What millennials should know about retirement planning

In the first quarter of 2015, millennials became the largest generation in the U.S labor force, with 53.5 million workers.

As a result of volatile economic conditions and shifting lifestyle priorities, this generation—my generation—has made different decisions as compared to previous generations.

From working for multiple companies to launching their own or getting in on the "sharing economy" boom, the 18-to-34 generation is changing the way business is done.

But should millennials continue on this trajectory when it comes to retirement planning?

The workplace formerly served as the retirement plan epicenter, often offering lifetime pensions and benefits after spending an entire career at one company.

Millennial woman at office computer
Luis Alvarez | Getty Images

As the pension has been replaced by the 401(k) plan, millennials now face a larger burden in saving for their own retirement. And while we don't need to completely reinvent the wheel, the changing business climate and advancement of technology necessitates a few updates to the process.

The good news is that it's now easier and cheaper than ever to manage your financial life, thanks to digital tools from "FinTech" start-ups and recent innovations from major firms. For example, the method by which investment portfolios are put together—asset allocation—has become a relative commodity.

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Many platforms and financial firms are now offering to select your investment portfolio essentially for free or at a significantly reduced cost compared to the standard 1 percent annual fee or upfront commissions. While it is too much of an oversimplification to implement a strategy based on just age and risk tolerance, the trend toward lower cost is a good thing for all investors.

What remains absolutely essential is developing a financial plan. A skilled advisor will help you build and attain a successful retirement investment plan based on your specific objectives.

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You can also do much of the planning yourself if you have the time and energy to become educated on certain areas and digital tools. Here is a brief guide to getting started and what millennials should do right now for their retirement planning:

Know where your money is. Organization is the first step in a solid financial plan. An account aggregator that displays all of your financial accounts in a single location is paramount. Your net worth is like your own personal stock price—is it going up or down?

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The most common mistake I have seen from pre-retirees is having accounts at multiple locations, resulting oftentimes with overlapping strategies. Feeling scattered and unorganized with your finances can lead to anxiety and frustration. Get organized and know where your money is.

Know where your money is going. While prior generations kept Excel spreadsheets or actually wrote down expenses in notebooks, you can utilize online budgeting tools. Many firms have a mobile app to help you stay up to date while on the go.

Set up and commit to a budget based on expenses for housing, entertainment, travel, groceries, etc. By visualizing the categories into which your money is going, you may be shocked to find out how much is allocated to certain areas. Making slight adjustments based on that information can have a staggering effect over time. Know where your money is going, and let technology catch mistakes early on.

Automate your financial life. Your parents had to mail in checks to pay bills and to place money into investment accounts. You get to automate using technology.

I recommend receiving automatic reports from your aggregator or budgeting software detailing a weekly summary of income, expenses and investments. You can also receive notifications when you exceed your budget in certain areas, for bank fees, deposit and withdrawal confirmations and much more.

You also need to automate your retirement contributions. The best retirement savings vehicle for the majority of millennials is a Roth IRA. Roths were established by the Taxpayer Relief Act of 1997 and allow you to invest your money without paying taxes on the gains—ever.

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To max out your Roth IRA at the current $5,500 annual limit, automatically deposit $458.33 into that account each month. If that's too much right now, split it into two separate payments each month or start with whatever you can. Just start, and automate.

Protect yourself and your family. Insurance is not just for your parents. The sad truth is that, despite our youth, many millennials develop health problems, have accidental property damage or pass away every single day.

Health insurance, life insurance, renter's insurance and more should be discussed to determine exactly what you need. Lastly, make sure to draft your personal will. Don't put your family in a difficult situation should something happen to you unexpectedly.

Set your financial goals using percentages, not dollars. I recommend setting goals based on a percentage of income. For example, living on only 80 percent of total income by age 40 could be your goal.

"Don't get caught being retirement-rich and savings-poor at age 53, when you want to purchase that vacation property."

Relying on dollar-based targets is not the best goal barometer, because stock market fluctuations are out of your control and can change significantly from year to year. Directing savings based on percentages also allows you to plan consistently even if your income fluctuates.

Also, set your goals for accessible savings, such as bank accounts or non-retirement investment accounts. Don't get caught being retirement-rich and savings-poor at age 53, when you want to purchase that vacation property.

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Review and monitor your plan. Think of yourself as a corporation: "Your Name Inc." Are you profitable? Would you buy your own stock? Reviewing your profit and loss every month is essential.

If you pay attention now and optimize your use of digital tools, your new plan will you save time and money and provide the 2.0 version of you with less financial stress and a retirement filled with freedom and adventure.

— By Evan Kirkpatrick, founder and CEO of Wendell Charles Financial