How To Save 20 Percent of Your Gross Income for Retirement

By: Emma Watkins

Look at the hard facts before setting retirement goals.

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Saving any amount for retirement is dependent on how much money you earn and the portion of it you need to survive. Before you set the goal of saving 20 percent of your gross income for retirement, you have to calculate your expenses and see how much is left. This crucial step tells you whether you goal is feasible. Don’t get discouraged if it isn’t. Use what you learn about your current financial status as the motivation to strive for changes.

Preliminary Steps

Step 1

Find your gross salary in your most recent pay stub and multiply it by 0.2. If you earn $3,000 per pay period, for example, a 20 percent savings from every paycheck totals $600.

Step 2

Keep a tab of all your expenses -- from monthly credit card payments to random trips to the vending machine at work -- for three months. Looking at your cash transactions for several months gives you a more accurate picture of where your money goes than the one you get when you consider only a single month. Be detailed as you describe the expense. Later, it will help you decide whether you can afford to drop it. Include in your expenses any money you already set aside on a regular basis for emergencies, as an example, or for vacations.

Step 3

Add up your monthly expenses and raise the total by 20 percent of your gross income. Deduct the new result from your net income. If you get a positive number, you have enough to save 20 percent of your gross income for retirement. If you come out at a loss, redefine your goal.

Follow-up Steps

Step 1

Begin to shop for a retirement savings plan if you don’t need to revise your goal. Find out from your employer whether your company sponsors any programs, such as a 401k. There are also plans, such as traditional and Roth IRAs, that don’t require an employer’s backing. A financial adviser can help you sort through the options. She can also remind you to stay within the limits allowed by the U.S. tax code. In 2013, the most you may contribute to a traditional or Roth IRA, for example, is $5,500. The limit rises by $1,000 if you have turned 50. If 20 percent of your monthly gross income is $600, or $7,200 for the year, you’ll need expert advice on how to invest the difference without breaking the law.

Step 2

Devise a new spending plan if the difference between your net income and expenses is negative. Examine the expense logs you’ve kept and identify items you can do without and costs that you can lower. Start drinking coffee at home, for example, and buying snacks in bulk at the supermarket, where it’s generally cheaper than the food machine. Consider setting less money aside for emergencies.

Step 3

Follow the new budget you created in step 2 for the next three months. By the end of the quarter, you’ll know whether you can keep up with the new lifestyle without feeling frustrated. If you feel strongly that you can, set up a retirement savings plan as discussed in step 1.

Step 4

Switch your focus from saving 20 percent of your gross income to increasing your take-home pay. If you find you cannot comfortably reduce your expenses to meet your retirement goal, you must first raise your income. Start networking and searching the classifieds.

Items you will need

  • Pay stub
  • Calculator


  • Set aside what you can for retirement. Your contribution may change from month to month because of unexpected expenses. Don’t let this discourage you. More importantly, don’t use the fact that you can’t make regular deposits as a reason to postpone saving. Having a small nest egg is certainly better than not having one at all.

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About the Author

Emma Watkins writes on finance, fitness and gardening. Her articles and essays have appeared in "Writer's Digest," "The Writer," "From House to Home," "Big Apple Parent" and other online and print venues. Watkins holds a Master of Arts in psychology.

Photo Credits

  • Hemera Technologies/ Images

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