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Millennials challenged by funding modern retirement

Today's 20-somethings face some challenging dilemmas when it comes to saving for retirement.

Not only must they fund their own retirements due to the near evaporation of company pensions, they also are saddled with more student-loan debt, stagnant wages and higher living expenses compared to a generation ago. And at the same time — in another departure from their parents' and grandparents' experience at the same age — they want to ... well, spend more time enjoying life.

"I've seen [young] clients want to take long sabbaticals," said certified financial planner Hui-chin Chen, who is also co-owner of Pavlov Financial Planning. "I had a client who wanted to go sailing around the world and another who wanted to take their children and go live on a farm for a year.

College Students with parents
Ann Hermes | The Christian Science Monitor | Getty Images

"So when they do financial planning, they focus on those goals, too."

Indeed, financial advisors see more young adults — compared to previous generations at their age — making their personal and social life a high priority instead of focusing solely on work, buying a house and raising a family.

"They want to have a balance in their lifestyle," explained Therese Nicklas, a CFP and women's wealth coach at U.S. Wealth Management.

This means that saving for retirement fails to register on many millennials' radar as yet. And even for those who are thinking long term, many of them don't entertain the idea of being fully employed one day and in a state of retirement the next.

For baby boomers and the generation before them, "retirement was putting the hammer down and going home," Nicklas said. "Young people today don't [envision] a traditional retirement."

"What I recommend to everyone is to make sure your portfolio is in alignment with your risk tolerance and you understand what you're invested in. If you don't understand, you will panic when the market drops." -Therese Nicklas, women's wealth coach at U.S. Wealth Management

Nicklas explained that many of her younger clients anticipate a transition from toiling away in a career to doing work that provides a sense of freedom and flexibility — e.g., consulting — while providing income.

But the hard truth is that most people will reach a point where they physically cannot work. And when that happens, they'll need retirement funds to cover all their living expenses. Today health-care costs alone eat up about $245,000 during retirement, according to a 2105 estimate from Fidelity Investments.

Another truth is that the value of your retirement portfolio when you're ready to tap it will be based on the amount you invested, the length of time it was invested and whether it was in aggressive investments. All of that points to benefiting 20-somethings if they can start saving now.

Exactly where you should invest it depends largely on your risk tolerance, which is generally defined as the ability to stomach large swings in the value of your investment portfolio.

"What I recommend to everyone is to make sure your portfolio is in alignment with your risk tolerance and you understand what you're invested in," Nicklas said. "If you don't understand, you will panic when the market drops."

The higher your risk tolerance, the more comfortable you'll be with relatively more aggressive investments, such as stocks. While riskier than cash or bonds, stocks also offer greater earnings potential. And the longer the money has to grow, say advisors, the more aggressive you can afford to be with it.

Many advisors refrain from specifying exactly how retirement savings should be divvied up, because the answer depends on a person's individual circumstances.

But for younger workers who are comfortable with most of their retirement money being in stocks — because they understand that time is on their side — target-date funds have become a good option for those not working with a professional, say many advisors. These funds automatically shift gradually from aggressive to safer investments as retirement approaches.

Other millennials, however, possess a fear and loathing of the stock market and all things finance.

Scot Hanson, a CFP and financial advisor with EFS Advisors, uses an approach that, while earning him some flak from peers, he claims helps create confident investors.

"For brand-new investors, let's just have gains for a while. Once they are seasoned, they can handle more risk." -Scot Hanson, financial advisor with EFS Advisors

Instead of putting most of his young clients' retirement money in stocks or stock-based funds, Hanson shields them from the market's volatility for the first few years of their experience as an investor.

"If they lose a lot in a market decline, I might scar them for life," Hanson said. "So for brand-new investors, let's just have gains for a while.

"Once they are seasoned, they can handle more risk," he added. "So then … I might pick some large-cap mutual funds, growth funds or international funds."

Hanson said it's all too common that new investors' first stabs at the market bleed value too soon and cause them to panic.

"And if they had a friend or family member warn them that stocks are too risky, then they lost money right away, they believe it," Hanson said. "Other people's opinions can ruin them."

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Meanwhile, student-loan debt — now north of $1.2 trillion in the aggregate — can be a big barrier to millennials who want to save for both retirement and short-term goals.

Advisors recommend eliminating student loans as quickly as possible, even if it means most of your potential investing money goes toward paying down debt.

There is good news for millennials, however. Because they are delaying major life decisions such as marriage and raising a family, they have some flexibility in their financial-goal decision-making, whether related to their golden years or to their life until then.

As Chen of Pavlov Financial Planning put it, "they have more time right now to give thought to what they really want their life to look like."

— By Sarah O'Brien, special to CNBC.com