Geoarbitrage: The Power of Money Depends on Where You Live

I have always earned my living in the greater New York City metropolitan area, technically here in suburban central NJ (and as the late great Rodney Dangerfield often said, “we don’t get no respect!”). Because of that fact, I have always known that living around here was way more expensive than most other places and the purchasing power of a buck got you significantly less here than, say, someplace in the southern part of the USA. That’s always been one of the big downsides of living in this area.

Geoarbitrage is taking advantage of the fact that your financial power depends on where you live. In retirement, this becomes especially important.

This fact is verified every year by the U.S. Bureau of Economic Analysis that has been measuring this phenomenon since 2013. It recently published its latest data and using this info, the Tax Foundation demonstrates the real value of what $100 buys you in every state in the Union. It revealed once again that the power of your money really does depend on where you live. I’ll tell you more about that in a bit.

Downsides, Yes, But There Are Upsides Too

Of course, earning a living where I live has a few upsides and one big one is that the wages paid here are higher than average compared with most of the other places around the country. So while you may be paying more for gasoline, rentals, houses, and taxes etc. in the NY/NJ region, you are also getting paid more and thus theoretically speaking, you can “afford” to live here if you choose to do so.

So It’s Really No Big Deal, Right? Or Wrong?

As long as you are working, and by that I mean earning an income from a full time job, you are probably managing to at least get by no matter where you hang your hat and call it home. I am talking generally here because I do know there are still plenty of people who work full time and don’t get paid a livable wage. But in theory, if you are healthy and have an education, you should be able to afford to live in any area of the USA you choose because where it costs more, you earn more and where it costs less, you earn less. Make sense?

But What Happens When the Wages Stop and You Retire?

Here my friends comes the “rub”. Sure, if you earn 10-25% more by working in a high wage area, you can afford to pay a little more for everything that makes up your monthly budget. But when you are depending on the good ole “fixed income” of Social Security as we retirees like to say, you suddenly are faced with those ever-increasing costs and the almost never-increasing sources of the funds to pay for it all! That’s one huge reason that so many retirees flee from this area and head someplace else like the Carolinas, Florida, or other places where the cost of living is below what exists here.

Relocating from a high cost of living area to a low cost of living area is known as geoarbitrage (short for geographic arbitrage). And that's just what my fellow bloggers and friends the Groovys did and you can read all about it on their blog, Freedom is Groovy. They are currently in progress of building a new home in North Carolina (The Groovy Ranch!) and because they planned and executed so well, they now are living their early retirement in ways that many people can only wish for.

Some of the Numbers You Should Know

The real value of $100 in each state for the same goods is often much higher in states like Missouri or Ohio than it is in states like New York or California.

The Relative Value of $100

In the Groovys’ case, it shows that by relocating from NY to NC their buying power has significantly increased and can buy you comparatively more in a low-price state than in a high-price state.

More Examples

Oklahoma is a low-price state. There, $100 will buy you goods that would cost $112.36 in a state at the national average price level. You could think of this as meaning that Oklahomans are, for the purposes of day-to-day living, 12% richer than their incomes suggest.

The top five states where $100 is worth the most are: Mississippi ($115.74), Alabama ($115.47), Arkansas ($115.07), West Virginia ($114.16), and Kentucky ($113.90). At the opposite end of the spectrum are Hawaii ($84.46), the District of Columbia ($86.28), New York ($86.51), California ($87.41), and New Jersey ($88.34). Unlucky me, I live in New Jersey!

Why Should This Matter to You?

First, the fact is that regional price differences are dramatically large from one place to another. For example, real buying power can be as much as 34% different when comparing Mississippi to New York. In real dollars, what that means is if you have an after-tax income of $60,000 in Mississippi, you need after-tax earnings of over $80,000 in New York just to afford the same overall standard of living.

In general, states with higher incomes have higher prices, period. This is especially true in and around big cities. Yes, these places with high costs of living do pay higher salaries for the same kinds of jobs, and that is what labor economists call a “compensating differential”. In other words, the higher pay offered is in order to make up for its low purchasing power.

It’s Not Always That Way

Some states have high incomes without higher prices. You should make an effort to find out where those locations are if you want to stretch your money in relocation. When you become aware of those states, it will change your opinion about which states are poor and which are wealthy. For example, residents of two states like Massachusetts and North Dakota earn approximately the same amount in dollars per capita, but after adjusting for the regional price differences, North Dakotan incomes can actually buy a lot more!

