If savings rates are as dismal as we have been led to believe then there will be a lot of people who are on the bubble (March Madness reference) for having saved enough so living smaller, not tiny but smaller, could be the difference between being comfortable with a 3-3.5% withdrawal rate or trying to squeeze out 4.5-5%.
The role that luck plays here cannot be minimized and by luck I mean the timing of when to start your idea of retirement. The person who retired on December 31st 2006 needing 4.5% was likely forced to make some very uncomfortable decisions (while everyone remembers what happened in 2008, the market was flat in 2007 so in this scenario they took their 4.5%, got little to no growth and then the market imploded). You may be lucky enough to hit your number at a bear market low or you may not, it is luck and beyond your control.
Additionally, the less you need to take out (because you live below your means) then potentially the less risk you need to take in your portfolio. If you only need to withdraw 1% do you need to take any stock market risk? Obviously you have 100 years’ worth put away after all.
That is meant to be extreme to make a point and someone in that situation could still run into a problem if inflation ever becomes a problem or if some sort of huge unforeseen expense comes up but the person needing 1-2% does not have to take the risk that person needing 5-6% does and that is the takeaway from tiny living.
This article was written by AdvisorShares ETF Strategist Roger Nusbaum.