When it comes to investing for retirement, millennials — usually defined as people born between 1981 and 1996 — face some unique challenges. Most millennials entered adulthood after 9/11, the 2008 financial crisis and the Great Recession. Many are burdened by student loans and other consumer debt. And all are affected by rapidly rising health care expenses and other costs of living. So, it is no surprise that many young people are gun-shy when it comes to investing.

At the same time, a higher life expectancy means millennials have to make their retirement savings last 20 to 30 years or more. Given the daunting prospect of potentially outliving the nest egg, millennials need to start saving for retirement while still young.

Power of Compounding

The good news is that time and the compounding effect of reinvesting earnings are a powerful combination. The earlier you start saving, the longer your time horizon, which means you can set aside less money but end up with more. Compounding makes a sum grow at a faster rate than simple interest, because in addition to earning returns on the money you invest, you also earn returns on those returns over time. It causes your wealth to snowball over time and means that you do not have to save as much to reach your money goals.

Suppose that Jessica begins investing $7,000 per year at age 25 and stops at age 45. Assuming she earns a 7% annual return, she will have accumulated more than $1.1 million by the time she reaches age 65. In contrast, Jessica's friend, Ben, does not start saving until age 45, when he begins to invest $14,000 per year and also earns a 7% annual return. When Ben reaches age 65, his savings will have grown to around $574,000. By starting early, Jessica invests half as much as Ben, but ends up with nearly twice as much.

Control expenses

Investment and brokerage account fees can have an enormous impact on your long-term returns, so it is important to understand these fees and, when possible, take steps to reduce them. Examples include brokerage fees, commissions, transaction fees, advisory fees and sales loads. It is particularly easy to overlook mutual fund expense ratios because these fees are built into a fund's return and may be difficult to ascertain.

It pays to do your homework and compare fees among various investment options. Even a small reduction in fees can substantially increase your returns over time. For example, suppose you plan to invest $10,000 per year for 30 years in a mutual fund that earns a 7% annual return. You are considering two comparable funds, but one charges a 0.75% expense ratio and the other charges 0.25%. A difference of 0.5% does not sound like a lot, but choosing the more expensive fund will cost you more than $75,000.

Don't be afraid of risk

Although stocks are risky investments, millennials who steer clear of them are missing potentially sizable gains during their peak earning years. The average return (price gains and dividends) of the S&P 500 index historically is about 10% a year, though its annual movements vary widely. History shows us that, over the long term, stocks generate higher returns despite short-term fluctuations. In fact, the stock market has not declined in value during any rolling 15-year period since 1926. Keeping money in cash, such as a savings account or money market fund, might be more suitable for your short-term goals but over time, the value and purchasing power of cash are eroded by inflation.

Of course, past performance is no guarantee of future results and it is possible to lose money in any stock investment. Millennials with a well-balanced, diversified portfolio of stocks, bonds and cash should feel reasonably comfortable about their ability to achieve their retirement goals with a tolerable level of risk.

You can also build a diversified portfolio as part of an IRA account or employer-provided retirement plan, such as a 401(k). These vehicles allow your savings to potentially grow on a tax-deferred basis — or even tax free, if you have the option of contributing to a Roth IRA or Roth 401(k) — substantially increasing possible returns. Some employers offer matching contributions, which can boost savings even more. If your employer matches, try to contribute at least that percentage of your salary to ensure you do not leave matching funds on the table.

Start early

Millennials struggling to pay off student loans and other debts may be tempted to put off investing for retirement. But as you can see, there are enormous advantages to starting early. No amount is too small and even modest investments now can pay off handsomely down the road.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.