Travel Around, You Will Find Amazing Facts Like…

Everything from the price of a cup of coffee to the cost of a house can fluctuate between, and even within states themselves. A gallon of regular gas costs over $3.80 a gallon in Hawaii, but just $2.51 in South Carolina (per GasBuddy as of August 2018).

The average Connecticut resident pays twice as much for electricity as the average Tennessee resident and a $7 beer in San Francisco will cost you half as much in Chicago. A $5 hamburger in California is usually a dollar cheaper in Nebraska. Right here where I live in Central NJ, the cost of many items is cheaper than it is in Northern NJ, but more expensive than you’d find in Southern NJ. That sometimes is a matter of just 50 miles and it does make a difference.

Overall, the data shows that a dollar can swing by more than 30% in terms of what it can buy from the lowest to the highest state! 30% is a big deal!

Relocation Really Can Make Retirement More Affordable

It is true that if you want to stretch your retirement dollars further, relocation can be a huge advantage. That 30% swing mentioned above is certainly proof that even if inflation stays in the 2-3% range each year for the next 10+ years, you would still be better off if you could relocate to a lower-cost state at retirement than if you didn’t. And of course, this information is just here in the USA. Some people actually leave the US and relocate to South and Central America or Mexico where their US dollars can stretch even further. I know some folks that have moved to places like Costa Rica to live more cheaply and yes, they even have satellite TV, so how bad can that really be!

In many places, they also reap a side benefit of a new and exotic (and weather superior) lifestyle that includes beaches and recreation not available where they currently live. It does sound tempting, doesn’t it? But then there are those downsides that we need to address too.

Downsides to Relocation – a Quick Review

It’s not brain surgery, but here’s some downsides that come to mind right off the bat.

  1. Moving is a hassle in itself. It takes time, money, and energy to move.
  2. You become accustomed to your environment and now at retirement, you may have to learn about a whole new world you have never experienced before.
  3. Your family, children, grandchildren, and friends may be left behind and far away and that can be painful.
  4. Your doctors and hospitals will all be new, which is especially hard to deal with if your health isn’t top notch and in retirement that happens an awful lot. Check to find out in advance what is available where you are going.
  5. Are you going to be able to get around physically as well as you can where you currently live? How is public transportation and will walking be convenient?
  6. What does your spouse or partner want to do and are you in agreement?
  7. Have you done all your homework and checked on all the small details about where you are heading? There can be many hidden costs as well as the obvious costs to consider.

If You Won’t or Can’t Relocate to a Lower Cost State, Then What?

Here we are, back to the same old song (with a different meaning) as the Four Tops once made into a big hit back in the 60’s…

There are things you can and must do to deal with retirement planning and frankly nothing on my list is new.

Inflation is one of the biggest risks that current and future retirees face.

Given today’s life expectancies, even relatively low rates of inflation can devastate the purchasing power of a pension or un-invested cash during your retirement years. How great could the impact be? Pretty dramatic.

You need to plan an additional alternate stream(s) of income for retirement. Social Security isn’t enough to handle it. Earn more now before you retire and you can save more for retirement while you are earning it, period. You need to think longer on your timeline of life. Retirement can last 10, 20, 30, or more years! How will you be paying for that cost?

Downsizing in retirement doesn’t always mean just relocation. It might mean giving up one or all of your cars or selling your summer vacation home or you can simply close off a room or two in your existing home to save on utilities and upkeep. You should be creative in budgeting and earning and spending, and stretch your retirement funds no matter where you choose to live!

Final Thoughts

What will $100 be worth 30 years from now if we have high inflation? I can’t tell you for sure but here is a scary thought.

The worst inflationary period I personally have experienced was between 1977 and 1982; inflation averaged 10% per year! If we were to have that level of inflation again, in 30 years $100 would be reduced to the equivalent of less than $6 in today’s dollars! Just $6! That means a new car in 2048 would cost about $300,000 and a 2-bedroom apartment right here in NJ would rent for about $18,000 a month!

Although that isn’t likely to happen, it does make you think. We don’t really know exactly what our financial lives will be like 30 years from now but we do know that everything will cost more money; it always has and always does. In order to be ready, we have to have a good plan and we have to implement it in advance. Again, that’s not a new idea, just one that bears repeating over and over and over again.

Do you think about the numbers when you think about retirement? How much will it cost to maintain the desired lifestyle you want in retirement? Is relocating in your future, or downsizing, or even both?

Are you maximizing your retirement savings plan right now and if not, why not? Your retirement is coming sooner than you realize and waiting and waiting to prepare for it makes it less likely to be a success!