Xbox One update error (32 title characters minimum?)

I would say 32 inch minimum.

Prison of Elders is a decently quick way to get etheric light. You can find some folk to help you thru 34 or run 32 for armor core as an alternative. I got one of my characters up from 32 to 34 in 3 weeks by runing POE 32 and getting 3 different armor pieces
from Variks. Once you have one 34 character POE 34 is one of the easiest surefire ways to get etheric light.

The title update message states that any characters created after applying the title update cannot be accessed in games that don't have the title update.

For example, let's say that you download and install the title update and create a new character. Then you go to a friends house to play Dark Souls 2 but your friend doesn't have the title update. You will not be able to play your new character at their
house until they also download and install the title update.

The title update should not affect pre-existing characters in any way. This could be a problem with a corrupt save file or it could be a problem that the update didn't get applied fully/correctly.

I did have some weirdness with the title update where it looked like I had downloaded and installed it - but then it prompted me to install again and the second time it went by really fast. Might be a good idea to shut down, restart and then see if you can
re-install the update.

Yes
(and a couple more characters to meet the 6 character minimum)

Before you format a USB flash drive as an Xbox storage device, make sure you have the latest console software update.

You can format up to 32 GB of the storage space on the USB flash drive to use as Xbox storage.

Note If you receive the message "Can’t configure," the USB flash drive does not meet the USB minimum requirements.