Millennials will get shortchanged in retirement

The millennial generation, a group encompassing people from those who are about 18 years old to those already into their early 30s, is educated, digitally savvy and community-minded. However, bad timing means that these young Americans will get shortchanged in retirement and on other financial fronts.

The oldest millennials were born right before the dot-com bust; then 9/11 happened, followed by wars in Iraq and Afghanistan and, lastly, the Great Recession.


Millennial financial advisor
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Amid all that turmoil, companies were downsizing, outsourcing and mechanizing jobs just as 84 million millennials were growing up and getting ready to work. In addition, the cost of higher education soared, creating $1 trillion in outstanding student loan debt, or an average of $30,000 in debt per borrower in 2012.

These circumstances have created a frustrating challenge for this generation: How do you live as an independent adult and, at the same time, save for the future and retirement?

Living independent lives

The answer for many millennials has been to move back home.

In fact, 31 percent of 18- to 34-year-olds live with their parents, according to the White House's Council of Economic Advisors—hardly a desirable living situation for either side.

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Others resort to sharing living spaces with multiple roommates to save on rent. For these young adults, there is another dilemma: Should cash go to retirement plans, to pay down student loan debt or to set up a more dignified and independent living situation?

These choices become more complicated when the job market isn't stable.

Over the past several years, the unemployment rate for millennials has remained higher than for the general workforce, at 8.6 percent vs. 5.9 percent overall. When economic opportunities are relatively scarce, it is hard to establish a career of one's choice and at a desirable salary level, resulting in frequent job changes and even periods of unemployment.

Looking at the positive side of things, 18- to 35-year-olds have time on their side. Retirement is decades ahead, and there is time to save.

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In addition, the gender pay gap that existed for so many other generations is closing for millennial women. The key to working through the challenging years is to create a plan for saving for immediate goals and retirement while paying down debt.

The ultimate goal of the plan will be to determine how after-tax earnings will flow.

Retirement saving

Saving the maximum amount—$17,500—in a 401(k) plan may not be possible for many millennials.

A Fidelity survey found that 44 percent of job changers in their 20s cashed out of some or all of their 401(k) plans, and 38 percent of job switchers in their 30s did the same.

Read MoreHow to best invest 401(k) dollars

It makes no sense to contribute to a 401(k) if the money is withdrawn a few years later, accruing taxes and penalties that eat away at savings. What is imperative, however, is at least making a contribution to earn the company match, if there is one.

If a worker is not eligible for a 401(k) or similar qualified plan, there is still the individual retirement account. Both traditional (deductible) and Roth (nondeductible) IRAs are options, but the Roth IRA makes more sense for millennials, as withdrawals aren't as punitive as with the traditional IRA.

Student loan debt

Student loan debt repayment must take priority. Defaulting on student loan debt will hurt credit scores and may explain why 67 percent of those under 30 have a credit score of 680 or below.

Low credit scores affect everything from buying a car to renting an apartment or obtaining a mortgage. The key to paying down these loans is to make more than the minimum payment each month and make this part of the plan.

"How much to allocate to retirement, paying down debt and saving for goals will depend on individual circumstances and the amount of after-tax income."

Savings accounts for near-term goals

Saving for financial goals outside retirement is very important for young adults.

First, relying on credit cards is an expensive way to fund emergencies, and no one wants to live off family for too long into adulthood. Second, withdrawing early from retirement accounts is costly due to tax and penalties and the chance that money may need to be withdrawn during a market downturn, locking in losses.

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Those who have very little savings should cut back on retirement contributions, except for anything that meets the company match, and boost saving in high-yield savings accounts for short-term goals and investment accounts for longer-term goals. How much to allocate to retirement, paying down debt and saving for goals will depend on individual circumstances and the amount of after-tax income.

The key point is to create a balanced saving and debt pay-down plan because not only will the personal balance sheet be healthier, but the psychological benefits of watching loan balances get to zero, while savings balances add more zeroes, are hard to beat.

—By Cathy Curtis, special to CNBC.com. Curtis is an independent certified financial planner and founder and owner of fee-only investment advisory firm Curtis Financial Planning.