MONEY Investing

Pigs Fly: Millennials Finally Embrace Stocks

Jeans with cash in pocket
Laurence Dutton—Getty Images

Young adults have been the most conservative investors since the Great Recession. But now they are cozying up to stocks at three times the pace of boomers.

What a difference a bull market makes. The Dow Jones industrial average is up 160% from its financial crisis low, and the latest research shows that young people are beginning to think that stocks might not be so ill advised after all.

Nearly half of older millennials (ages 25-36) say they are more interested in owning stocks than they were five years ago, according to a Global Investor Pulse survey from asset manager BlackRock. This may signal an important turnaround. Earlier research has shown that millennials, while good savers, have tended to view stocks as too risky.

In July, Bankrate.com found that workers under 30 are more likely than any other age group to choose cash as their favorite long-term investment, and that 39% say cash is the best place to keep money they won’t need for at least 10 years. In January, the UBS Investor Watch report concluded that millennials are “the most fiscally conservative generation since the Great Depression,” with the typical investment portfolio holding 52% in cash—double the cash held by the average investor.

This conservative nature has raised alarms among financial planners and policymakers. Cash holdings, especially in such a low-rate environment, have no hope of growing into a suitable retirement nest egg. In fact, cash accounts have been yielding less, often far less, than 1% the past five years and have produced a negative rate of return after factoring in inflation.

Conservative millennials, with 40 years or more to weather the stock market’s ups and downs, have been losing money by playing it safe while the stock market has turned $10,000 into $26,000 in less than six years. Yes, the market plunged before that. But in the last century a diversified basket of stocks including dividends has never lost money over a 20-year period—and often the gains have been more than 10% or 12% a year.

Millennials are giving stocks a look for a number of reasons:

  • The market rebound. The market plunge was scary. Millennials may have seen their parents lose a third of their net worth or more. But with few assets at the time, the market drop didn’t really hurt their own portfolio, and stocks’ sharp and relentless rise the past six years is their new context.
  • Saver’s mentality. Millennials struggle with student loans and other debts, but they are dedicated savers. They have seen first-hand how little their savings grow in low-yielding investments and they better understand that they need higher returns to offset the long-term erosion of pension benefits.
  • Optimism still reigns. Millennials are easily our most optimistic generation. At some level, a rising stock market simply suits their worldview.

This last point shows up in many polls, including the BlackRock survey. Only 24% of Americans believe the economy is improving—a share that rises to 32% looking just at millennials, BlackRock found. Likewise, millennials are more confident in the job market: 32% say it is improving, vs. 27% of Americans overall. Millennials are also more likely to say saving enough to retire is possible: only 37% say that saving while paying bills is “very hard,” vs. 43% of the overall population.

Looking at the stock market, 45% of millennials say they are more interested than they were five years ago. That compares with just 16% of boomers. Millennials also seem more engaged: They spend about seven hours a month reviewing their investments, vs. about four hours for boomers.

This is all great news. Millennials will need the superior long-term return of stocks to reach retirement security. Yet many of them are just coming around to this idea now, having missed most of the bull market. In the near term, they risk being late to the party and buying just ahead of another market downdraft. If that happens, they need to keep in mind that the market will rebound again, as it did out of the mouth of the Great Recession. They have many decades to wait out any slumps. They just need to commit and stay with a regular investment regimen.

Read next:

Schwab’s Pitch to Millennials: Talk to (Robot) Chuck
Millennials Are Flocking to 401(k)s in Record Numbers
Millennials Should Love It When Stocks Dive

MONEY Second Career

Finding the Perfect Balance Between Work and Fun in Retirement

Ranger with snowmobile, Yellowstone National Park, Wyoming.
Ranger with snowmobile, Yellowstone National Park, Wyoming. Blickwinkel—Alamy

These retirees found a way to spend all their time on pursuits they love.

“Damn the submarine. We’re the men of the Merchant Marine!” That singsong phrase woke me up every morning for seven months on my first ship, the SS San Francisco. I went to sea after graduating from college. For four years, I worked on ships, mostly tankers, steaming through the Suez and Panama canals, past the Rock of Gibraltar at midnight under a full moon, stopping in ports like Athens, Dubai, and Yokosuka. A number of my peers had similar adventures after college, including leading wilderness trips, tending bar, teaching English overseas and traveling around Europe picking up odd jobs. Ah, those were adventurous days before the desire for a career and family responsibilities took over.

