Pages Menu
TwitterRssFacebook

Posted by on Mar 3, 2015 in ETF Strategist

The Benefits Of Tiny Withdrawal Rates

The Benefits Of Tiny Withdrawal Rates

By Roger Nusbaum, AdvisorShares ETF Strategist

 
For about the last year we have been blogging about the concept known as tiny houses. In that time interest has proliferated in terms of new websites devoted to the concept as well as at least four TV shows about tiny houses. The show Portlandia just had a bit making fun of tiny houses in a sketch where the toilet and the office were the same space as was the bathtub/shower and TV area.

A true tiny house is on wheels, on a trailer so it can be mobile which allows for, ahem, mobility and in certain places allows for bypassing property tax because something on wheels is not a house. Building tiny houses can be very cheap in nominal terms ranging from $15,000-$20,000 on the low end, $30,000-$50,000 as what I believe to be mid-range and like anything else the upper end may know no limits.

I routinely say that moving into a 150 square foot trailer on a full time basis will not be the solution for too many people but there is a lot that can be learned here. The Tiny House Listings website had a blog post with three brief anecdotes about how tiny living changed people’s lives financially.

A common thread to these profiles (not just this article but many such profiles) is that the tiny housers don’t want to live on the treadmill of working for the almost sole reason of making a big mortgage payment and generally maintaining a materialistic lifestyle. They are also often interested in having more free time to pursue their interests. Other, younger tiny housers view tiny houses as their only realistic shot of owning a home anytime soon.

You may or may not relate to that last paragraph but that does not mean there are not takeaways from what these people are doing.

The folks profiled in the above linked article feel as though they have flexibility now that they did not have previously because they have no mortgage and their other monthly expenses are very low. While we have only been discussing tiny houses for about a year we have been discussing living below your means for more than ten years.

Obviously living below your means is likely to result in saving more money but more than that it can become the difference in how successful whatever your definition of retirement will be. You likely have read plenty about the 4% rule (4% is viewed as the optimal withdrawal rate in retirement to avoid running out of money) but lately I’ve seen references to the 3.5% rule with the idea being that 4% might be too high in a zero percent interest rate environment.

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.

The AlphaBaskets blog provides frequent market insight and commentary by AdvisorShares Investments, LLC, created by AdvisorShares and other leading active managers.  AdvisorShares Investments is an SEC-registered investment adviser and the investment adviser to the AdvisorShares actively managed ETFs. The views expressed on AlphaBaskets should not be taken as investment advice or a recommendation for any of the actively managed ETFs advised by AdvisorShares.

X