Early retirement in Portugal: geographic arbitrage on steroids
I talked about geographic arbitrage before, when I first considered moving to Portugal for good. Today I want to go deeper on this topic, as I’ve had lots of questions lately. First off, geographic arbitrage means taking advantage of different prices in different markets, for tax-, dividend-, rent-, or even the purpose of lowering your living costs.
In my book “My strategy to retire early“, I go over the reasons why I chose Portugal to retire in, and why it maximizes my chances to attain my goal of retiring by 33. In this post, I will go thoroughly over the nuts and bolts of that decision, as well as clarify important concepts and ideas under geographic arbitrage in general.
If you are looking for a geographic arbitrage example as you are planning on moving to a different country for tax or living costs purposes, you’ll likely enjoy this post.
When I first considered moving to Portugal, I checked a few countries around the world and their suitability for early retirement. Geographic arbitrage is not exactly a new concept in this regard. People immigrate to other countries to earn larger salaries all the time. They usually immigrate, save hard and come back. The key idea is that the standard living cost and the standard salary is way higher in the country people immigrate to. When they come back, it all of a sudden looks like they are rich.
The first thing to do in order to consider moving to another country for geographic arbitrage reasons is to look at some key elements, including the average salary, the tax code, etc.
I too considered several countries in my research:
…and Portugal looked like the best country out there to roll out my plan. Here’s why.
Average salary: the #1 factor to consider geographic arbitrage
Prior to moving to Portugal, I worked in Germany for 5 good years. My salary in 2015 was 52k/yr, which means €2400 net monthly. In Germany, this can go a very long way if you save hard. I could live off of 800€, which means that I had €1,600 per month to invest. In 5 years, that is almost €100,000 free cash flow. This has allowed me to renovate my real estate portfolio (the killer being rental property #3, which I renovated in two different phases) and buy rental property #4.
In Portugal, the average salary is considerably lower. Officially, according to this source, Portugal’s average salary is $24,529. Having lived in the country for a few years, I can tell you I know very few people living off such a salary. Most people I know walk away with at least 33% less than that, averaging about €1,000 net per month (or €12,000 per year). Please remember that the minimum wage in Portugal is €650,00 per month!
Let that sink for a moment. If you wanted to retire early, in Portugal, with the minimum wage, you’d need about €200,000, assuming you could net 4% on that portfolio. Incredible, right?
The fact that salaries are so low in Portugal is the first hint that Portugal is a great candidate for early retirement. The country offers high living standards, and attaining the minimum wage is kinda “easy”, so choosing Portugal seems quite straightforward…
Now, the magic question: Ben, how much do you need to live well in Portugal? As I live in one of my rental units, I don’t have to pay rent anymore (although I do pay condo fees and property taxes, yes). As a result, my biggest expense is immediately taken care of. Could I live off €650,00 considering that I don’t need to pay any rent? You bet I could!
Taxes: a really important factor on geographic arbitrage
Ben, the infographics doesn’t say anything pertaining to taxes. Is Portugal still #1 when it comes to taxes?
The short answer: yes.
The long answer is more complex. Portugal has many advantages when it comes to taxes, especially if you are not a Portuguese citizen. If you retire in Portugal and collect a retirement pension from abroad, you don’t pay taxes. How cool is that?
At the same time, due to the progressive tax bracket system of the national IRS, you’ll be penalized if you earn too much. In Portugal, your actual tax bracket depends on the number of kids you have. Pretty cool huh? Because there are more than 25 brackets, you really need to make a lot of money to be taxed a lot. For instance, up to almost €3,000, the IRS will only tax you at 28.5%. Plus, you don’t have to sum up all your income (including rental income and dividends). As of today, that can be taxed separately, at 28%.
Unlike other countries, such as Germany, traveling to your home country doesn’t allow you any write-offs, though.
As I have a PhD and I am paid through grants (which are NOT considered income, i.e. they are tax-free), I can sum up my rental income and dividends and be taxed accordingly. As I also did a lot of renovation this year, I will have a lot of write-offs so I don’t expect to pay much to the IRS in 2017 and 2018…
As I said above, rental income can be taxed on its own at 28% (unless it comes from a holding, which is even more tax friendly).