Peter Millon is living the adventure, too—in his Unretirement, at age 69. Last year, he spent about 70 days skiing the slopes in Park City, Utah, when he wasn’t working four days a week for ‎Rennstall World Class Ski Preparation, repairing skis and waxing skis for racers. Essentially, he split his retirement time 50/50: working half-time and pursuing his passion the other half. In the off-season, Millon plays golf with his oldest son who lives in Salt Lake, fishes and takes target practice. Not bad.

Leading a Wealthy Life

A wealthy industrialist? A Wall Street master of the universe? A high-tech titan of business? Hardly. Millon isn’t wealthy, but he leads a wealthy life. “Do something you love, something for you,” he says. “Don’t do it for anyone else.”

Millon began his career working at a small ski maker in St. Peter, Minn. He then spent decades as a technical director at Salomon North America and its various competitors. During the real estate bubble years, Millon was selling high end appliances for the home, living in a townhouse in Massachusetts. Business tanked when the bubble burst, and he took advantage of an early retirement package. Three years ago, he sold the townhouse and moved to Utah where he was known in the ski community, picking up a condo on the cheap. These days, Millon lives comfortably off Social Security, some investments and the income from his part-time job.

The ‘World’s Oldest Intern’

John Kerr is living the 50/50 life in his Unretirement, too, working as park ranger in Yellowstone between May and September. He didn’t plan on becoming a ranger, though. Kerr had a four-decade career at WGBH as a marketing and fund raising executive, retiring at 65. “It took the shock of the change to rattle my bones a bit,” says John Kerr. “I had way too much energy and experience to sit around.”

His exploration took him out to Jackson Hole, Wyo., where Kerr has a small condo. While walking around Bozeman, Mont., he saw a sign for the Yellowstone National Foundation, which supports Yellowstone National Park. He walked in unannounced and from an off-hand remark during a conversation with the organization’s head, he learned it had an internship opening. Kerr applied and for the next year he was “world’s oldest intern,” talking to visitors about wolves.

Kerr became a Yellowstone ranger five months a year for the next nine years, living close to Jackson in the winters and using his time off to visit family. Now 76, he recently moved back to New England to be near family. Still, he expects next season he’ll return to Yellowstone. “It has been a great adventure,” he says.

Advice for Your Unretirement

When I asked Kerr and Millon what advice they’d give to others in their 60s and 70s eager for adventure, Kerr emphasized the importance of an open mind. “You have to have your eyes open and your ears flapping,” he chuckled. Millon suggested drawing on the relationships you’ve made over the years and the skills you’ve developed without trying to compete for the kind of job you had earlier in your career.

What I took away from both men is that the financial penalty of working fewer hours and doing more of what you love can be much less than you might think.

“The key is that when your interests align with your work, there is nothing from which to retire,” says Ross Levin, a certified financial planner and head of Accredited Investors in Edina, Minn. “We save money to ultimately create a lifestyle. If that lifestyle doesn’t need much money, then we need to save less.”

Think of it this way, says Levin: You earn $10,000 a year in your fulfilling work on a ski slope or in national park or down in the Florida Keys. That’s the equivalent of having $250,000 in investment assets, assuming the 4% withdrawal rule (a standard guideline for safely taking money out of retirement savings). A $20,000 income is the equivalent of $500,000 in assets, and so on.

Much of the conversation about prospects in the traditional retirement years often forgets how creative people are at coming up with solutions. Many Unretirees I’ve interviewed over the years have found they made significant cuts in expenses without slashing their standard of living.

So, if your career didn’t leave you with the kind of portfolio that pushes you into the ranks of the wealthy, that doesn’t mean you can’t construct a comparable lifestyle. The question is: What’s your adventure?

Chris Farrell is senior economics contributor for American Public Media’s Marketplace and author of the new book Unretirement: How Baby Boomers Are Changing the Way We Think About Work, Community, and The Good Life. He writes about Unretirement twice a month, focusing on the personal finance and entrepreneurial start-up implications and the lessons people learn as they search for meaning and income. Tell him about your experiences so he can address your questions in future columns. Send your queries to him at cfarrell@mpr.org. His twitter address is @cfarrellecon.

