Retirement Savings Tips Every Millennial Should Know

NEW YORK ( MainStreet) -- Saving for retirement isn't a big priority these days for young adults who face huge student loans and poor job prospects, but experts say "Millennials" who skip 401(k) and IRA contributions today will regret it tomorrow.

"There'll be a drastic difference in your retirement nest egg if you start at age 25 instead of waiting until you turn 55," says Jinnie Regli of Milliman, a Seattle-based firm that administers 401(k) plans for businesses.

Milliman recently ran the numbers and found that 25-year-olds who make $25,000 a year and put 4% of their pay into 401(k)s will have $491,000 by age 65 -- but only $68,000 if they start saving at 55. (The firm's figures assume a 2.2% company match, 3% yearly raises and 7% annual investment returns.)

But Rachel Cruze, the 24-year-old author of The Graduate's Survival Guide (and the daughter of personal-finance guru Dave Ramsey), says few in her generation think about retirement savings at all.

"Millennials have been brought up in a world of smartphones and the Internet and just don't have a long-term perspective," Cruze says. "Some of them don't even know what a Roth IRA or a 401(k) is."

In fact, a recent Ameriprise ( AMP) poll found that just 29% of Millennials -- Americans who came of age around the year 2000 and are now mostly in their 20s -- said they were "trying to grow their savings."

By contrast, 43% said they were either "just living from one day to the next financially " or "working hard to get out of debt."

How can Millennials get their 401(k)s and individual retirement accounts on track?

Here's a look at Cruze and Regli's top retirement-savings tips for people in their 20s and early 30s.

Get on a budget
You won't have any money to put in a 401(k) or IRA if you don't get on a monthly budget first to make sure your savings and spending match up with your income.

"Having a budget puts you in control," Cruze says. "You tell your money what to do instead of the other way around."

Lots of websites offer free tools to help you create a monthly budget online. Not surprisingly, Cruze likes the one at

You can also easily draft a budget on any piece of paper.

Cruze suggests starting by estimating how much money you plan to spend next month on everything -- food, clothes, gas, rent or mortgage, etc. Then update your estimates with hard numbers as you actually spend money each month.

You should have a pretty accurate budget after about 90 days, Cruze says.

Of course, if you find you're spending more money each month than you make, you'll have to start cutting back until you have a surplus for savings.

Eliminate debts
The average U.S. college kid graduates from school with about $25,000 in student loan debt, according to the latest figures from the Institute for College Access & Success.

Factor in credit-card debt and a weak job market and lots of Millennials find themselves so far in the red they can't even think about retirement savings.

"College loans are a big topic of discussion for my generation," Cruze says. "You hear about people in their 30s and 40s who are still paying off their student loans."

She recommends paying off all debts -- including college loans -- before even starting to save for retirement.

Ideally, you'll pay off all of you debts within a year or two of graduating college, Cruze says. "It takes a lot of sacrifices -- you can't buy clothes and you can't go out to eat -- but you can do it," she says.

Save early and often
Regli admits few Millennials can afford to make the maximum allowable annual contributions to retirement accounts -- $17,000 for 401(k)s and $5,000 for IRAs if you're under 50.

Still, she encourages young adults to save as much as possible, as the compounding of investment returns means those who start early generally wind up with the biggest nest eggs.

"Don't be discouraged if you can only save $10 or 1% of your compensation per paycheck ," Regli says. "You'll be glad you made the effort when you're nearing retirement."

Grab your employer's 401(k) match
One thing you should definitely try to do is put enough money into your 401(k) each year to get the maximum available employer match, Regli says. "It's like getting free money," she says.

Many businesses match every dollar an employee contributes to a 401(k) with around 50 cents of company money, up to a certain maximum.

If you can't set aside enough money to collect the maximum match, Regli suggests getting as much as you can.

"Even if you just get some of the match, it's worth it in the long run." she says.

Put all raises toward your 401(k)
One good way to increase your retirement savings is to put all raises that you get toward your 401(k) until you reach the $17,000 annual contribution limit for those under 50.

"The idea is that if you're making do with what you earn now, you can put your entire raise toward your 401(k) and save for retirement," Regli says.

Don't borrow against your 401(k)
Many 401(k) plans allow you to borrow money from your account for up to five years, but Regli says you should avoid the temptation.

"You're contributing this money for your retirement, so you should try to leave it in your 401(k) for that purpose," she says.

On paper, 401(k) loans sound great.

You can usually borrow up to $50,000 or 50% of your 401(k) balance (whichever is lower) for any reason, and you generally pay the money back over five years through payroll deductions.

There's no credit check, and the interest you pay actually goes back into your 401(k) account -- meaning loans are essentially interest free.

But the funds you borrow will be out stocks or other investments until you pay the money back, so you'll miss out on potential gains.

"When you take money out of your 401(k), you're not giving it the time in the market that it needs to grow," Regli says.

Don't treat your 401(k) like a glorified savings account
Companies will often send you a big check with your 401(k) balance if you leave your job -- money many Millennials will run out and spend rather than "roll over" into another retirement account.

That's a bad idea, Regli says.

"That's money that you're saving for retirement," she says. "If you go out and buy a boat with it, what will you have left for retirement?"

Instead of spending your 401(k) proceeds, you should deposit them in a rollover IRA or similar account within 60 days, Regli says. That way, you'll not only keep the money for retirement, but avoid income taxes and early withdrawal penalties on the funds.

Better yet, have your 401(k) plan deposit the money directly into another retirement account for you. That will ensure you don't miss the 60-day deadline for avoiding taxes and penalties.

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