For both tax and security reasons, opening up a holding for real estate may be a smart move for RE investors in Portugal. This will both minimize taxes on rental income and provide the investor with some security in case of lawsuits. This is why I only keep one property under my own name – the rest is held in a holding.
Real Estate Investing (REI) during geographic arbitrage
In most countries I know, rental income in a different country is never taxed in the country we live in. In Portugal, that is no different. The same way you’ll still pay your rental income in Portugal, even if you immigrate to the US, you’ll not be taxed for rental income in the US if you decide to live in Portugal. Although this may look almost irrelevant, it is actually very important for geographic arbitrage.
Because Portugal’s real estate is so cheap, it is common to see US citizens coming to Portugal and acquiring properties over here. I think this is a great hedge to have if you plan on living in Portugal for geographic arbitrage reasons because your income will increase if living costs increase. In fact, I can’t think of a better hedge to have against increased living costs.
At the same time, Portugal’s real estate is one of the cheapest in western Europe. While it would not be wise to talk about market corrections in the future, I personally think it is safe to assume it can’t go any lower. This, along with the following reasons make it interesting to invest in Portugal.
In fact, from the countries, I considered when doing my geographic arbitrage analysis, I determined that Portugal offered the cheapest and the highest-yield real estate. As I said before, buying real estate where you retire is a great hedge against increased living costs, so this is great news if you ever plan to retire in Portugal.
Although you may invest in Real estate, you may come to the conclusion that renting your own place is better for you. Say you want to retire in Lisbon. Most likely, as of today, it would be clever to rent instead of buying.
Now, more great news: renting in Portugal is cheaper than in comparison to other countries.
Wait, is that good if I invest in Real Estate?
Yes, as long as you use different tactics to rent a place for yourself and invest in real estate. This is why I love multi-units in Portugal. A x-plex doesn’t cost x times more than a single condo, but it can rent for way more than x times what the condo rents for. In mid-sized cities in Portugal, you can definitely find nice flats for under €500 or even €400, which compares really well against countries like the UK, Germany, and Finland.
Weather and quality of life during geographic arbitrage
It cannot be all about the money! Moving to a new country due to geographic arbitrage reasons should not be only about saving or making more money.
If I were to tell you that Lisbon is the sunniest capital city in Europe, with an astonishing 2,799 hours of sunshine per year… wouldn’t that be great to add to your geographic arbitrage masterplan? 🙂 Plus, the entire country, on average, gets about 3,300 hours of sunshine per year, meaning more sunny days than almost anywhere else in Europe. How much would you save on Vitamin D supplements? 🙂 Just kidding…
But Portugal is not only about the sun and saving money on supplements. In my humble opinion, it is one of the most beautiful countries in Europe, if not the most beautiful one. Have you been reading FromCentsToRetirement for long enough so you recall my previous header? 🙂
Having lived in many countries to this day, I can certainly attest that food is generally cheaper in Portugal. What I really like about the prices of food in Portugal is that going out for lunch or dinner is incredibly cheap in Portugal.
There are cheap prices everywhere. When I order take away, I can actually split the mean and eat it for lunch and dinner, because the Portuguese are used to big portions. Eating out at restaurants is also very cheap, and I usually eat at a restaurant nearby, for $3,5. That includes a meal like in the picture, one drink and one expresso at the end of the meal (which the Portuguese cannot go without).
I also order take away a lot, like I said, and that typically costs €4 to €5 but that is almost always enough food to have lunch and dinner.
Compared to the other countries I lived in, this is peanuts. Plus, the food is great. I think that restaurant prices are well congruent with the average salaries, in most countries. Therefore, a country with low average salaries cannot afford to have expensive restaurants, as food is a commodity. This is, of course, if you don’t decide to go and live in a touristic place, like the Algarve.
These low prices actually spread to other commodities. For instance, expressos are really cheap, if you are a coffee lover. In Portugal, they typically sell for 60 cents.
How about yourself? Up to geographic arbitrage? Want to share your experience? Let me know in the comments down below!
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