Gen Y Retirement Planning Guide: Fast and Foolproof

Maybe it's a function of growing up around Boomer parents worried about their retirement prospects , or maybe it's coming of financial age during a downright ugly time, but whatever the motivation, a sizable slice of Gen Y wants its retirement planning advice, and wants it now. Nearly four in 10 Gen Yers say they wish their employer offered up retirement planning advice.

Source: MetLife Employee Benefits Trend Survey

You'd expect 40-something Gen Xers to be focused on retirement, and I read the low counts for Boomers to be a function of their already having done the planning or hired an advisor to do the planning for them. But the fact that 37 percent of Gen Y says they'd appreciate some retirement planning guidance was a bit of a surprise. Too bad then that in the same MetLife survey, only about one-third of employers say they offer any retirement planning education.

That's a shame, because if Gen Y made a few smart tactical moves in their 20s or early 30s they would buy themselves a whole lot less stress in their 50s. Moreover Gen Y retirement planning is actually quite easy. Yes, easy. There is absolutely no need to spend gobs of time overthinking the matter. Just nail a few straightforward steps in your 20s and early 30s and other than a 10-minute annual check up, you're set for the next 10-15 years.

Here's my down-and-dirty Gen Y retirement guide.

• Increase Your 401(k) Contribution Rate 1 -2 percent a year. Auto enrollment means you're already likely contributing to a 401(k). Now we just need to make sure you're stashing away enough. The goal is to be socking away 10 percent to 15 percent of your gross salary for retirement. If you just left it to your company to set your default rate, there's a good chance you're contributing just 3 percent of your salary. Even if your boss kicks in half that-another 1.5 percent-in a match you're still not halfway to the double-digit goal.No one is saying you've got to close that gap today. Your strategy should be to gradually increase your contribution rate at least one percentage point a year until you get to that 10 percent to 15 percent level. One caveat: If your current contribution rate isn't high enough to grab the maximum company match I'd push to get that raised pronto. Two words for you: Free money. You really want to turn that down?

• Pick the Target Date Fund: If your 401(k) offers one, and you have no interest in getting fancy by building your own portfolio, choose the target fund and feel good about the choice. On the off chance you're aware of the controversy surrounding target funds these days, the bottom line is that what's being debated is irrelevant to anyone in their 20s, 30s and even 40s. The hot topic is how conservative/aggressive the funds are for folks in their 50s and 60s. You don't have to get wrapped up in that debate. Pick the target fund and you're good to go.

• Avoid Leakage. That's the rather unfortunate term the benefits consulting world has come up for money that you withdraw from 401(k)s prior to retirement. For Gen Yers the temptation to commit leakage occurs most often when you're job hopping; rather than just leave the 401(k) where it is (an option if you have at least $5,000 invested) or roll it over into an IRA, you can also opt to cash it in. I won't pretend it's not tempting. You're looking at what is probably a relatively small sum; maybe less than five figures and you sure could use the cash. Pay off some of those student loans, the credit card, the home down payment...a va-ca-tion. I get it. But try and resist the urge to splurge here. Not only is your take going to be reduced by income tax and a 10 percent early withdrawal penalty, but there's that annoying issue of opportunity cost. Take the current balance you're considering cashing in and multiply it by 10. Then decide if it's worth spending that money today. That's about what you are likely forgoing in terms of future value. (I assumed a 6% annualized rate of return for a 28-year-old who leaves the money growing to age 70.)

• No 401(k)? No Match? Set Up Your Own Roth IRA. You can contribute $5,000 this year. If you're single and have modified adjusted gross income below $105,000 ($167,000 for married couples filing a joint federal tax return) you can contribute the max to a Roth IRA directly. Above those income thresholds, open a traditional IRA and then convert to a Roth IRA. Why the Roth love? Well, beyond the allure of tax-free income in retirement, a Roth IRA is tailor made for Gen Y. In the event you find yourself in a serious financial fix you can raid your Roth contributions at any time, for any reason and not get slapped with a tax bill. It's just your Roth earnings that can be hit with tax and penalties for early withdrawals. The contributions are all yours, 24/7/365. To state the obvious-and appease my higher ups-I am obligated to remind you it is never ideal to raid your retirement savings. But it sure is nice to know you've got a nice back-up emergency fund if you ever need it. As for how to invest your Roth IRA: Fidelity, T. Rowe Price and Vanguard all offer low-cost target retirement funds for a quick and easy way to get invested.

That's it. Sure you could spend a whole lot more time thinking, worrying, and tinkering. And if that's what you're up for, then go at it. But just know that if you nail these four steps you've done an incredibly good job of retirement planning. Sometimes setting the bar a little lower so you actually have the energy and wherewithal to get over it is more beneficial than staring at a higher bar and doing nothing.

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