In the wake of the flight from big cities as a result of the pandemic (and my own plans to move cities in the next 3-4 months), I wanted to take some time to look at how your choice of location impacts your ability to quickly achieve financial independence.
None of this is meant to say it is better to live in one city vs. another, but when you are making decisions around moving for a job / deciding where you want to live, this should be an important input. An example that often comes up is whether you should accept a 10-20% increase in compensation to move jobs/cities from a lower cost of living city to somewhere like New York or SF. There are plenty of reasons to want to live in a big city (your friends/family are there, you like being able to walk everywhere, your future career requires you to be there, etc.), but that pay bump alone is probably not enough for your near-term financials to be in favor of the move.
I am going to look at this difference across 4 cities with very different costs of living (I will be benchmarking things to Atlanta):
- Atlanta, GA (My hometown): Relatively low cost of living city with plenty of employment opportunity
- Fort Worth, TX: No state income taxes, a 10% lower cost of living than Atlanta, and plenty of employment growth
- Boston, MA: Massive young population and a popular hub for companies, but still much cheaper cost of living than NY / SF (45% more expensive cost of living than Atlanta)
- New York, NY: Largest city in the US by population one of, if not the, most expensive US city to live in (145% more expensive than Atlanta)
Setting up our comparison
We are going to evaluate how long it would take a hypothetical person, with strong saving habits and a consistently growing salary, to achieve a net worth of $1M in these various cities. As a note, I am making a couple of assumptions to simplify this, but should not affect the comparison between cities, the overall time horizon may just be adjusted depending on the circumstances:
- Starting age: 22 years old
- Starting debt: $0
- Starting net worth: $0
- Years with no income: None
- Years where expenses spike: N/A
First, let’s look at differences in the cost of living across these cities (indexed to Atlanta) based on NerdWallet’s cost of living calculator (uses the ACCRA cost of living index):
Note: Majority of difference in ‘housing’
Making a decision about where to take a job
Let’s contextualize this decision and say that our hypothetical person has a job offer and can pick between one of these four cities. I am assuming this individual is 22 years old, has no initial debt, and $0 starting net worth. This logic applies across age groups and situations, however, the time horizon may just change depending on your circumstances.
Scenario 1: Geographically neutral income
The company is offering a salary of $60K / year across all 4 cities (this geographically neutral pay is becoming increasingly common, especially as companies learn from so many employees having worked from home this past year).
Note: Tax assumptions are from the free income tax calculator from SmartAsset
So clearly there is a major range of outcomes, especially between New York (wouldn’t achieve that portfolio until much later in life) and the others (36-40). The major drivers of that difference are:
- Expenses – New York’s cost of living is 145% more than Atlanta, resulting in a very low savings rate in NY (7%) vs. Atlanta (64%) and Fort Worth (69%)
- Taxes – Texas has no state income tax which results in a lower effective tax rate (18%) vs. New York (26%), which has the highest tax liability of any of the cities resulting in the lowest after-tax income
As a result, you would accrue $1M in our simplistic example at age 36 in Fort Worth, but not until 64 (!!) In New York (as a caveat, this model does not assume things like tax-advantaged savings, social security, dependents, etc.).
Scenario 2: Pay differences across geographies
Now you might be thinking that salaries are going to be different by location to make up for differences in cost of living. This is becoming less true as companies adjust to new styles of working and want to encourage employees to spread out across locations. That being said, let’s look at what this would look like if you factored in an adjusted salary. I have used 2018 median household income data from indexmundi to adjust starting salaries.
As you can see, the range of outcomes has shrunk, but it would still take ~16-18 years longer to achieve your net worth goal in New York vs. the others. Even more importantly, since you would have a larger pool of expenses, if you intended to stay in an expensive city after retiring, you would need a MUCH larger stored net worth to be able to live off your investment returns, so you would need to accrue far more in a city like New York.
Salary bump to equalize regions
Assuming you were planning to move to the same city after hitting your net worth target regardless of where you worked, let’s discuss what the actual salary bump would need to be to equalize the financials of these options. Again, we are indexing to $60K / year in Atlanta:
- Fort Worth, TX: ~$55K / year (~8% less)
- Boston, MA: ~$72K / year (~20% more)
- New York, NY: ~$98K / year (~63% more)
Of course, this isn’t the whole story. Maybe you are okay accepting a lower standard of living in a bigger city allowing you to cut expenses, maybe your promotion cycle is faster in a specific city, maybe you have family support in one of these cities, etc. There are a million and one factors in play when deciding where you live. That being said, you should know what the impact of your cost of living on your long-term financial health and plan accordingly.
Also, if you are stuck with savings rate below where you want it and are looking for a way to massively raise it, looking at lower cost of living cities is a great idea. Check out my post on expense tracking / management strategies for others.
I am planning to move from Atlanta to Boston in the next 3-4 months to start a new chapter, so will be re-baselining my cost of living soon. Let me know if you have any stories of how moving has impacted your financials!
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