This is a guest post from Pauline of InvestmentZen.com. Pauline left the 9 to 5 seven years ago to live life on her own terms, and is currently based in sunny Guatemala.
This is the view I have in the background as I write this post.
Nice, isn’t it?
No, I am not on holiday. This is home, I live there all year round. When I am not on holiday, that is.
I have been living on the shores of beautiful lake Petén Itzá, in Northern Guatemala, for four years. Before that, life had taken me to Morocco for a year, and then I spent a couple of years on the back of a motorcycle exploring Mexico, the U.S., and 30 European countries.
Being financially independent allowed me to design the life I wanted and leave my cubicle at age 29.
My original freedom date was at age 40. How did I cut 11 years off? I saved more aggressively, hustled to earn more, invested more money, … and relocated to cheaper countries.
Achieving Financial Independence by Earning, Saving and Investing
You see, financial independence is achieved through a combination of the following:
- Trying to maximize your earnings
- Saving as much money as possible
- Investing said money for higher returns
Earning more is very powerful, because right now, you are making ends meet with whatever you make. So if you earn $2,000 a month and can live on that, earning $2,500 means easily boosting your savings by an additional $500, or 25% of what you used to make. With the average U.S. savings rate hovering around 5%, that is no small change. In fact, if you invest your extra $500 from age 25 to age 60 in low cost index funds with a robo advisor, and if the markets behave like they have over the past 30 years, at an average rate of return of 8% (source), you will end up with over a million dollars. $1,161,961 to be exact.
Investing more is just as powerful to create your financial independence, because if you keep your monthly $500 in a 1% savings account, you nest egg will only be $251,544 after 25 years. Three quarters of a million you didn’t have to work for were created by the high interest rate, compounding year after year.
Which takes us to the saving part. Saving more is a limited endeavor. After you have cut on transportation, reduced your bills and stopped going to the gym, you still need a roof over your head, and food on the table. While saving 100% of your income is unrealistic, not saving enough means you need to save for a longer period of time to reach your goal.
We just said that if you can save $500 per month for 35 years, you can have a million dollars while only saving $250,000 of your actual cash. But if you are a high earner and manage to save the same $250,000 in say five years, it will still take 18 more years for it to turn into a million dollars, assuming our 8% rate of return.
Relocating Abroad Can Help
So what can we do with today’s next egg to accelerate financial independence? You need to be able to live on less. And that is where a drastic measure, such as relocating abroad, can help greatly. In Guatemala, I paid cash for that lovely lakefront property. The price tag? Only $50,000 at the time. It bought a small thatched house in bad shape, and spent around $80,000 over the following years renovating it, and building a couple more independent units to rent to travelers.
The decision to buy the house came after two years of travel on a motorcycle, my only possessions fitting in a small side pannier (the other side contained my partner’s stuff and the top tank our spares, tent and sleeping bags). I wanted a place to call home, and emotionally, wanted to own it. $130,000 is expensive if you consider you are missing out on $5,200 a year of passive income, assuming a safe withdrawal rate of 4% from your investments. So if your sole purpose is to bring your retirement date closer, you could stick to renting. On top of the emotional aspect though, I collect around $1,000 a month in rental income, so it works for me. Nevertheless, for a hassle-free retirement, let’s get a rental.
In Guatemala, you can rent a nice two bedroom house, fully furnished, with HOA, internet and water included, for $500. Your electric bills should come to around $50, you will need $100 per person to eat a balanced diet, and $200 will give you a nice leisure budget. So it can be done for under $1,000 per month. A $12,000 yearly budget means you “only” need to save $300,000 to be able to retire.
Now I need to explain something here. Retiring abroad for the sole purpose of saving money is insane. You can rent a $350 place in the MidWest, coupon your way through Walmart, and still manage a sub-$1,000 monthly budget in the U.S.. No visa requirements, no language barriers, no missing Thanksgiving. However, your quality of life will be inferior to that of a lower cost of living country. And if you try to live on less than $1,000 in New York or the Bay Area, I wish you luck.
In Guatemala, the minimum wage is around $300. Some extreme foreigners make ends meet on that little, living in a hut, eating rice and beans, and going home every five years. That would allow you to retire on a $90,000 net worth. Crazy, right? But is that the life you want to live? Is that a way to spend your years just waiting for time to pass because you can’t afford to do anything more than sleep and eat? Not in my books.
For me, the whole point of living in Guatemala is to have the luxuries I would not be able to afford in Europe or the U.S., at least not on a regular basis. I have two staff for my guest house. My housekeeper cleans my personal quarters as well, and the handyman walks and feeds my dog when I am away. Because my house is paid for, most months, I still spend under $1,000 in Guatemala-related expenses, including their wages. I would have to shell out seven figures for a similar four bedroom property in the States. And I enjoy a clear, 85 degree water all year round.
The money I save on rent and day to day expenses allows for several international trips per year. In 2016, I went to Patagonia, three times to the U.S. and three times to Europe. It was a busy year. That lifestyle works for me, as a single, healthy woman who loves to travel. If I had a family, I would probably want to be closer to a good school, a hospital, and other modern amenities.
Considerations for Relocating Abroad
The decision to relocate to another country or a lower cost of living area has to be a personal one. You have to take everything into account, such as:
- How much lower your rent or mortgage would be. Being one of your most important expenses, that weighs heavily.
- Are there things that will be more expensive? Internet and cell phone bills come to mind, as they can be dearer in rural areas. If you work online, slower internet can be complicated.
- Which things will you get for free? Relocating near your in-laws can reduce your day care costs, growing a garden means free veggies.
- What is the added cost of travel, if your extended family is far? I like to visit Paris, where I am from, at least once a year. If your parents don’t have a guest room, there could be accommodation expenses on top.
- If you relocate abroad, how much is a visa, or a visa run, how will you do healthcare, and where will you send your kids to school? In Guatemala, public schools and hospitals are not really an option.
- How will you fit in with the local culture? Do you speak the language, will you learn, or just live an expat life? I prefer local. Expats who don’t speak Spanish tend to avoid the cheap local eateries and pay extra for premium housing.
- How much do you value interactions with friends and family? I get about as much family time in one trip to France as I used to when I lived nearby and we saw each other once a month. Skype and FaceTime take care of the rest. It is not for everyone.
- How about taxes? If you live outside of the U.S. for more than 330 days per year, you can claim the foreign exemption of income tax, which means thousands of dollars if you still have an income from your job. If you are fully retired and financially independent, there are other setups to lower your tax burden. That alone could cover the extra cost of trips back home.
As I like to put it, the grass is never greener elsewhere, it is just another shade of green. Relocating to a cheaper state or country will bring its set of joys and have its drawbacks. In terms of money, it is probably a way to achieve early retirement sooner, especially if you can keep your high income and work remotely for a few years before retiring. But before you take the leap, I would recommend you spend an extended period of time in the region of your choice to make sure it is the right fit for you.
What do you think? Would you move to another state or even abroad to reach financial independence sooner? What would you refuse to compromise on?