If you’ve read the About this Blog page you know that the Heartland on FIRE crew lives near St. Louis, MO. Smack dab in the middle of America’s Heartland… a place that many call “Flyover Country”.
Now at first blush, the Heartland doesn’t offer ocean views, rocky mountains, the trendiest restaurants or shopping, or the highest paying jobs in country. It’s also true that the weather tends to be bipolar (super hot and humid in one moment and bitterly cold the next). As I am writing this the temperature has dropped from the mid 60s down into the 20s! What the hell? So, it’s understandable why many think the way they do.
However, for those of us on the path to FI, you may find that Heartland living can be a secret weapon to achieving FI significantly sooner.
Huh? Is this dude smoking something?
I am talking about Geographic Arbitrage.
By definition, arbitrage means taking advantage of different prices in different markets. Geographic Arbitrage means earning money in higher priced markets and spending it in markets with lower cost of living and taxes. An extreme example of geographic arbitrage would be earning money in a strong currency, such as the US, and living in southeast Asia, where the buying power is much higher.
But we are talking about staying in the US here, right? Aren’t we earning money in the same currency as we are spending it?
Hang in there with me for a moment. The quickest way to FI is to maximize your savings rate and as I discussed in Playing with FIRE, you control your savings rate by increasing your earnings, decreasing your spending or ideally both. The cost of living in your area has a massive impact on your spending. With a lower cost of living, your savings rate can rise.
COMPARING COST OF LIVING BETWEEN THE HEARTLAND AND THE COASTS
There are many cost of living calculators online (simply Google cost of living calculator and a plethora of options appear); however, for the purpose of this article I used Bankrate’s which uses data published by Council for Community and Economic Research (C2ER).
Say you live in St. Louis and have an annual salary of $78,000. (Chosen to mimic the HoF estimate of annual spending necessary for FI). An equivalent wage in a select group of cities is summarized below, as well as the difference between these wages and the STL wage.
| City | Equivalent Wage | Difference |
|---|---|---|
| San Francisco, CA | $148,748.00 | $70,748.00 |
| New York City, NY | $191,753.00 | $113,753.00 |
| Denver, CO | $92,419.00 | $14,419.00 |
| Boston, MA | $121,680.00 | $43,680.00 |
| Portland, OR | $109,200.00 | $31,200.00 |
| Seattle, WA | $118,307.00 | $40,307.00 |
| San Diego, CA | $122,101.00 | $44,101.00 |
| Baltimore, MD | $95,117.00 | $17,117.00 |
| Philadelphia, PA | $100,767.00 | $22,767.00 |
Many other Heartland cities compare favorably to St. Louis on a Cost of Living basis as can be seen below (again compared to a St. Louis wage of $78,000).
|
The average cost of living in the Hearland cities listed ($78,276) is $44,232 less than the average of the Coastal cities listed ($122,232) in the table above. The Bankrate calculator includes a breakdown of the various costs differences, the largest difference is, unsurprisingly, housing prices.
How much of a difference would $44k, annually, make in your calculations for early retirement? Heck, that is enough money for a small family to live on all by itself! Even crazier, think of the future value of this money if it is invested!
|
*Assumes 6% growth rate
CONSIDER RETIRING TO THE HEARTLAND
If you are currently working in a high cost of living area, you should take a close look at your estimated spending in retirement. If you are open to moving you may find you can retire much sooner in the Heartland
As an example, let’s say you live in San Diego, CA and plan on retiring there. You are figuring on $122k in annual expenses (the San Diego equivalent of $78K). This means your FI number would be roughly $4,700,000 (25x your expenses and accounting for inflation… say 2%, as figured from the Retirement Calculator). Let’s further assume you have a starting portfolio value of $500,000 and save $4,000.00 a month. Punch these numbers into the Retirement Calculator and we see you need to work 22 years to reach FI.
22 years?! Ugh…. that’s like half of forever. What does it look like if rather than retiring in San Diego you plan on retiring to the Heartland?
Here’s how it looks: If you calculate your retirement spending based on the reduced cost to maintain the same standard of living in the Heartland ($78K), then this would drop your FI number to $3,000,000 (25x $78,000 plus inflation). Your new time to reach FI is 17 years! Freedom is now 4 years earlier! How’s that for a secret weapon!
TAKE FULL ADVANTAGE OF GEOGRAPHIC ARBITRAGE IN THE HEARTLAND WITH NON-W-2 INCOME
A perfect scenario to max out the benefit of geographic arbitrage would be to live in the Heartland, and have income on par with jobs in the major coastal cities. To pull this off would free up large sums of money, we are talking thousands of dollars, each month to invest towards FI.
But if I am living in a low cost of living area, won’t my earnings be lower as well? How can I have my cake and eat it too?
Yes, it’s true that W-2 wages tend to fluctuate with the cost of living and the highest paying jobs are often found in the large coastal cities.
But if you are seriously working towards FI you are probably heavily invested in the stock market, real estate, or may have other non-W-2 income streams, such as an online presence, or from freelance work. This money works just as hard for you, regardless of where you set up shop.
In fact, if rental property cash flow is a key part of your FI plan, then the Heartland is a great bet. Rental rates are high with respect to property prices, so you can get into deals with better Capitalization Rates (aka Cap Rates: the ratio of Net Operating Income to Property Asset Value) than in most of the coastal cities.
YOU WON’T GET BORED LIVING IN THE HEARTLAND, BUT IF YOU DO, THEN TRAVEL YOUR HEART OUT!
If you look for it, there are plenty of things to do for every person’s taste including numerous great outdoor activities (camping, hiking, hunting, boating, fishing, caving), delicious restaurants, museums, some of the country’s best zoos, college and professional sports, etc. Anyways, I don’t want to get lost in the weeds here.
But let’s just assume you do get bored. What to do? Well, many people plan to travel a lot in retirement anyways, right?. With the Heartland’s central location, cross-country road trips are very attractive, since you only have to drive “cross-half-county” instead of “cross-whole-country”. So load up the RV and stay awhile, anywhere. Meanwhile, you won’t be racking up huge bills back at home base. Plus with the lower cost of living you are left with much more $ to spend on airfare and accommodations in whatever far off land, foreign or domestic, you crave.
The lure of the Heartland to me is that with the lower cost of living, I have much greater control over my spending. This allows me to focus on saving and finding new ways to generate non-W-2 income. I am confident this combination will get me to FI faster than living in higher cost of living coastal areas.
So, what do you think? Does the Heartland factor into your plans for FIRE?
Good article! I’m largely locked in to the city for jobs as I refuse to commute 1.5hrs each way. For those that have location independence with their income stream, I don’t understand staying in high cost areas… Unless it’s a lifestyle choice.
There’s another blogger working on a geo-arbitrage calculator for home bases.
Thanks! I agree, the commute can be a killer. I see people in my office commuting an hour each way and it blows my mind. If you could find a lower cost of living city, with a very short commute to your job, that would be a great way to reach FI faster.