If you search around the internet to capture as many perspectives as you can on how to retire early, you’ll find a mixed bag of opinions as to whether it’s possible to accumulate enough in savings without drastically reducing your cost of living. In particular, one element of the cost of living that receives a great deal of focus is where a FIRE investor lives. While not everyone who writes about FIRE opines that a potential early retiree needs to find the thriftiest locale they can stomach to call home, most will tell you that living in a high-cost area will set you back.
Are there advantages to living in a low-cost area when saving for FIRE? Absolutely. But can you live in a higher-cost area and still do it? I’m of the opinion that you can, and below I’ll explain why.
What do we mean when we talk about low-cost versus high-cost places to live? It’s not exactly rocket science, but here goes. When we think about places with a lower cost of living, the following are often the most common characteristics: housing costs, lower (or no) state income taxes, relatively less expensive staple items like food and gas, and lower entertainment costs. On the contrary, a place might be considered higher-cost where its residents face higher state income taxes (and local taxes, like in NYC), high housing costs, high cost of staples, and more expensive entertainment.
The entertainment category might be a good proxy for overall costs. If the cheapest beer you can get in a place is $8-$9, I’d say you’re in an expensive place, while if you can get one for $3, you’ve found yourself a less expensive place. See – neither rocket science nor earth shattering.
Generally speaking, places like New York and California fall on the more expensive side of the spectrum, particularly in cities like New York, San Francisco, and Los Angeles where apartments and rents are high and residents can pay around the 10% mark in state income taxes. On the other side of the coin are places like Florida and Texas, where there is no state income tax and housing costs tend to be significantly lower. Compare the median cost of a 4 bedroom house in LA with one in Dallas or West Palm Beach and you’ll immediately see what I mean.
So does this mean that someone saving and investing for FIRE should avoid New York and California and locate themselves to the relatively less-expensive pastures of Texas and Florida? Not necessarily.
Twenty to thirty years ago, the answer to this question might be easier. Back then, New York and California had most of the relatively higher paying jobs. With the exception of some very specific industries (like oil in Texas), you’d be far more likely to find a lucrative career in one of the major business epicenters on the coasts. Unless you were a doctor or lawyer, New York and California were the place for financial and professional services, so that’s where you went to make at least six figures. And you’d bear the high cost of living to earn more money.
Cut to the present and this isn’t necessarily true. Industries have moved all over the country, making it possible to find more lucrative jobs in places with less expensive costs of living. The tech industry is setting up camp in Texas, oil jobs have become even more lucrative, the defense industry is finding homes in Florida and Arizona, and so on. These places have attracted not only business with their relatively lower costs but also the high-paid workers those businesses bring with them.
Of course, if you live somewhere expensive, your wages may still include a cost of living adjustment to account for that fact. All things considered, you can probably still fetch a higher salary in a more expensive location than a less expensive location, though the difference is not quite as stark as it once was. But, just because you’re bringing home a higher paycheck doesn’t necessarily mean you’re able to save more. If your paycheck in San Francisco is $6,000 per month but you pay $2,500 for an apartment, you won’t pocket as much as someone in Phoenix who takes home $5,000 but pays only $1,500 in rent. Something to keep in mind.
Additionally, one more recent adaptation in the way we work may have changed the math on where the highest wages are available. As more salaried-type work has become available to do remotely, the physical location of workers has become less important. With the rise in remote work, an employer can theoretically earn Los Angeles or New York wages, but be somewhere with a cost of living that’s a fraction of life in the city.
The remote work boom, or at least its move toward greater acceptance, is, as of posting, relatively nascent and in part due to the COVID-19 pandemic. It remains to be seen whether companies will reduce salaries for workers who flee to less expensive spots, or how long they’ll tolerate workers who never come to a physical office. But for those who can take advantage, and those who want to live somewhere with less expensive housing, remote work presents a great opportunity to invest the savings from reduced housing costs.
