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Retirement planning: Handle debt wisely
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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.

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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.

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, associate 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.

But if you're young, unmarried and childless, here's where you 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.'s corrections policy -- Updated: May 6, 2004
More stories by Lucy Lazarony
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Part 2: 25 years to go
Part 3: 15 years to go
Part 4: Approaching retirement?
Winners and losers: Certificates of deposit
Winner or loser: Mortgage shopper
Winner or loser: Home equity loans

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