More from Next Avenue:

Doing Great Work After 60

Shifting From Full-Time to Part-Time Work

12 Takeaways From a Mini-Retirement

MONEY Second Career

The Secrets to Launching a Successful Encore Career

These prize-winning social entrepreneurs built non-profits that make a difference.

“You must do the thing you cannot do,” Eleanor Roosevelt once wrote. It’s the only way to overcome the fears we all face in doing something new, she thought, and take a leap into the unknown.

Kate Williams quoted Roosevelt earlier this week here when she accepted a $25,000 Purpose Prize, one of the awards given annually by Encore.org, a San Francisco-based nonprofit that works to engage baby boomers in “encore careers” with a social impact. The awards, now in their ninth year, recognize trailblazers over age 60 who have tackled social problems creatively and effectively. Cash prizes range from $25,000 to $100,000.

Williams, 72, lost her eyesight to a rare degenerative disease after a long career as a corporate human resources professional. She overcame her own fears, first by moving away from friends and family in Southern California to start over in San Francisco and later by starting an employment training program for the blind. Today, she runs a similar, larger program for the national non-profit organization Lighthouse for the Blind.

Encore.org’s mission is to promote a game-changing idea: Greater longevity and the graying of America present opportunities, not problems. This year’s Purpose Prize winners underscore that point. They’re rock stars in the world of social entrepreneurship, having started organizations that work on issues like sex trafficking, disaster relief, autism and education in impoverished neighborhoods.

The idea of second careers with social purpose has broad appeal. Millions of older Americans want to stay engaged and work longer, sometimes out of economic need but often out of a deep motivation to give back. An Encore.org survey this year found that 55% of Americans view their later years as a time to use their experience and skills to make a difference, though just 28% say they are ready to make it happen.

Many people have trouble figuring out where to start—which brings us back to Roosevelt. Fear of the unknown is a key hurdle in starting down a new path later in life, and I had the chance to ask some of the encore experts gathered for the awards about how they would advise others seeking to begin.

The juices get flowing when people connect their experiences and knowledge with a problem they are passionate about. But first they have to make the leap.

“I had been in the corporate world, not part of the blind community,” Williams says. “I was frightened, but what I thought would be overwhelming turned out to be a beautiful thing. As soon as we started our training classes, I was hooked.”

The Lighthouse for the Blind program has worked with 100 blind job seekers over the past three years, and has placed 40% of them.

David Campbell, winner of a $100,000 prize this year, wanted to help after the Indian Ocean tsunami that devastated parts of Southeast Asia in 2004. A senior executive at several software and Internet technology companies, he figured he could help by creating a Web-based tool to organize volunteer tsunami relief efforts. That led him to start All Hands Volunteers, which has worked on 45 disaster relief projects in six countries and dozens of U.S. locations. The non-profit uses the Internet to route volunteers to places where they can be put to work effectively.

“People just want to know that if they go, they’ll have a place to sleep that won’t be a burden to the local people, and a contact to start with,” he says. “We give you exact instructions on how to get there, and assure that you’ll have a bunk bed, food and someone will have organized work and that you’ll have the right tools to be productive.”

Campbell talks often with people looking to get started on encores. “I always advise people to start by volunteering with some organization with social purpose – it’s an easy, great way to start. But the question many people have is, ‘Which one, and what might I do?’ “

Campbell suggests people consider geography and the focus of the work. “Do you want to work locally, nationally or internationally? Do you care about health, education or some other thing? That starts the conversation and helps people narrow it down.”

Then, he says, visit a non-profit that interests you, and take the time to understand its needs.

“Be willing to help understand the mission, and do whatever it is they need help with. And don’t treat volunteering as a casual activity. You need to commit to a certain number of hours of work a week as though it were a paying job, and take responsibility for it.”

To paraphrase another famous Roosevelt, the only thing you have to fear is fear itself.

Related:

Can I afford to retire?

Should I work in retirement?

Does working affect my Social Security benefits?

 

MONEY retirement age

Australia’s Brilliant — and Brutal — Retirement Crisis Solution

Sydney Opera House and downtown skyline, Sydney, Australia.
Jill Schneider—Getty Images/National Geographic

Australia is asking workers to work longer. Would it work in the United States?