Nevertheless, there are other things about more expensive markets that still make FIRE a viable option. The first, and most significant, is housing – which is, of course, a big part of what makes an expensive market so expensive in the first place. If you’re able to purchase a house in an expensive housing market, the long-term investment aspect can be beneficial for a FIRE saver. The thing about expensive housing markets that sets them apart is that home prices are fairly robust, meaning that they rarely lose value and in most cases gain an outsized value as the years progress.
And it all has to do with the parcel of land, not the pile of bricks sitting on top of it. Expensive dwellings have historically retained their value due to their proximity to other places people want to be – whether that’s work (remote boom notwithstanding), the beach, nice weather, city life, etc. This means there’s a great deal of inherent value in the expensive housing, resulting in housing markets that don’t fall as much during recessions and that grow significantly over time.
If you live in one of these areas and you own, although a significant portion of your paycheck may go toward your mortgage, there is likely to be accumulated value in the property down the road that can be used for retirement. Now, one big caveat to this is that it assumes you’d be willing to sell that house when you’re ready to retire. It wouldn’t necessarily be at the date of your “early” retirement, but it could be then or at some point thereafter, so that you can pull the cash value out of the house and use it to pay for expenses. If you don’t sell the house as a means of retiring early, remember that continuing the mortgage payment has to be factored into your costs.
So think of living in an expensive housing market as just a different way of investing. If you live someplace that allows you to have more cash, you might invest more of your money in the stock market. On the contrary, if you live in someplace with higher housing costs, you’re investing more money in real estate. Both have proven to be solid long-term investments when done properly.
Housing is not the only thing about expensive markets that can help later in retirement, nor does the fact that you don’t purchase a house (or apartment, condo, co-op, etc.) in an expensive market preclude you from FIRE.
At least for some of the more expensive housing markets that are more urbanized, public transportation can be a more viable alternative than it is in suburban areas, offering the opportunity to save on transportation costs. If you live in NYC, San Francisco or Seattle, etc., you may be able to save the cost of a car altogether in favor of walking, trains, buses, and so on. Between the cost of the car, gas, and insurance, that’s quite a bit of savings that can accumulate over the years, even accounting for alternative means of transportation like rideshares and taxis.
So there are definitely options in more expensive housing markets of which a FIRE saver can take advantage: relatively higher wages, accumulated housing value, and other cost savings like public transportation. Done right, even an investor who lives somewhere expensive can still strive toward their savings goals to reach early retirement. Is it easier to accumulate cash in a place with a less expensive cost of living? Possibly, assuming you earn enough money. But it doesn’t mean that FIRE is out of the question if you live in a place with a relatively higher cost of living – it just means that your approach may be different.
Another important factor to consider, and one that I repeat elsewhere, is that you have to consider the type of lifestyle you want to have. Remember, FIRE should not be a goal in and of itself. FIRE should be something you want to do as part of an overall approach to making a better life for yourself.
So yes, it might be easier to live in a less expensive place to pocket and invest more cash during your working years. But, you have to consider the value in that. Do you really want to live in that location? Does it have what you’re looking for in a quality of life? That, within reason, is the main question – obviously FIRE takes some sacrifices, but sacrificing your entire life can make the pursuit of early retirement not worth the effort.
Like every other choice you make, you have to weigh the value of FIRE against that of where you live. If living in the city or other more expensive location makes it worthwhile for you, and you can still take some of the actions described above (and others) to achieve early retirement, then by all means, do it. Do it even if it means you might have to work a year or two longer – assuming you’re ok with that. If, however, you value early retirement more than quick access to restaurants or the beach or proximity to work or whatever keeps you somewhere more expensive, then it’s up to you to make the change.
Remember that you still need to live your life while you’re working – don’t turn it entirely into a period of years in which you hunkered down saving all your money. Find the right balance and take the necessary steps to get to where you want to be. If that means reducing housing costs, then do what you have to do. But if you can fit everything into the budget, then don’t feel compelled to do something like choosing to live in a particular (cheaper) location just because it might be easier to get to where you want to be at some point in the future.
The FIRE Investor's Guide to Early Retirement 