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Can living somewhere with a lower cost of living potentially inhibit someone from living somewhere with a higher cost of living later in life?

For example if someone works in a small town with cheaper housing and lower relative salary most of their life, would they likely have the means to live/retire somewhere with a much higher cost of living (e.g., a larger city) as opposed to someone trying to the do the opposite (higher cost of living and higher relative salary)?

It seems like a person would acquire much more in terms of overall assets living in an area that has a higher cost of living with a commensurate higher rate of income. This would seem to give someone in this situation much more mobility in terms of where they could potentially live and retire later in life.

(I am assuming a person would be doing comparable work in both situations.)

It just doesn't seem to be something that equals out in the end from what I can see...

  • Not using this information to make any drastic life decisions, just something that has been on the back of mind for awhile... – radix07 Aug 23 '12 at 15:18
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I don't think that this can be generalized. It is not the absolute cost of living and salary that is important, but the difference between the two. To be more precise, the difference between spending and income. The more money you save, the more you can spend in retirement. Depending on your individual situation, including habits and personal preferences, this may be either the higher cost of living area or the lower cost of living area.

As an example, if you tend to eat out a lot, you may be better off in a small town with limited, less expensive choices that are 1) less expensive and 2) less tempting. On the other hand, in a big city you may have more public transit options so need only one (or zero) cars instead of two.

I would focus on living someplace you enjoy, and then try to maximize your savings given the constraints of your chosen area.

  • I agree that it comes down to spending vs income, but I don't believe most people would behave drastically different because of where they live. I believe that the income/spending ratio would likely be very similar regardless of where a person lives, but that actual amount would be much larger if you had a higher income/cost of living... – radix07 Aug 23 '12 at 15:15
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    @radix07 - people behave drastically different based on where they live. When I moved from a rural county to a metro one, I (and my family) have made much more use of the facilities available to us. At least we do and in my studies samples size that is 100% (with a 50% margin of error) – MrChrister Aug 23 '12 at 15:41
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    On the other hand, if you're a young single professional living in New York or San Francisco and earning big-city dollars, but you keep your cost of living down (rent a cheap studio apartment, keep the partying under control, eat in more than you eat out, etc), then you can really clean up. It gets harder once you have a family; that's when the elevated rents really hit you. – user296 Aug 24 '12 at 2:41
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It might, but not necessarily. In fact, it may be quite the reverse.

How it might: a person lives and works from 25 to 65 in expensive Cambridge, MA, and managed to buy a home there on mortgage for a high price. He is, in fact, strongly motivated to excel and earn more money to pay that high mortgage and other high costs of living--and, as you noted, he can do it there if his career goes well. Upon retiring, he "downshifts" to live in Cambridge Springs, PA, a rural community close to no urban area, where he buys a new house for a very low price. (For comparison, houses in Cambridge might be $600k; in Cambridge Springs, PA, it might be $85k.) In so doing, he converts a great deal of equity into retirement savings, has a home, and is all set to...do very little by way of urban pursuits in that quiet part of the U.S.

So, people can downshift this way and wind up living in a house with a ton of equity in the bank. But they cannot easily "upshift" in terms of their domicile. In that sense, the low-cost-liver is inhibited, as you asked. Well, unless...

How it might be the reverse: A college professor/government worker/doctor/other decentish paying profession gets a job somewhere in the "flyover states", but it's a good career that pays well, despite their being in a small town with low real estate costs and cost of living. He works for 30 years there, has his mortgage paid off, accumulates wealth, spends little, and when he retires, he has so much extra wealth that he can possibly buy a $600k house in Cambridge cash and have a fair bit left over for retirement. Whereas, due to the high cost of living, his colleague who worked in the metro area may not have banked so much retirement savings.

So the point is, as others have noted, it depends.

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I think you're making the erroneous assumption that a person's income and their cost of living are always proportional. While common, it's not universal; people make six figures and live in small houses in inexpensive neighborhoods. Conversely, people live paycheck-to-paycheck in really expensive neighborhoods, or have their cost-of-living paid for by some other arrangement above and beyond their actual paycheck.