Americans are quite familiar with the challenges threatening the Social Security system, with an aging population starting to retire and putting more strain on the shrinking group of workers paying the Social Security taxes that support their benefits. But America isn’t alone in facing a retirement crisis, and other countries are taking much more dramatic steps to shore up their systems for providing financial assistance to people in their old age. In particular, Australia plans to force its workers to stay in their jobs for years beyond their current retirement age in order to qualify for benefits — and it’s giving employers incentives to make sure older workers can get the jobs they need to hold out that long.

The Australian solution: Work until you’re 70

Australia has seen many of the same things happen to its old-age pension system that the U.S. has seen with Social Security. When Australia first implemented what it calls its age pension more than a century ago, only 4% of the nation’s population lived to the age at which they could claim benefits. Now, though, life expectancies have grown, with the typical Australian living 15 to 20 years beyond the official retirement age of 65. As a result, 9% of the Australian population gets benefits from the age pension, and the potential for some of those recipients to get support from the program for two decades or more has threatened the financial stability of the system. Currently, 2.4 million Australians receive about $35 billion in benefits from the program, making it the Australian government’s largest expenditure.

As a result, Australia has made plans to increase its official retirement age. Over the next 20 years or so, Australians will see the age at which they can officially retire climb to 70 if the plan is approved, putting the land down under at the top of the world’s list of highest retirement ages.

When you just look at the age-pension portion of Australia’s retirement system, that sounds draconian, and plenty of Australians aren’t thrilled about the move. With a significant part of Australia’s economy based on extracting natural resources like oil, natural gas, coal, and various metals, the back-breaking work that many Australians do makes the prospect of staying on the job until 70 seem almost physically impossible. Proponents of the measure counter that argument with the fact that 85% of Australians work in the services industry, and many of those jobs don’t require the physical exertion that makes them impractical for those in their 60s.

Moreover, younger Australians worry about the need for older workers to stay on the job longer. Many fear a “jobless generation” of young adults who can’t get their older counterparts to give way and make room for them to start their careers.

What Australians have that the U.S. doesn’t

Yet before you bemoan the fate of the Australian public, it’s important to keep in mind that the age pension system isn’t the only resource they have going for them. In addition, Australians participate in what’s known as the superannuation system, under which employers are required to make contributions toward superannuation retirement accounts equal to 9.5% of their pay. Like American 401(k)s, employees are allowed to select investment options for this money, with default provisions usually investing in a balanced-

Over time, superannuation assets have built up impressively. As of June 30, assets in superannuation accounts rose to A$1.85 trillion. Australia is also seeking to have those fund balances rise more quickly by requiring more from employers on the superannuation front. Over the next seven years, the employer contribution rate will rise to 12%, accelerating the growth of this important part of Australians’ retirement planning.

Like 401(k)s and IRAs in the U.S., Australians can make withdrawals from their superannuation accounts at earlier ages than they can claim pensions. For those born before mid-1960, access to their retirement savings opens at age 55. That age is slated to rise to 60 over the next decade, but it will still give Australians access to money well before age pensions become available to help them bridge the financial gap.

Should America follow Australia’s lead?

Calls to increase Social Security’s retirement age have met with strong opposition in the U.S., and the Australian plan won’t change that. Yet without the backstop that superannuation provides, raising the retirement age to 70 in the U.S. would be even more painful for aging Americans. Some workers are fortunate enough to have employer matching and profit-sharing contributions that mimic what most Australians get from superannuation, but it’s rare for anyone to get anywhere near the 9.5% to 12% that Australian workers have contributed on their behalf.

Many see Australia’s answer to its retirement crisis as brutal, but given the aging population, it’s consistent with the original purpose of old-age pensions. If the U.S. wants to make similar moves, American workers need the same outside support for their retirement that Australians get — and that will also require more effort on workers’ part to save on their own for retirement.

MONEY Ask the Expert

One of the Most Important Retirement Decisions You Need to Make

140605_AskExpert_illo
Robert A. Di Ieso, Jr.

Q: My wife is 62 and I am 65. She has a small pension of $21,000 and can take it as a lump sum or an annuity of $154 a month. We also have a credit card with $17,000 at 8% and two car loans of $17,000 at 8%. Should we use the money to pay off debt or roll it into an IRA? – Joe Skovira, Cheshire, Conn.

