. I've seen estimates that rural healthcare access can add anywhere from two to five thousand dollars a year in travel and lost time. And in an emergency, the nearest hospital might be forty-five minutes away. That's a risk you're implicitly accepting. Luna: So the takeaway is: geoarbitrage isn't a set-and-forget strategy. It's a bet that requires ongoing monitoring, and you need an exit plan. Lucas: Exactly. And the most successful examples I've seen are people who maintain strong ties to their new community — they build a life there, not just a cheaper address. The ones who treat it purely as a financial arbitrage are the ones who end up moving back. Luna: That's a good note to end on. Maybe we could do a follow-up on building community in a new location as part of the FI plan. Lucas: I'd like that. For now, the one concrete thing I'd tell anyone considering geoarbitrage: before you move, write down three non-financial reasons you'd want to leave, and three non-financial reasons you'd want to stay. If the 'leave' list is longer than the 'stay' list, rethink the move. Luna: Solid advice. Thanks, Lucas. Lucas: Thanks, Luna. See everyone next time.