9 Numbers You Need to Know for a Solid Retirement Plan

By Stephen L. Nelson

A while back, one author wrote an entire and very popular book about your and my “number”… by which he meant the retirement account balance you need to retire. That was a clever idea. And, wow, that’s impressive he did an entire book on one number.

What you can do here is something different: Take ten numbers to map out a good retirement plan. And it’ll only take a few paragraphs.

The first number is 10% (the percentage you should probably annually save)

The first number to consider? The annual percentage of your income that you should save. And that value is 10%.

In other words, if you work through the income allocation calculations that figure out what’s the right amount of savings you need so you end up with a retirement that’s financially balanced compared to your working years, the number works out usually to about 10%.

By the way, if your income falls short of that enjoyed by the average person or family, it turns out you don’t need quite 10% but that 8% will do, further if you’re earning significantly more than the average person or family, you need more like 12%. (This variance stems from the way Social Security Benefits work.)

Whatever savings an employee will throw in but way of a matching amount, counts too. For example, if an employee contributes 3% to your retirement account that counts as the first 3% you need.

The second and third numbers are 30 and 30 (years of compounding and years of contributions)

You also want to know something else about your saving, too: In order to get enough retirement savings to supplement your Social Security Benefits, you probably need around 30 years of contributions. (So, like, 30 IRA contributions.)

You need around 30 years of compounding. In other words, sure, you can start at age 40 as long as you’re willing to wait until age 70 to begin drawing on your retirement savings. And if you do start young at age 25, well, that’ll probably mean you can retire around age 55.

The fourth number is 1 (the smallest number of mutual funds you can use)

What’s smallest number of mutual funds you can use and still look yourself in the mirror? The number is 1. You can use a single, good, low cost mutual fund for all of your retirement money as long as the fund invests widely and dials down the risk over time.

Something like the Vanguard Target Retirement Fund which “targets” your retirement date is an example of this. For example, if you’ll probably retire amount 2050, you could rationally, even proudly use the Vanguard Target Retirement 2050 Fund.

The fifth number is 6 (the largest number of mutual funds you might need)

If you have some reason why a target retirement fund doesn’t work, you can construct your own portfolio of mutual funds (or equivalent exchange traded funds). But know that if you’re picking funds with widely diversified holdings—as you and I should be doing—you really don’t need too many funds.

The superstar investment manager David Swenson suggests you can build a very sturdy portfolio using only six index funds, for example:

  • Total US stock market index fund (holding 30% of our money)

  • Developed International stock markets index fund (holding 15% of our money)

  • Real Estate Investment Trusts index fund (holding 15% of our money)

  • Inflation-protected US Treasuries index fund (holding 15% of our money)

  • Intermediate-term US Treasuries index fund (holding 15% of our money), and

  • Emerging international stock markets index fund (holding 10% of our money)

The sixth number is .25% (the maximum percentage you should spend on annual fees)

.25% is the maximum amount you need to and should spend on annual investment expenses. Seriously, you really shouldn’t need to spend more than this.

If some day, for example, good discipline and hard work mean you find yourself with $1,000,000, you should spend $2500 a year or less in fees. (That’s .25%.)

You do not want to spend 1% or 2% on investment expenses which is what many people end up paying. A 1% or 2% a year fee means spending $10,000 to $20,000 a year. Ouch. That’s brutal.

By the way, many great mutual funds and exchanged traded funds cost you way less than .25%. The large Vanguard Group funds (like the Total Stock Market Index Fund and the Total International Stock Market Index Fund) charge around .1% annually.

You can even pay a little higher fee on some of your portfolio’s funds (like .5%!) if you have some of the funds costing you a frugal .1%.

If you want to learn more about how to save investment expenses, visit and spend some time at the popular www.bogleheads.org forum.

The seventh number is $0 (the amount of money most people should save via a Roth-style account)

An easy number to remember is the amount of money you should (if you’re at all typical) have in a Roth-style retirement account: That number is zero.

In other words, most people saving money for retirement should use a traditional IRA or traditional 401(k) account. Roth-style accounts make sense for people whose marginal rates will go up in retirement… a very small group.

The eighth and ninth numbers, 4% and 5%, are your possible withdrawal rates

The eighth number, 4%, reflects the safe withdrawal rate you can probably safely use to draw down your retirement savings once you stop working. In other words, just to keep the math easy, if you have a $1,000,000 in your savings, you can probably safely draw $40,000.

The ninth number, 5%, reflects what you might be able to draw down annually from your retirement savings if either you’re a bit lucky or willing to be flexible. Again, using the example of $1,000,000, with luck and flexibility, you can probably draw $50,000 and have everything work.

Safe withdrawal rate calculations assume that you get to bump up your withdrawal amount each year for inflation — even if (and this is the tricky part) your savings shrink due to bad investment performance.

You can gain a pretty good insight into how risky or how safe different withdrawal rate scenarios are by using the www.firecalc.com website.

And one other note, just so you know and don’t feel bad: Most people don’t end up with anywhere near to $1,000,000 in their savings accounts when they retire.