How to Save 20 Percent of Your Gross Income for Retirement

Saving 20 percent of your income for retirement most likely won't be a piece of cake. It's a definite challenge, but a challenge that will pay off in the long run. Plus, if you get in the habit of saving a lot when you're still young, you won't get in the habit of blowing all your money on things you don't really need. Start saving now so that you can live it up in retirement.

Step 1

Figure out how much 20 percent of your gross income is. For example, if you pull in $4,000 per month before taxes and other expenses are taken out, your goal is to put aside $800 for retirement.

Step 2

Add up all of your expenses for the month, including housing, utilities, student loan payments and groceries. Don't forget to include savings for non-retirement purposes, such as an emergency fund or saving for a down payment on a house, as well as spending on non-necessities. Include the amount of taxes and health insurance premiums you pay each month, too, since you're working with gross income. In a perfect world, your expenses won't be more than 80 percent of your income.

Step 3

Find ways to cut back if your expenses are now more than 80 percent of your gross income. You might reduce your clothes-buying habit, for example, or bring your daily lunch instead of eating out. Reduce expenses until they are 80 percent of your income or even less.

Step 4

Sign up for your company's 401(k) plan or other retirement plan, if possible. If your company doesn't have a retirement plan, or you're self-employed, you can open an individual retirement arrangement (IRA). Keep in mind that the contribution limit for an IRA is much lower than it is for a 401(k), just $5,000 per year as of time of publication.

Step 5

Make your contributions automatic so that you don't have to think about it. The money is taken out of your paycheck each week, just as your income taxes and health insurance premiums are taken out. You won't have any excuse to not contribute your 20 percent.

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