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Starting Small: Millennial Investors Learn the Power of Compounding

Danielle Maddox

Although millennials may be focused on securing their first jobs, paying off student loans and putting money away for emergencies, financial planners and advisors say young adults should add another financial task to their list: Start investing for retirement.

"Millennials are sharing, if not the entire burden, the vast majority of the burden for their own financial well-being in the future," says Sean Moore, certified financial planner at SMART College Funding in Boca Raton, Florida. "There are just not the support systems that were in place for the last generation."

Young people must find alternatives to traditional pensions, says Elle Kaplan, CEO and founding partner of LexION Capital Management LLC in New York City. "Pensions have all but disappeared, and workers must now save for themselves via IRAs, 401(k)s or savings," Kaplan says.

Pensions are not the only dwindling retirement benefit. The Social Security Administration has continued to lose money since 2010, and at the current rate, the federal trust fund is estimated to run out of its reserve by 2033, according to an August 2013 report released by the Social Security Administration. "The theory is that it's insolvent and won't be there," Moore says. "I can't predict what's going to happen, but I can tell you I don't think it's going to be as big of a slice for [millennials] as it is for [their] parents and grandparents."

[Read: Why You Need to Prepare for Retirement in Your 20s.]

A lack of basic investing knowledge was an initial savings setback for Luke Shane, a 24-year-old senior communications specialist in Hartford, Connecticut, who works at Travelers, a national insurance company. "I think my only hesitation was being naïve or ignorant about the process at the beginning," he says. "Once I understood the benefits of starting early and how that nest egg can grow over time, I got started pretty quickly." He now contributes to a 401(k) and an inidividual retirement account.

About half (51 percent) of millennials believe they will receive no benefits from Social Security, and 39 percent think they will get benefits at reduced levels, according to a Pew Research Center survey of 1,821 18- to 33-year-olds in February 2014. At the same time, obstacles such as student loans and a slack labor market have made it difficult for young adults to invest for retirement.

Caroline Radaj, 24, a marketing coordinator at Wisconsin Alumni Association in Madison, Wisconsin, has both an IRA and a 401(k). Radaj's parents opened the IRA for her when she graduated from college. "At the time, my main focus was just trying to get a job, and I didn't really have money to commit to [investing]," she says.

[Read: Why Aren't Millennials Investing? Fear Isn't the Only Factor.]

To take advantage of compound interest and receive a substantial return on your investment, Kaplan says you should invest as early as you can and for decades. That way, your nest egg can withstand market corrections.

"Even though some [millennials] might feel a little stunned by what happened in 2008, those sorts of market dislocations actually happen about twice a decade. You have to take on risk, and in return for that risk, we're rewarded by making a nice return," Kaplan says.

Millennials have an investing advantage because they have decades until retirement, she adds.

Even if those first contributions are small, they become significantly larger over time through the power of compounding, Moore says. "I saw the charts, and I had to run the calculations myself because it almost doesn't sound believable until you run the numbers."

Shane currently contributes 5 percent of his annual income to his 401(k). For his IRA, he plans to make one contribution annually of just below the maximum an investor can deposit. This year, it's $5,500.

Following her parents' initial contribution, Radaj says she began putting $20 at a time into her IRA because she could not afford to contribute more.

"Start with a small amount of money," Moore advises. "If you start with a small amount today, it's the same as starting with a large amount of money in the future."

[See: 7 Ways to Pay Less for Your Investments.]

According to the Securities and Exchange Commission's compound interest calculator, if you start with $1,000 and contribute $200 monthly, assuming a 7 percent average annual return, your investment will grow to nearly $500,000 in 40 years.

Radaj says she's grateful that her parents chose to help her fund an IRA as a graduation present instead of a trip to Europe or designer watch. Meanwhile, Shane's investments have gained 5 percent since the start of the year.

"The person that is going to care most about your retirement is you," Shane says. "There's no better way to protect that than by being proactive on your own terms."

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