Geographic Arbitrage: The Least Expensive States for Retirement

Geographic ArbitrageGeographic arbitrage is a popular concept in personal finance.

It involves working or living somewhere where you can earn more or spend less than if you worked or lived someplace else.

For example, someone who works remotely from home might decide to live someplace with a lower cost of living. Or a doctor might choose to work someplace where high demand for his or her specialty results in a larger salary. Or a retiree might move from a high cost of living area like New York City to a less expensive state or country, so the money they earned over their career has more buying power.

Earlier this week, posted an article titled How Long $1 Million Will Last in Retirement in Every State.

The author, Andrew Lisa, found the average total expenditures for people 65 and older, including groceries, housing, utilities, transportation, and healthcare. He then multiplied that total by the cost of living index in each state to determine the average annual expenditures for retirees in each state. Finally, he determined how many years a $1 million portfolio would last a retiree in each state by dividing $1 million by the annual cost of retirement in each state.

While Lisa’s methodology would not necessarily work for a potential early retiree, who might have different spending patterns than the average senior citizen, his findings were still interesting.

According to the study, $1 million would last more than twice as long in the least expensive state for retirees, Mississippi, than it would last in the most expensive state, Hawaii.

In general, the most expensive states for retirement bordered the Pacific Ocean or were in the Northeast. The least expensive states for retirement were generally in the South and the Midwest.

Interestingly, there were a multitude of geographic options in every price range.

Want to live near the ocean on a budget? Mississippi, Georgia, or Texas may be your place. If you don’t care as much about the cost, Hawaii or California may be right for you.

You can live close to relatively inexpensive mountains in Tennessee, or pay for a pricier mountain retirement in Alaska.

If you want few neighbors and a fairly inexpensive lifestyle, Idaho may be for you. That type of solitude in retirement is a lot more expensive to purchase in Vermont.

Two things didn’t factor into their calculations were potential investment earnings and inflation. The assumption was that retirees would never earn another dollar on their $1 million retirement portfolios, and that the cost of living would never increase.

Most of us who are thinking about financial independence and early retirement plan on investing to put our money to work for us, and also recognize the potential impact inflation could have on our spending power over time.

In the interest of refining’s findings for potential early retirees, I changed a few assumptions and then re-ran the numbers.

Specifically, I assumed an early retiree would spend 20% more than a senior citizen, the early retiree would invest to increase the value of their portfolio by 6% a year, and that inflation would be 3% a year.

The results following my changes to the assumptions were quite interesting, and really illustrate the potential power of geographic arbitrage, which is something many early retirees consider.

Under my assumptions, $1 million in Mississippi would now last almost three times longer than $1 million in Hawaii, as the relatively low cost of living in Mississippi enables the majority of the retiree’s assets to generate income for many years into retirement.

In contrast, in Hawaii the cost of living is so high that when we increased spending by another 20% and added in inflation, $1 million ended up being depleted five months sooner than in the scenario, despite our assumption the early retiree would earn something on his or her investments.

While your potential expenses in retirement would obviously vary from either methodology, both demonstrate the significant impact the cost of living in an area can have on how long your money might last. Geographic arbitrage is something to consider as we contemplate achieving financial independence and early retirement.

The full results of the methodology for senior citizens and my methodology for early retirees follow:

Early Retirement

Have you considered relocating to a less expensive area as part of your strategy to achieve financial independence and early retirement?


  • Mrs. Adventure Rich

    August 23, 2017

    Woohoo, we live in state #4 (Michigan)! We moved here from #49 (California) last year and hope to settle here long term 🙂

    • ROMT

      August 23, 2017

      Glad to hear you are enjoying life in Michigan! And you can’t do much better than #49 to #4 if you want to lower expenses!


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