A: Choosing the right way to handle a pension payout is critical to your retirement success. It’s all too tempting to use that money to pay off debts, when your other sources of cash run short. But raiding your pension could be a mistake. “You should pay off the debt but don’t sacrifice the pension to do it,” says Rich Paul, a certified financial planner and president of Richard W. Paul & Associates.

Even though the pension income is small, that $154 monthly check adds up $1,800 a year, or a 9% payout. It would be hard to generate that consistent income on your own in an IRA. “Those are guaranteed dollars that you’ll receive for the rest of your life—you can’t get that kind of return with conservative investments,” says Paul.

There are also taxes to consider. If you take the pension as a lump sum, and don’t roll it over into an IRA, you’ll likely owe capital gains or income taxes. Moreover, the income from that lump sum might push you into a higher tax bracket, further eroding its value.

As for your debts, they’re clearly a drain on your cash flow. So look for ways to free up cash to pay off those bills by cutting your spending. For strategies on getting on top of that debt, see here and here.

It also makes sense to prioritize your credit card debt over the car loans, says Paul. That way, if you ever need extra cash, you’ll have a bigger credit line to tap. You could even use the $154 to step up payments on the credit card.

“It all comes down to cash flow. You’ll feel a lot more comfortable in retirement with more guaranteed income and less debt,” says Paul.

Do you have a personal finance question for our experts? Write to AskTheExpert@moneymail.com.

Related:

Should I save or pay off debt?

What debts should I pay off first?

Should I take my pension as a lump sum or as monthly payments?

MONEY Longevity

Americans Are Living Longer Than Ever. And That May Kill Your Pension

With more workers likely to reach age 90, employers will have to step up their pension funding. Or, more likely, hand you a lump sum instead.

For the first time, both boys and girls born today can expect to see at least 90 years of age, according to revised mortality tables published on Monday by the Society of Actuaries. This represents a staggering extension of life over the past century. In 1900, newborns could not expect to see what is now the relatively youthful age of 50. But a big question looms: how we will pay for all these years?

In the last 100 years, the drumbeat of extended life expectancies has been interrupted during World War I and again during the Great Depression, but only fleetingly in any other period. Medical science and greater attention to health and nutrition have stretched lifetimes by a year or more every decade. In the new tables, newborn boys are expected to reach exactly 90 years of age—up from 87 in the last published tables in 2000. Girls are now expected to reach 92.8—up from 87.3.

This extraordinary expansion has changed every phase of human life. Only a few generations ago childhood came to an abrupt halt at ages 13 or 14, when boys went to work and girls married and started families. As lifetimes expanded, the teen years emerged and kids were kids longer. They went to high school and then to college. Today, the years of dependence have stretched even longer to 28 or 30 in a period recently defined as emerging adulthood.

Middle age and old age have also stretched out. Half a century ago reaching age 65 meant automatic retirement and imminent infirmity. Today, millions of 65-year-olds aren’t just in the workforce—they are reinventing themselves and looking for new pursuits, knowing they have many good years ahead.

According to the revised tables, which measure the longevity of those who hold pensions or buy annuities, a man at 65 can expect to live to 86.6—up from 84.6 in 2000. A woman at 65 can expect to live to 88.8—up from 86.4 in 2000. In another 15 years the typical 65-year-old will be expected to reach 90. And these are not necessarily years of old age; for many, most of these extra years will be lived in relatively good health.

What is good news for humanity, though, sends tremors through the pension world. Every few extra years of life expectancy come with a price tag. Already, many private and public pension funds are woefully underfunded—and the new tables essentially mean they are even further behind. Aon Hewitt, a benefits consultant, estimates that the new figures add about 7 percentage points to the amount a typical corporate pension must set aside.

So a typical pension that has only 85% of the funds it needs based on the old mortality rates now has only 78% of what it needs based on the new rates. This will almost certainly lead to a further erosion of individuals’ financial safety nets as pension managers try to figure out how to fill the holes. Already the majority of large companies have frozen or changed their pension plans in order to reduce their financial risk, while shifting workers to 401(k)s. Look for more employers to abolish their traditional pensions and to offer workers a lump sum settlement rather than remain on the hook for unknown years of providing guaranteed income.

“As individuals receive lump sum offers, they need to understand that their life expectancy is now longer,” says Rick Jones, senior partner at Aon Hewitt. “They need to be able to make the money last.”

