Handle debt wisely to take the first baby steps toward retirement
By Lucy Lazarony • Bankrate.com

With the flick of the graduation cap into the air and the promise of a new job waiting, the last thing most college graduates want to mull over is paying for retirement.

They just can't see it. Most can't imagine being 30, let alone 65. And yet many financial choices that twentysomethings make now will help determine whether they'll be working away in their twilight years or kicking up their heels and swapping stories of how things were way back in the 20th century.

Slay the debt dragon
Step one on the financial march is to get a handle on debt. A top priority is to get rid of as much credit card debt as possible. The average credit card debt for today's college graduates is $2,748 for undergraduates and $4,778 for graduate students, according to Nellie Mae, a student loan provider.

"If you want to be serious about being healthy financially in later years, that has to be taken out," says Meg Green, a certified financial planner based in Miami.

Double or triple minimum credit card payments whenever possible. Plot out a realistic spending plan. Lots of recent college grads, especially young doctors and young lawyers, are so sick and tired of living as "poor students" that they spend like mad in their early- and mid-20s. Much of that spending goes on credit cards.

This strategy, while filled with plenty of "I've made it" euphoria, can mean trouble later.

It's just not wise to spend with abandon and pile up high credit card debt in your 20s, especially for people who are facing a good 10 years or so of student loan payments. It only makes that financial hole you're trying to climb out of that much deeper.

"You'll never survive if you're starting out in life with a lot of debt and you don't dig yourself out right away," warns Marilyn Steinmetz, a certified financial planner in West Hartford, Conn.

Of course, not all debt is negative. Some debt is necessary to meet goals. A college education and a mortgage, for example, are worth going into the red for.

"I don't think there's anyone I know who gets through life all cash," Green says.

Beware the too-big mortgage
Twentysomethings lucky enough to swing a mortgage should not go overboard with their "dream" home. Make sure those mortgage payments are manageable each month. Who wants to eat peanut butter and jelly sandwiches on a card table each night -- even if you do own the joint? Overwhelming home expenses can eat into all aspects of your financial life, including long-term goals such as retirement.

"It's a matter of balancing," says David Morganstern, a certified financial planner at Capital Management Consulting in Portland, Ore. "You don't want to put everything in so that you're house poor. People need to budget themselves so that they have enough cash flow after they've bought the house and fixed it up to save for retirement."

Begin saving
OK, so you've got a handle on your debt situation. And if you do buy a house anytime soon, you'll be sure not to let it suck you dry financially. So far, so good. Now don't forget about saving.

As Green points out, "Debt should not stop you from socking away even the littlest bit away for retirement."

An easy way to do this is to join your company's 401(k) program.

Most employers allow their employees to sign up as soon as an initial probationary period ends. An employee can request that as much as 15 percent be deducted from each paycheck toward the retirement plan. Many companies will match whatever the employee contributes, dollar for dollar, up to a certain limit. If 15 percent is too high, start with 5 percent and gradually work your way up to the maximum, advise some financial planners.

Scrimping a bit now will pay off in the long run. Let's say you're a 25-year-old with a job that pays $25,000 a year and a company 401(k) that matches 50 percent of employee contributions. If you save 6 percent of your salary -- keeping that percentage level as your salary rises -- and earn 8 percent on that money, you will end up with $1.1 million by age 65.

But, "Only you can decide what works with your budget, but the key is to pay something toward retirement, no matter how small the percentage," says Ron Meier, a professor at the College for Financial Planning in Greenwood, Colo.

Another realistic way for this age group to start saving now is to decide on a percentage of each paycheck to be earmarked for retirement. Arrange to have a certain percentage, say, 5 percent deducted from your paycheck and automatically deposited into a savings account even if it's only $25 a month. The current national average for a MMA is only 1.07 percent, but after 40 years that adds up to over $15,000. Couple this with 401(k) contributions that will gradually increase the longer you work, and contributions made by a spouse, and $15,000 proves to be a hefty hunk of change.

Hand-in-hand strategies
Remember that savings and solid debt management strategies go hand in hand. One professor suggests adopting a more flexible strategy for saving, rather than the rigid 20 percent of take-home pay some planners advise. The "70-20-10" formula breaks savings goals into bite-sized chunks that are easy to swallow, says Tahira K. Hira, a professor of family and consumer science at Iowa State University in Ames.

"Use 70 percent of your take-home pay for regular purchases, such as groceries, rent or clothing; set aside 20 percent for purchases that cost large sums of money," Hira says. "Save the remaining 10 percent for retirement -- and don't touch it."

It's all about finding that balance. Chip away at debt, sock some money away for savings and still allow yourself some money for play.

"You've been in college for four years, probably getting by on the bare necessities, and now you feel it's time to reward yourself," Hira says, "and that's OK, but try to put retirement in perspective: 'Will I be able to live the way I want to live when I'm 65?' "

Insurance to get -- and not get
Think all this retirement talk boils down to budgeting and saving? Think again. There's also a thing called life insurance to contend with.

If you have a spouse, domestic partner or children, you ought to sign up for life insurance.

An insurance agent, says Randall Guttery, assistant professor of finance at the University of North Texas, has a legal obligation to give you straight advice on whether to buy term or cash-value life insurance (although your decision might affect the agent's commission), so don't mistrust the agent.

But be a discriminating customer: Seek advice from more than one agent. Research life insurance over the Internet and trust your instincts when choosing an agent, advises Harold Skipper Jr., professor of risk management and insurance at Georgia State University.

A dangerous assumption
There's another kind of insurance that you might consider buying to make retirement as smooth as possible: disability income insurance that replaces your salary or wages if you are disabled before retirement and can't work. Without such insurance, and without a job, you'll have trouble saving anything for retirement.

Don't make the mistake, Skipper says, of assuming that disability benefits from Social Security and your employer would cover your living expenses should you become totally disabled. The benefits might replace your income or they might not.

The Social Security Administration's Web site explains its disability benefits, and you can call toll-free 1-800-772-1213 to get more information.

But if you're young, unmarried and childless, here's where all single GenXers out there get a break: You probably don't need any life insurance.

"When it comes to buying life insurance," says Skipper, "the underlying question at every age is, 'Will my death create significant financial hardships for people I care about?' If the answer to that question is no, either because it wouldn't create a hardship or you don't care about them, you probably don't need to buy life insurance."

Michael D. Larson, Holden Lewis and Michelle Samaad contributed to this story

-- Updated April 30, 2002