How to balance debt and invest for retirement

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Who could say no to free money? Generation Y. Fewer than one-third of all eligible workers between the ages of 18 and 25 participate in their company’s retirement plan, according to a survey by human resources research firm Hewitt Associates. They’re losing free, steadily increasing funds from employer-matched contributions.

It’s not hard to see why retirement savings has taken a back seat to other obligations. In the past decade, the average level of debt for a graduating college senior has more than doubled. Student loan debt tops $20,000 for 2008 graduates, who also carry an average credit card balance of more than $3,200, according to The Project on Student Debt, a Washington, D.C.-based nonprofit organization.

Nicholas Aretakis, author of “No More Ramen: The 20-Something’s Real World Survival Guide,” says this is testament to why it’s important for younger employees to develop long-term savings habits early. “It’s crazy for any employee, even under financial strife, not to save for the future,” he says. “Many feel that they cannot afford to invest when actually the converse is true — they cannot afford not to invest.”

5 tips to savings without going broke now
Cut corners and credit cards
Those morning lattes, sandwiches on the go and weekend movies out, taken individually, are minor expenses. But they all add up exponentially when you think about the returns that money could be generating in a 401(k) or 403(b) plan.

Skip a daily $4 luxury coffee during the working week and you’ll have an extra $1,000 to throw in a retirement plan by the end of the year. Assuming that your retirement plan generates 8 percent annualized returns, after four decades, that one year of skipping the extravagant coffee will have grown to nearly $22,000. Factor in an employer-matched contribution of $500 and you end up with more than $32,000. If you skip the pricey caffeine permanently and invest $1,500 each year ($125 per month), you end up with more than $400,000. Of course, as you build your career, you’ll be able to contribute higher amounts to your retirement plan over time. But this illustrates the power of building wealth simply by denying yourself a simple cup of coffee every day.

Twenty-somethings are in a good position to cut corners, says author Nicholas Aretakis. Since many students who graduate from college are accustomed to living lean, new grads have not yet become accustomed to a life of luxury. “Rough it until you can afford better,” Aretakis advises. “Whether you live at home, take on a roommate, buy a used car over a new one — do what you have to to live within your means.”

Living within one’s means also means avoiding debt. To skip the plastic trap, Dan DeKeizer, a vice president and actuary in MetLife’s Retirement Strategies Group, recommends having a small stash of emergency money one or two paychecks’ worth of income — on hand.

Even in unexpected situations, Danialle Foy, a 29-year-old administrative assistant in Chicago, says to try to avoid credit cards at all costs. “The month we needed brakes for our car, I took a job at a bar for a week just so we could pay in cash,” she says. “That’s kind of extreme, but that’s how serious we are in not charging.”

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