Today we feature a Guest Post from my blogging buddy Benjamin Davis. A very exciting and important topic: Geographic arbitrage! Benjamin holds a Ph.D. and decided to become a landlord to retire early. He writes on From cents to Retirement, a blog about early retirement and real estate investing. He also wrote the book My strategy to retire early (paid link) and runs a real estate and investment consulting business in Portugal. His goal is to build a real estate portfolio with 100 units before he turns 35 and turn From Cents To Retirement into a reference blog for early retirement through Real Estate investments, while he inspires others with his own story. Take it away, Ben!
I was born in Portugal and divided my childhood between Portugal and Italy. I lived in Canada and Germany after that. My family is Canadian and Italian so you can imagine how much I have been exposed to different cultures.
When I decided I was going to retire early, I needed to select the country I was going to live in. I decided to move to a country that would allow me to take advantage of geographic arbitrage, which is defined as the practice of taking advantage of different prices and tax rates in different markets.
There are multiple reasons why I selected Portugal. It would be very easy to talk about the food, the weather, the overall quality of life, etc. But this post is to talk about the financial aspects of this decision.
First, keep in mind that the annual average salary in Portugal is below $25,000or a little more than $2,000 a month. That is the official number, but I know very few people earning this much. In fact, I think that the most common salary per person is somewhere between $750 and $1,400 a month. And that is way more than necessary to live.
After living in Germany for 5 years, I know I wanted to live in Portugal. I currently earn about $1,700 per month, and I live off of $600. That is enough for me to have a reasonably good life, as I do not refrain myself from anything. To generate $1,700 with a 4% annual withdrawal rate, you need just a little bit over $500,000. Mind blowing, right?
That means that you “only” need half a million bucks to retire if you are willing to cross the ocean and get to live in the sunniest country in Europe. It seems like a tough decision, right? That was the decision I had to take a few years ago when I decided to retire early. Today, I can see a number of advantages of having chosen Portugal:
1: Great quality of life
Great weather, great food, cheap services and very low crime rate. Plus, for US residents, this is a plus: Portugal usually ranks top in Europe as far as English proficiency is concerned.
2: A great real estate market:
First, properties are way cheaper than in most countries in eastern Europe and the US. You can pretty much start investing in real estate, in Portugal, for as little as $50,000. At the same time, I personally believe that Real Estate in Portugal will appreciate way more than in most other countries in the next years. There could be a correction at the European level, which should normalize the markets, given that more and more people move within Europe.
Second, yields are pretty juicy. Not only the acquisition costs are low, rents are pretty decent. Of course that there are specific markets where rents are better, as in any country, but overall I’ve been able to make investments yielding almost 20% net per year.
Third, there is a variety of mortgage types you can get, and as there are many banks in the country, the conditions are pretty competitive. I personally use a mix of properties paid in cash and leverage, by getting 30-year fixed mortgages. Currently, I own 14 units and I expect to grow my portfolio to 100 units before I turn 40.
3: Wonderful tax advantages for expats/retirees
For instance, if you are retired and you get a pension from your home country (or any other country, for that matter), your pension will not be taxed in Portugal. Plus, as a resident, you get full access to the public healthcare system (just like natives do). As of today, if you want to retire in Portugal and want to commit yourself to live there for a few years, you can get legal residence status in no time.
4: Cheap to travel within Europe, from Lisbon or Porto.
[ERN: I noticed that too: TAP offers some really inexpensive airfares from their hub in Lisbon to a lot of European cities and also from North American airports. We will definitely come and visit once we’re retired!]
Today, I run a consulting business that helps investors from abroad investing in the Portuguese real estate market, in a totally passive way. If you want to educate yourself about the real estate market, you can check out my blog, where I post hundreds of resources, from free real estate books to “landlording” tips such as where you can dump a couch. One of my advisees has decided to come to Portugal to retire, and could not be happier about his decision.
The purpose of this post is to open your horizons when it comes to retiring early, and choosing the place to do so. You can retire much earlier if you decide to take advantage of geographic arbitrage. You don’t have to go to Portugal or any other country far from the US. You can perhaps look for a better place within the US. However, I see that many FI seekers do not consider this aspect and I know how much of a difference it can do in a plan like this.
Choose wisely. Retire earlier.
[ERN: awesome post! Thanks for sharing this! We will probably not yet pack our bags and move to Portugal permanently. But it’s nice to have that option in case we need to cut our expenses in retirement!]
Thanks for a guest post though I would have preferred a bit longer one ;-).
Yes, I’ve heard stories about Americans moving to Portugal and I would love to visit this country myself. I have a question though to the guest-author or anyone who has some knowledge about living in a foreign country. Portugal is probably the friendliest country to live in for expats from tax perspective. However, what I’m curious is what happens to the estate when one of the couple dies in Portugal? Nobody seems to explore such topics, but I don’t know if this is because there are not big expenses associated with the death in a foreign country and no claims against the assets left behind or is it so complicated that one must consult some kind of a lawyer before growing your roots in the new country? I for one would love to know in advance before a bought a house in Portugal (or other country). You can still play geographical arbitrage by renting or house sitting temporarily and in this case you probably don’t need to think what will happen with the estate and its taxes when your SO dies there because you’re just a visitor.