All in all it's less about where you live as how you live. Your gross income is, of course, a major factor, but your net worth as of retirement is a function of how that money has been used:

  • Spending less than you make (thus having money saved and avoiding using credit)
  • Having a good credit score (and getting good interest rates on the notes you do take out)
  • Saving as much as possible as soon as possible into a retirement fund (thus seeing long-term growth of money you put away)
  • Building equity in your home (the value of things you own isn't liquid, and you most likely won't make money on durable goods you buy, but they are a store of net worth provided you owe less on their loans than they're worth)
  • Maintaining good health (this is often overlooked, but health care costs are the single biggest reason for bankruptcy, and the biggest chunk of most seniors' budgets; avoiding these things is key to making your nest egg last)

Given these things, two people with exactly the same incomes could have two entirely different retirement outlooks. Not all of these things are under your complete control; you could do everything right and then get cancer and lose everything fighting it. Plenty of the 8.2% of U.S. working-age unemployed didn't do anything "wrong" to end up unemployed and going backwards very quickly on their retirement outlook (if indeed they ever can fully retire).

However, I will say this: where you end up does depend greatly on where you start. Your parents' net worth (and what they taught you or didn't teach you about financial responsibility), your level of education (though education is a means to an end, and some educational paths don't pay for themselves, or are out-and-out dead ends), the opportunities available to you early in life, all of this is a powerful determinant of your future success. From there, you can move up, tread water, or dive sharply. I reject much of the "rich dad poor dad" stuff; entrepreneur college drop-outs who go rags-to-riches are just as lucky as the next guy to win the Powerball, by being in the right place at the right time to take advantage of the opportunity that rocketed them to the top. They did not "create" that luck. There are plenty of entrepreneurs with extremely good ideas working very hard to keep their heads above water, and 99.999999% of them will never be the next Bill Gates or Mark Zuckerberg.

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As peoples' incomes increase, so does their spending. If someone gets a new job that increases their income considerably (or their partner starts working to double their family income), they might decide to transfer their kids from a public school to a private school, they might join clubs they couldn't afford before, they might trade their small house for a bigger more expensive house. Their incomes have increased so they want a better standard of living for themselves and their families. Whenever they get a promotion/payrise or bonus they usually find a way to spend that extra money. There are many high paid workers who have no more savings than lower paid workers.

The secret is to increase your savings and assets as your income increases by having some delayed gratification and gradually putting more and more money away. You don't always need the latest gadgets and accessories, but most of us want them because others we know have them. Not many people can achieve this and that is why they don't end up having enough savings, assets and income to have a comfortable retirement. Where you live should not have anything to do with how well you can retire, it has more to do with how well you can manage the income that you do get.

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What you are saying is that all else being equal, one should be able to save more in a city with higher salaries and commensurate costs of living than in a city with lower salaries and costs of living.

In principle, you are correct.

In practice, I would be hard-pressed to identify a profession with all else equal, and perhaps an economist could give you instances of constant ratios of cost-of-living, but no one here is going to.

A big city and a small town have trade-offs. Big cities have greater quality of life issues (living nicely is expensive). In small towns, depending on your profession, you might face greater (maybe sales or law?) or lesser (maybe doctor or government bureaucrat?) competition depending on your profession, but living well is less expensive.

I personally chose to make the decision to leave the small town for the big city. I wanted to work in a profession (programming) that I believed would reward me well as well as allow me to compete handily (as opposed to the stiff competition I faced as a young financial advisor in a small town with mostly old money.) I wanted the culture and opportunities of a big city, in spite of the downsides.

The small town left me at a nasty negative net worth. Thanks to recent successes, I'm now at a slightly positive net worth and I'm living in a decent apartment with my wife. We don't eat out much (I do get a couple of $10 lunches a week), and we don't shop much, but I can buy my friends lunch without it hurting, I still feel like I'm getting ahead, and that really feels good.

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