Companies probably will have until 2017 before regulators require them to account for the new mortality rates, Jones says. That means, all things being equal, lump sum payments will be higher in a few years. For those on the verge of taking their benefits, it might make sense to wait. Public pensions, which generally are in worse shape than private pensions, will have to account for longer lives as well, though they are not subject to the same regulations and the adjustments will come slower.

The new figures also promise to speed changes in the 401(k) world, where both plan sponsors and plan participants have been slow to embrace annuities, which are insurance products that turn savings into guaranteed lifetime income. Savers have generally avoided certain annuities because they are seen as expensive and leave nothing for heirs. Lacking demand and facing legal hurdles, employers have also shied away.

Yet policymakers and academics have been arguing for a decade that 401(k) plans need to provide a guaranteed income option. The U.S. Treasury has been pushing the use of longevity annuities in 401(k)s, recently issuing guidelines for their use in target-date retirement funds. With a longevity annuity, also known as a deferred income annuity, you can buy lifetime guaranteed payout for a relatively small amount and have it kick in at a future date—say, age 80 or 85. And these days, even that’s not all that old.

Read next: You May Live Longer Than You Think. Here’s How to Afford It

MONEY retirement planning

3 Ways to Feather Your (Empty) Nest

Birds in nest throwing money in the air
Sebastien Thibault

Just because the kids are gone doesn't mean it's time to splurge. Here are some ways to treat yourself well without compromising your comfort in retirement.

The phrase “empty nest” may sound sad and lonely. But—shh!—don’t let the kids know that when they clear out, Mom and Dad have fun. Often too much fun. A study by the Center for Retirement Research at Boston College found that empty-nesters spend 51% more than they did when their children were home. “We have clients who go out to lunch and dinner every day,” notes Cincinnati financial planner John Evans.

Certainly after surviving Little League, teenage attitude, and the colossal cost of college, you ­deserve to splurge. But you also don’t want to compromise your finances as you begin the final sprint to retirement. Here are three ways to keep feathering your nest while still enjoying your freedom.

First, Keep Your Spending in Check

  • Rerun your numbers. While you can likely afford to let loose a bit, make sure your retirement plan is in order before you go wild. “You should save a bare minimum of 10% a year, really more like 15%—and if you’re behind you may need to save 20% to 30%,” says Boca Raton, Fla., financial planner Mari Adam. Use T. Rowe Price’s retirement income calculator to see what you need to put away to get your desired income.
  • Make a payoff plan. Erasing your debts before retirement will require sacrifice now—but will take pressure off your nest egg and allow you to have more fun later. Figure out how to do it with the debt calculator at CreditKarma.com.
  • Plug the kid leak. One in four affluent parents ages 50 to 70 surveyed recently by Ameriprise said that supporting adult children has put them off track for retirement. Lesson: Get your priorities (retirement and debt elimination) straight first, and build gifts into your annual budget proactively vs. giving willy-nilly.

Second, Free Up Even More Cash to Stash

  • Downsize. Convert Junior’s room into a better tomorrow: Moving from a $250,000 house to a $150,000 one could boost your investment income by $3,000 a year while reducing maintenance and taxes by $3,250, the Center for Retirement Research found.
  • Cut your coverage. If your kids are working, you may not need life insurance to protect them. You may be able to take them off health and auto policies too.
  • Moonlight. Besides increasing your income and helping you establish a second act, “self-employment makes a huge difference in what you can do on your taxes,” says Tony Novak, a Philadelphia-area CPA. That’s especially valuable in these peak earning years when you’ve lost the kid write-offs.

Finally, Supercharge Tax-Efficient Savings

  • Catch up on your 401(k) and IRA. Once you hit 50, you can sock away $5,500 more in your 401(k) this year, for a total of $23,000, and an extra $1,000 in your IRA, for a total of $6,500. In 2015, you’ll be able to put an extra $6,000 in your 401(k), for a total of $24,000; IRA caps remain unchanged. If you start moonlighting, as suggested above, you can shelter more money in a SEP-IRA—the lesser of 25% of earnings or $52,000.
  • Shovel cash into that HSA. Got a high-deductible health plan? Families can contribute $6,550 ($7,550 if you’re 55-plus) to a health savings account. Contributions are pretax, money grows tax-free, and you don’t pay taxes on withdrawals for medical expenses. If you can pay your deductible from other savings, let your HSA grow for retirement, Novak says.