Anyway, if you have any (general) info re estate planning in Portugal, I would appreciate to hear it. Re assets, I’m referring to financial assets U.S. retirees usually have these days: 401k retirement savings, IRA’s (individual retirement savings) and taxable brokerage accounts.
Thank you.
PS. Sorry to broach such a sad topic but it’s part of retirement planning for couples, isn’t it?
PPS. E.g. I read somewhere that Spain assesses taxes based on your asset value, not the income, so if you’re honest to report the total value from all brokerages in which you keep your money at (apart from being selective which statement of your brokerage account to report on; Don’t be surprised, Spanish accountants advise to do so), it can be very pricey to reside in Spain as an expat.
Hi! You’re bringing up very interesting topics, but the reality is that I built my small fortune entirely in Portugal, so I am not sure what would happen in that case. Plus, I have the citizenship and I don’t want to go back. 😉
Sorry I can’t help much 🙁
Thanks for the post! I’m fascinated by the idea of geographic arbitrage and appreciate the thoughts on Portugal.
I’m still eagerly looking forward to the hopefully-soon-to-be-announced ERN relocation decision!
Thanks! Why not Portugal FP? 🙂
Good post, Benjamin. Nice to see you here on the Big ERN hub! With so many arbitrage advantages, and its proximity to many expensive European countries, don’t you think these advantages will slowly fade away with time as many European retirees wanting to come to Portgual for warm weather and better bang for the buck? This is what is slowly happening in the other low cost locales in Asia that I am familiar with.
That’s a huge concern! But he has a hedge against that: A large real estate portfolio in Portugal.
Hi buddy!
Historically, Portugal has been a country with much lower cost of living, in comparison to other western countries in Europe. If a correction does happen, it will be as ERN said: I will have a very good edge against that 😉
Thanks!
We did our own geo-arbitrage in late 1998, moving internationally to New England (MA) from Old England. Salaries doubled for my wife and I and our cost of living went down a bit. All good. Retiring next year with two young kids (11,9). All good. So, what is there to worry about?
Cost-of-living is back on our mind. $1,700 per month to live on for you? Nice! We may well be paying more than that (per month) on just healthcare (inc. dental, vision) alone. Which has us talking about going back to the UK to live, since we all carry UK passports while still being US citizens. There, healthcare costs are not four-figure pounds per month, for sure.
We will soon see when the exchanges open what the premiums for healthcare are for us with a family of four are going to be. Our short-term plan may still be to retire to the mountains of NH but if healthcare costs continue to sky-rocket over next few years, we have other options including a reversal of our international move from nearly 20 years ago. A move back to the UK (or an EU country) would have to happen soon though to avoid the upheaval of relocating teenagers in what will be some of their most challenging years.
Thanks for stopping by, Dr. PIE! Good point. We are considering the same in case healthcare doesn’t work out in the U.S.! And we will have two countries to choose from! Thanks for sharing!
Thank you so much for this wonderful article really!
Hello Big Ern, i’m a huge fan of your work, you’re basically the only one who systematically tried to give a precise answer to the safe withdrawal rate question. I’m writing here because i wasn’t able to access on the forum, i hope it’s a good place to write. I’m from Italy and i studied a lot to try to find that number for an european investor, but there is no data very well crunched like you did, i tried to replicate that with a simple fixed allocation of 80% international stocks and 20% international bonds, trying to keep things simple and of course not considering a certain percentage like a fixed rate, but more like a rule of thumb.
Of course we have to go international because every nation of europe, even all europe itself it’s not barely comparable to the USA stock market, and i choose a 3% withdrawal rate to be safe, not having other data. Do you plan to ever do a SWR part where you analize a safe withdrawal rate for an european inverstor with basics asset allocations? maybe it could be useful not just to us european but even to USA citizens living in europe. Thanks and have a nice retirement!
Good suggestion. I don’t have the data for this. We’d need monthly return data going back a long time and monthly CPI inflation data.
If anybody can provide the data, I can certainly add this to the toolbox. But so far, nobody offered that.
Thank you for taking time to reply! i’m afraid that at least for europe CPI inflation data is very different from country to country, Italy and Germany for example had terrible inflation compared to the rest of europe after the war, things are a little more aligned after we switched all to the same currency almost 20 years ago, but of course that is not enough data. I will make another suggestion, that could be helpful to me and to actually everybody: have you ever tried to calculate the safe withdrawal rate based on a total world stock index and total world bond index with american CPI? i remember from one of your post that you don’t believe a lot in international diversification, but you just point out the correlation during bear markets, i think that it would be useful to consider that an international index could have less volatility, thus possibly increasing the safe withdrawal rate even with less returns. I think it could be useful to a lot of people even in America that maybe prefer an international approach. Thanks again, all of your work inspired me and make me know FIRE in a very realistic way!
I included the MSCI World ex-US index data in the sheet. Unfortunately, only post-1970. Pre 1970 is hard to find monthly data.
And non-US bond data is also hard to come by, unfortunately.