Retirement strategy for Gen X

-Linda Stern is a freelance writer. Any opinions in the column are solely those of Ms. Stern. You can e-mail her at lindastern@aol.com-

By Linda Stern

WASHINGTON (Reuters) - Putting hard-earned money into a 401(k) account may seem ridiculous to a young person who's barely scraping in enough cash to pay for groceries and the cell phone bill. Maybe that's why a new generation of workers are skimping on their retirement plans.

Fewer than half of Generation Y workers, ages 21 to 32, are making contributions or even aiming to do so, according to a new study from Fidelity Investments. They are, instead, worried about paying off student loans and simply making ends meet. As a result, they contribute less than they should to their retirement plans and are making poor decisions about how to invest the money.

Sometimes ignoring the 401(k) makes sense: Companies that offer weak plans or don't match employee contributions shouldn't expect to see big participation rates from their workers. But even 22 year olds should have some retirement savings strategy. Here's how to plan for the long, long term while you trying to live for today.

-- Play for the match. It's hard to do anything with your money that's better than investing in a 401(k) plan when your employer matches part of your contribution. The most typical match is 50 percent of your contribution up to 6 percent of your salary, meaning that the employer will kick in as much as 3 percent of your salary. If you make $35,000 a year and contribute $2,100 (at $40 a week), your company will add an additional $1,050. That's a 50 percent rate of return on your investment, before you even invest. A true no-brainer. Force yourself to do that by signing up for an automatic paycheck deduction. You won't miss what you never see.

-- Pay off the credit cards before you go further. Debt, especially at the 14 percent interest rate currently charged by many credit cards, is a killer. Use any cash you can muster to get your credit card balances to zero before worrying about additional retirement savings. To get a feel for how long it will take you to pay down your debts, check out the calculator at www.youngmoney.com. Don't worry about paying anything more than the minimums on your student loans. They usually are at a low enough rate that you could afford to stretch them out while you pay off everything else and establish a savings program.

-- Inspect your plan. If your company doesn't match, or if you're contributing up to the match and trying to figure out whether to contribute even more, figure out how your plan compares to others. If your employer doesn't offer good investment choices or allows the plan to charge high fees directly to you, don't rush to add extra cash. You may find an alternative investment that's better. To compare your plan to national averages, check the website 401khelpcenter.com/benchmarking.html.

-- Build your career, but don't use every job change as an excuse to raid your retirement fund, as do 40 percent of young workers. Roll it directly into your next employer's 401(k) plan, or -- if the new plan is nonexistent or no good -- into an IRA. Pulling money out of your retirement plan costs a lot now. You'll pay income taxes, plus a 10 percent penalty on the amount you pull out. It will cost you later, too, when you realize that you never have a chance to make up that deposit.

-- Consider your own IRA. Even if you have a 401(k) at work, there's a good chance that you also qualify for a tax-deductible IRA: If you're single and make under $52,000 a year or married filing jointly and make less than $83,000 a year, you can contribute to a 401(k) and an IRA and deduct both contributions. Even better for low earners is a Roth IRA: Though your contributions are not tax-deductible, your retirement withdrawals won't be taxed. And 40-plus years of tax-free compounding is awesome to behold. Leave $4,000 in a Roth IRA earning 8 percent, ignore it for 40 years, and you can cash in $98,000. If you have second thoughts about your contributions and need to get at your money, that's easier to do with a Roth IRA than a traditional IRA.

-- Invest aggressively and smartly. Don't let your company fill your 401(k) with company stock; once it approaches 10 percent of your holdings, sell it and diversify. Do keep most of your retirement money in mutual funds that invest in stocks not only domestically but around the world. Over the course of your working life you'll need that kind of growing power to keep pace with the curves your career and the economy will throw at you over the next several decades.

(Editing by Gunna Dickson)