What is a nest egg and how do you build a big one?
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A nest egg is money that you’ve accumulated from saving and investing, and is typically used for retirement-related purposes. You might accumulate a nest egg in an employer-sponsored retirement plan such as a 401(k) or an individual plan such as an IRA. Or if you’re planning to use the money before retirement age, on a house, for example, it may be in a taxable account.
In general, your nest egg is money that you want to protect at almost any cost. Your nest egg is what you use to be financially secure when you’re no longer working or what you’re saving up so that you can afford a dream – whether that be a dream house, a dream vacation or a dream car, for example.
How to build a nest egg
You can build a nest egg in many ways, but you should do it purposely and carefully. You want to preserve the money that you’ve been accumulating and ensure that it’s not lost on a poor investment, for example. That doesn’t mean it has to be only in the least risky investments, but it should mean that you’re carefully weighing your alternatives and balancing out the risks.
Here are some key steps to follow as you think about building your nest egg:
1. Choose the right account
You’ll need to tailor your account type to how you intend to use the money.
- If your nest egg is for retirement, then consider an employer-sponsored plan such as a traditional 401(k) or Roth 401(k). Your employer may match your contributions – free money! – and you’ll receive valuable tax advantages for saving in the account.
- If you max out your employer-sponsored plan, you also have an IRA – either the traditional or Roth version. An IRA also offers huge tax advantages.
- If you need the money sooner than retirement age – say for a special purchase – then you can turn to a taxable account. You won’t get a tax advantage, but you’ll have complete flexibility with the money.
- If you’re looking to save for college, a 529 college savings plan can offer tax advantages and other benefits.
You may have a number of top retirement plans available to you during your career. Whichever way you go, make sure that you’re using the account type that makes the most sense for the purposes of your nest egg.
2. Choose the right investments for your needs
You’ll also want to tailor your investment plan to how you intend to use your nest egg and when you’ll need the money.
- Do you have decades before you need the cash? You can be more aggressive with the account and invest in higher-return assets such as stocks. While they may fluctuate more in the short term, over time they tend to outperform other major asset classes.
- Do you have more than five years before you need the money? It could still make sense to have some of your investment in stocks, but you might want to balance that against assets that have less risk but still offer some upside.
- Do you need your nest egg in just a few years? In this situation, you probably want to stick mostly to safer assets such as bonds or high-yield savings accounts, so that your money is there when you need it.
Regardless of how you intend to spend your money, make sure your investment is aligned with that goal. Otherwise, the amount of money may not be there when you need it. For the long term, you’ll likely come out better investing aggressively, while a short-term goal may require more conservative investing.
3. Add to the account regularly
Once you have money in your account, it’s important to keep adding to it. Regularly adding to the account helps it to continue to climb in the longer term. A 401(k) allows you to save easily by withdrawing money from your paycheck before it even reaches you, helping you amass more.
And it’s vital that you protect your nest egg so that it’s there when you need it. If you’re saving for retirement, it’s critical that you stick to your plan so that you can have comfortable golden years. Avoid the temptation to spend your nest egg on something other than your real goal.
Should you invest your nest egg?
Your nest egg’s biggest enemy is inflation. Over time, inflation eats away at the purchasing power of money. So if you’re not earning more than the rate of inflation, you’re losing in the long term – even if you have more dollars in absolute terms.
With low-return investments such as bonds, savings accounts and CDs, inflation is hard to beat, especially if it’s exceptionally high, as we’ve seen so far into 2022. That’s why owning stocks is crucial for those growing their nest egg, especially if they have a long time until they need the money.
A well-diversified portfolio of stocks gives you the best chance to beat inflation over time. Stock prices are driven by the success of the underlying business, at least over time. But in the short term, stocks can be volatile. Therefore, investors should allow for a lot of time before they need the money, so they can ride out the ups and downs of the market along the way.
If you want to max out your nest egg and have decades to go, here’s how to save for retirement.
Because your nest egg is money that you’re saving for a special purpose, you want to carefully protect it. For some people, that may mean taking on a financial adviser – one who has your best interests at heart – to manage the money. For others, it may mean guiding and tracking the investments yourself so that you see where you stand each month. Regardless of how you approach it, however, you’ll want to ensure that your nest egg is there when you need it.