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Tips to help Millennials save and invest for retirement

Robert Powell
Special to USA TODAY

It's not easy being a working Millennial or Generation Xer these days. You've got student and maybe credit card debt to pay down. Plus, you likely have to set aside money for an emergency fund, maybe an engagement ring, and a down payment on a car and house.

You're also being told to start saving and investing for retirement — even if it's 40 or more years away.

Robert Powell

And, oh yes, you also have a life to live with whatever discretionary income you have left over after completing all those financial-planning tasks.

So what's a Millennial or GenXer to do? What's the best way to manage all your short- and long-term financial goals? Should you tackle them one at a time — debt first, then retirement — or all at once? And how should you invest for retirement?

Start with a balance sheet. Step one, says Derek Lawson, financial planner at Sonas Financial Group in Kansas City, Mo., who specializes in Gen Y clients, is to take an inventory of everything you own: checking accounts, savings accounts, investment accounts, CDs and IRAs. Those are your assets. Then do the same for what you owe: student loans, Parent PLUS loans if you plan to help your folks pay down that debt, credit card debt, and car loans. Those are your liabilities. Do this too for your significant other, if you have one.

This cataloging of assets and liabilities creates what's called a balance sheet, which, among, other things, will reveal your net worth: How much you are worth after subtracting your liabilities from your assets. Get in the habit of updating your net worth statement every year and comparing your year-over-year progress in growing your net worth.

Create a spending plan. Next, create a budget. You'll need to track your monthly income and expenses, including a category for retirement savings. Lawson suggests using a three-bucket approach to spending, where one is for past and committed expenses, such as student loans; one is for savings, such as retirement; and the third is current expenses, food, rent and the like. You Need a Budget is Lawson's favorite budgeting app.

How important is this? "They need to set priorities," says George Papadopoulos, a certified financial planner in Novi, Mich. "With substantial income coming in for the first time in their lives, they need to set themselves up in building a great foundation to eventually becoming financially independent."

Pay down debt. For his part, Joe Pitzl, managing partner of Pitzl Financial in Arden Hills, Minn., says paying down debt is a form of saving. "Any way you plan for it, retirement needs are still a function of being able to generate enough cash flow to meet spending needs," says Pitzl. "If debts are high, you have to generate more cash flow, which requires more assets. If you minimize your spending commitments, you need less to make it work. For those tight on cash flow, reducing debt ought to be the priority."

Look for ways reduce spending commitments. Young workers should also look for ways to cut costs as one way to free up income to put toward debt and retirement. Live at home with your parents; continue living with roommates; and use public transportation.

"Millennials can save a lot by simply extending into their early working years the lifestyle they had as a student, a time when many of them were certainly enjoying life," says Erik Carter, a senior resident financial planner with Financial Finesse, a financial education company based in El Segundo, Calif.

Strike a balance. When it comes to living for today vs. saving for tomorrow, Millennials have to strike a delicate balance. "How much they want to save for the future vs. enjoying life now is a personal decision," he says. "The important thing is that they're aware of the risks and forgone opportunities of not saving more now so they're making a conscious, educated decision. There is no one right answer for everyone. It largely depends on their personal situation and priorities."

Save enough to get the full company match. No matter what, however, do contribute to an employer-sponsored retirement plan, such as a 401(k), if your company offers a match. "It's free money," says Lawson. "Contribute whatever percentage of your salary is necessary to get the full employer."

Company matches vary, but companies typically contribute 50 cents for every $1 you save in your 401(k) up to 6%.

Contribute to a Roth IRA or Roth 401(k). If you don't have an employer-sponsored retirement plan, or if your employer doesn't offer a match, open a Roth IRA with a firm that offers low-costs investments, says Lawson.

A Roth IRA offers several advantages over a traditional IRA for young workers. "One way to hit the proverbial two birds with one stone is to contribute to a Roth IRA," Carter says. "Since the contributions can be withdrawn tax- and penalty-free anytime and for any purpose, it can be part of an emergency fund."

Plus, Roth IRAs can be used for education expenses and up to $10,000 for a home purchase under certain circumstances. "The key is to keep the Roth IRA in cash until they have enough emergency savings somewhere else," says Carter. "At that point, the Roth IRA can be invested more aggressively for retirement."

Think power of compounding. Never forget what Albert Einstein had to say on the subject: "Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it." According to Ted Jenkin, the co-CEO and founder of oXYGen Financial in Alpharetta, Ga., a 22 year old who puts away $2,000 a year until they are 30 years old will have a larger nest egg than a 30 year old who puts away $2,000 a year until they are age 65. "The time value of money has not changed because we have changed a generation," says Jenkin.

Save 50% of every salary increase. Instead of just saving 10% of your salary, think about saving that plus 50% of any and all salary increases you get along the way, says Lawson. "This method could end up helping many people save a lot of money for their retirement while also letting them spend too," says Lawson.

Allocate your investments based on your fact pattern. Consider your career and your salary before deciding what to invest. "The standard approach is that investors with a longer time horizon have more capacity to take more risk," says Carter. "That's partly factoring in the value of their lifetime human capital approximating a bond, unless they're in a high-risk, high-reward occupation such as an entrepreneur, and partly because they have more time to recover from investment losses."

Use different accounts based on your career. Which types of accounts you use to save for retirement might vary based on your career. Entrepreneurs, for instance, ought to shy away from putting money in retirement accounts where they would be penalized for taking early distributions, says Jenkin. Those with a stable career, by contrast, can put money in traditional retirement accounts.

Toe dip into investing. If investing in equities is too nerve-racking, consider a different tack. "I'd rather see them invest more conservatively as they learn about markets and investing," says Pitzl. "On one hand, there is a certain amount of brute force savings necessary in the early years to get the compounding snowball started. On the other, investing conservatively early in life while learning how it works may result in a greater understanding of and tolerance for risk as life and portfolio size progresses."

Keep it simple. Another school of thought: Millennials should simply invest in a target-retirement year mutual fund in their 401(k). That's a fund of funds that invests in a mix of stock and bond funds that becomes more conservative over time. "It's simple and they don't have to rebalance it," says Papadopoulos. "They should be more concerned about trying to contribute the highest amount they can into it rather than allocating it properly at this stage of their life. 'Set-it-and-forget it' is a good policy to follow."

Seek professional help. Ask a financial adviser to review your savings rate and your investments. Some advisers will do this for a nominal hourly fee. Resources include XY Planning Network, an organization of fee-only financial advisers who work with GenXers and GenYers, and Garrett Planning Network, nationwide network of independent, fee-only financial planners.

Robert Powell is editor of Retirement Weekly, contributes regularly to USA TODAY, The Wall Street Journal and MarketWatch and teaches at Boston University.

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