About International Cost of Living Comparisons

by Kristen May
Tokyo's cost of living is significantly higher than most cities in the U.S.

Tokyo's cost of living is significantly higher than most cities in the U.S.

Whether you have a job offer abroad or are considering retiring internationally, money will play a big part in determining if the move is feasible. One of the major variables to factor into your decision of whether to move abroad is how the cost of living compares with what you're experiencing now. This gives you an idea of what monthly income you'll need in the local currency to maintain the same standard of living.

Sources for Comparisons

Data on cost of living comes from a wide range of sources, and you can turn to several places to find comparisons on the cost of living in your current city and the one to which you are moving. One free option is Expatistan, which compiles user-submitted data to provide costs in six major categories. For more detailed and reliable data, you'll have to turn to paid options, including the Economic Research Institute's Relocation Assessor or the Economist Intelligence Unit's worldwide cost-of-living index. Human resources departments at companies that relocate workers abroad often have access to this data.

Calculating Cost of Living

Services that calculate cost of living do so by gathering data on prices around the world and comparing the cost of identical items in two different cities. The best way to calculate an index is to average the prices and set that as the baseline, then calculate a percent above or below that price for each city. For example, say a pound of coffee costs $8 in one city and $14 in the other. The average is $11, and the city with the lower price has an index of 73 and the city with a higher price has an index of 1.27 in the coffee category. Typical categories include groceries, eating out, household supplies, personal care, entertainment, transportation, clothing, domestic help, utilities, and sometimes housing. An overall cost-of-living index takes all of the data on expense categories and weights it based on how the average consumer spends money.

Determining Spendable Income

Many cost of living comparisons only consider the use of spendable income, which is what you have after taxes, savings, retirement, insurance and sometimes housing. Therefore, you'll also have to factor in the differences in these costs in another country. For example, if you're moving internationally and pursuing citizenship there, you may be eligible for insurance or retirement benefits. However, you also may pay higher taxes and have a lower net pay.

Relocating on a Fixed Income

You may be looking to relocate on a fixed income, either because most of your income is from relatively predictable investments or pension accounts in the United States or you're working remotely and maintaining your existing pay in dollars. In this case, you will need to consider the exchange rate to determine how much your monthly income will be in the other country. Multiply your income by the exchange rate to find out how much you'll have in the other currency. Because exchange rates are not stable, you'll want to ensure that you leave a buffer so you can still afford to live internationally if the value of the dollar drops. Therefore, you will either need to live in a location with a lower cost of living than your current one or choose to maintain a lower standard of living.

Making Your Comparison

Once you gather the raw data, aggregate it to decide whether to make your international move. In addition to sites that offer data, many sites have advice from people who have moved to the city you're considering. These people explain how they adjusted their spending and what challenges or surprises they faced in the cost of living. Use these to get ideas about where to live, how to get around the city, and areas in which you may be able to spend less than the usual cost of living in that location. If you're moving for a job, present the data you have collected to your employer to negotiate a contract for your pay. One solution is to have the company provide your housing and tie your additional pay to the exchange rate. This helps guarantee that you will maintain a particular standard of living, even when exchange rates fluctuate.

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