Sources: Employee Benefit Research Institute, PulteGroup, MONEY calculations­

MONEY retirement planning

Millennials Feel Guilty About This Common Financial Decision—But They Shouldn’t

Sad millennials leaning on desks
Paul Burns—Getty Images

Young adults aren't saving as much as they think they should for retirement. But paying off debts is just as important.

Millennials are pretty stressed out about their long-term finances, according to Bank of America’s latest Merrill Edge Report. Some 80% of millennials say they think about their future whenever they pay bills. Almost two-thirds contemplate their financial security while making daily purchases. And almost a third report that they often ponder their long-term finances even while showering.

What’s eating millennials? Student loan debt. Even the very affluent millennials surveyed by Bank of America feel held back by student debt—and these are 18-to-34 year-olds with $50,000 to $250,000 in assets, or $20,000 to $50,000 in assets and salaries over $50,000. Three-quarters of these financially successful Millennials say they are still paying off their college loans.

Among investors carrying student debt, 65% say they won’t ramp up their retirement savings until they’ve paid off all their loans. But with that choice comes a lot of guilt: 45% say they regret not investing more in 2014.

Contrary to popular wisdom, millennials are committed to investing for retirement. Bank of America found that the millennials surveyed were actually more focused on investing than their elders. More than half of millennials plan to invest more for retirement in 2015. But 73% of millennials define financial success as not having any debt—and by that measure, even relatively wealthy millennials are feeling uneasy.

Fear not, millennial investors. You’re doing just fine. First off, you’re saving more — and earlier — than your parents’ generation did. A recent Transamerica study found that 70% of millennials started saving for retirement at age 22, while the average Baby Boomer didn’t start until age 35. On average, millennials with 401(k)s are contributing 8% of their salaries, and 27% of millennials say they’ve increased their contribution amount in the past year. Even if you can only put away a small amount at first, you can expect to ramp up your savings rate during your peak earning years.

For now, here are your priorities:

Save enough to build up an emergency fund. You could be the biggest threat to your retirement savings. A recent Fidelity survey found that 44% of 20-somethings who change jobs pull money out of their 401(k)s. (That’s partly because some employers require former workers with low 401(k) balances to move their money.) Fidelity estimates that a 30-year-old who withdraws $16,000 from a 401(k) could lose $471 a month in retirement income—and that’s not even considering the taxes and penalties you’d owe for cashing out early. If you have to make the choice between saving and paying off debt, at least save enough to get through several months of unexpected unemployment without draining your retirement accounts.

Pay off any high-interest debt first. When you pay off debt, think of it this way: You’re making an investment with a guaranteed return. Over the long term, you might expect a 8% return in the stock market. But if you have a loan with an interest rate of 10%, you know for certain that you’ll earn 10% by paying it off early.

Save enough to get your employer’s full 401(k) match. The 401(k) match is another investment with a guaranteed return. Invest at least as much as you need to get the match—typically 6%—with the goal of increasing your savings rate once you’ve paid off the rest of your debt.

Related:

MONEY Taxes

IRS Bumps Up Retirement Fund Contribution Limits

You can now save more in your tax-deferred retirement accounts.

Good news: The IRS has bumped up retirement account contribution limits for 2015 to reflect cost-of-living increases. So if you’ve been wanting to sock away more in your tax-advantaged accounts, next year is your opportunity.

Today’s announcement raises the annual contribution limit for 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan by $500 to $18,000. The catch-up contribution limit for employees over age 50 also increased from $5,500 to $6,000.

IRA contribution limits and IRA catch-up contributions, however, will remain the same, at $5,500 and $1,000, respectively, meaning older workers can still set aside $6,500 a year in these accounts.

This follows Wednesday’s announcement that retirees will see a 1.7% cost-of-living bump in their Social Security benefits next year.

Contribution limits are reviewed and adjusted annually to reflect inflation and cost-of-living increases. Last year, 401(k) and IRA limits remained unchanged from 2013 levels because the Consumer Price Index had not risen enough to warrant an increase.

For more details about the changes and more information about the new gross adjusted income limits for certain tax deductions, see the table below or the IRS website.

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Read more from the Ultimate Retirement Guide:

 

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