Nest Egg

An individual's goal that involves saving money and assets for a specific purpose

A nest egg is an individual's goal that involves saving money and assets for a specific purpose. This goal often involves retirement, the purchase of a house, or education. The most common long-term goal is to save for retirement.

It involves setting money aside for a single purpose and letting it grow over a long period, often through a combination of a high-yield savings account and investments.

To reach the goal, an individual saves and invests money during working years. These goals usually involve substantial sums of money, which is why retirement is the most common nest egg that individuals work towards.

Some examples are:

  • Retirement 
  • House
  • Car
  • Starting a business
  • School
  • Home Remodel
  • Starting a family
  • Emergency reserve (i.e., medical problem)

Generally, besides retirement, most of these goals are more closely associated with a traditional savings account.

The term comes from poultry farmers in the late 17th century. These farmers laid eggs in hens' nests to induce them to lay more eggs. This increased egg production by the chickens meant more income for the farmers. 

Understanding the concept

The purpose of these goals is to not only preserve the capital that you invest or save but also enable your money to grow. However, because the money is often needed in the future, the funds should not be invested in an overly risky investment.

Putting your money somewhere it can grow will offset inflation and ensure your money works for you. Examples of investments that are more conservative, allowing one to maintain a more risk-averse approach, are:

  • Certificates of deposits
  • Bonds
  • Dividend-paying blue-chip stocks
  • Money market funds
  • Treasury bills, notes, bonds
  • Preferred stocks

Portfolio

The allocation of these securities and the diversification of your portfolio depends on your investing profile. Some factors to consider are:

  • Risk tolerance
  • Time horizon
  • Investment objectives
  • Liquidity
  • Tax implications
  • Inflation rate
  • Volatility
  • Investment capital

There are many elements. In other words, it can consist of more than just a savings account and securities. Some other assets could be: 

  • Artwork
  • Precious metals
  • Collectibles
  • Sports memorabilia
  • Real estate

Assets that you believe will appreciate, allowing you to later sell for a profit, can be valuable components of your nest egg. This is a critical difference between nest eggs and traditional savings accounts.

Savings

Compounding is a crucial process that allows the money in your nest egg to grow. With compounding, your return on investment can grow exponentially

The earlier you begin investing, the more you can capitalize on the positive effects of compounding. Starting to save early eliminates much of the financial stress as you near retirement.

Consulting with a financial planner and taking advantage of tax-free accounts are reliable methods to ensure you have enough money for your long-term financial goal.

Tax-advantaged accounts like a 401(k), a Roth 401(k), a traditional IRA, or a Roth IRA can be excellent starting points for your retirement savings. 

Traditional IRAs and 401(k)s enable you to defer the taxes to when the money is withdrawn, allowing you to invest the money you would've had to pay in taxes. 

Many companies have a matching incentive with 401(k)s, where they contribute a certain amount of money to your account based on your contributions. Therefore, maximizing your 401(k) contributions is always a good idea.

Timing

With Roth 401(k)s and Roth IRAs, you pay taxes upfront, but your earnings from your portfolio are tax-free. Unlike the traditional IRA and 401(k), you do not have to pay taxes when the money is withdrawn.

These accounts tend to have significant fees if you attempt to withdraw the money before a specified age (usually 59.5 years old).

Additionally, investing in bonds and low-risk stocks are conservative options for ensuring some growth while minimizing risk.

It's essential to understand your investing profile, including your financial goals, situation, time horizon, and risk tolerance when deciding what to invest your savings in.

Nest eggs vs. traditional savings account

While savings accounts and nest eggs are similar, there are a few important distinctions.

Comparison
Nest EggSavings Account
Intended for a specific, long-term goal (retirement)Intended for shorter-term goals (going on vacation)
Often has an investment componentTypically does not include investments
The goal is to generate a higher rate of return and grow your money over a long period of time.

Lower interest rates

Early withdrawals usually come with taxes or feesWithdrawals do not typically have taxes or fees

The distinction between the two saving methods can be challenging to recognize, as it is a subjective comparison. What someone considers a long-term financial goal can vary from person to person.

The most crucial distinction is that a nest egg generally emphasizes your money's growth, while traditional savings account values security more.

Saving for retirement

Retirement is the primary long-term goal that most people save for. This is often the most costly goal people save for in their lifetime and, therefore, requires the most planning. 

Retirement Money

The most common objective in the past has been for your retirement savings to be at least $1 million. Of course, this is just a rough estimate of recommended retirement savings for the average American, but it has been increasing.

The ideal retirement savings increase annually due to inflation rates and increased living costs. However, as the dollar's purchasing power decreases, the size of your retirement nest egg must increase.

These are more important than ever for financial security during retirement today because Social Security in the United States will not be enough for retirement. Social Security is designed to supplement your income rather than sustain your retirement.

Many individuals allocate a portion of every paycheck to their long-term retirement plan.

Compounding is an imperative process in saving for retirement. Here is an example that demonstrates the profound effects of compounding when saving for retirement.

Value of $1000 Compounded at Various Rates of Return Over Time

Effects of Compounding when saving for retirement
Years4%6%8%10%
10$1,481$1,791$2,159$2,994
20$2,191$3,207$4,661$6,728
30$3,243$5,743$10,063$17,449

It is clear that the earlier you start investing, the more your money will grow.

Factors to consider when establishing goals for retirement:

  • Lifestyle goals
  • Sources of guaranteed income
  • Inflation rates
  • Status of Social Security
  • Dependants
  • Health care
  • Insurance
  • Housing costs
  • Debt

This Bankrate Retirement Calculator can provide insight into how much you should save before retirement, utilizing information specific to you.

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Researched and authored by Jackson Hartz | LinkedIn

Reviewed and edited by James Fazeli-Sinaki | LinkedIn

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