A nest egg is a significant sum of money an individual or family has saved or invested for a specific future goal. Typically, a nest egg is designated for longer-term savings goals such as retirement. In fact, saving for retirement is often referred to as “growing your nest egg.”
Understanding what a nest egg is and how it can help you reach long-term savings goals can help you build financial security for the future.
Definition and Examples of a Nest Egg
The term “nest egg” comes from a 17th-century farming practice, where farmers would leave both real and decoy eggs in the henhouse to encourage the hens to lay more eggs, which would generate more income for the farmers. Today, a nest egg refers to a specific type of long-term savings often used to support a major life goal, such as retirement.
Everyone’s financial goals are different, so how you define and use your nest egg might be different from, say, a colleague at work. However, the majority of savers would agree that a nest egg is different from a traditional savings account. Money set aside in a nest egg generally supports longer-term goals such as retirement, whereas a regular savings account is typically earmarked for short-term savings goals such as home repair or a vacation.
In addition, a nest egg often consists of savings built up over your lifetime, and may include a variety of assets, such as cash and other investments, retirement accounts, and real estate—even rare artwork and collectibles in some instances. Essentially, a nest egg is made up of assets that have potential to grow in value over time and provide passive income at a later date.
How Does a Nest Egg Work?
Often used in the context of retirement, a nest egg typically includes applicable savings and investing strategies. But knowing how to invest and how much to invest can sometimes be challenging.
Tools such as an online retirement calculator can give you a ballpark estimate to help you determine how much you need to save. Speaking with a financial professional can help you customize your savings goals—depending on how long you have until you plan to retire, and how much risk you can tolerate, for example.
Here’s how it might work: Let’s say you want to save a $1 million nest egg for retirement. You’re 35 years old and plan to retire at age 67.
Let’s assume you already have $30,000 earmarked for retirement. From now on, you decide to contribute 15% of each paycheck to a retirement account like a 401(k). Your salary is $60,000 a year, so your total annual contribution to your 401(k) would be $9,000. If your investments return around 6% a year, you would reach $1 million in your 401(k) by the time you retire.
Even though you only invested $288,000, your nest egg reaches $1 million due to the power of compound interest.
Keep in mind, everyone’s goals and how much they need to save are different. Your specific numbers will depend on your individual circumstances, such as your salary and how many years you have until retirement, as well as external factors such as stock market returns. Ultimately, you should determine what you want your ideal nest egg to look like and plan accordingly to achieve those goals.
Since a nest egg is earmarked for future expenses, you also need to account for factors such as inflation. Saving $1 million might seem like a lot, but in a few decades, rising inflation rates might significantly erode your savings. In other words, if your savings and investments don’t grow at a rate that at least outpaces inflation, it could mean that a $1 million portfolio will barely fund your living expenses and other costs by the time you’re ready to retire (depending on your specific lifestyle).
Another thing to keep in mind is protecting your nest egg. For example, if you’ve saved tens of thousands of dollars for retirement, it doesn’t make sense to pull the money out for other purchases, like a down payment on a house or taking an extravagant vacation. Plus, withdrawing the money early typically comes with hefty taxes and penalties, and may not leave you with enough funds in your nest egg to provide sufficient retirement income.
Accessing a retirement account such as a 401(k) or IRA before you turn 59 ½ can result in a 10% early-withdrawal penalty.
Create separate savings and/or investment accounts for shorter-term financial goals like buying a car or taking a once-in-a-lifetime vacation. This way, you can avoid dipping into your retirement account and capsizing your retirement goals.
Your spending habits aren’t the only thing you need to protect your nest egg from. Fraudsters and thieves may try to trick you into parting with your savings by giving them control of your money, or selling you products or services you don’t need. Thoroughly vet anyone who handles your finances and make sure they’re acting in your best interests.
Nest Egg vs. Traditional Savings Account
|Nest Egg||Savings Account|
|Savings are generally earmarked for a specific, long-term goal, such as retirement||Typically used to set money aside for short-term goals, such as purchasing a car or going on vacation|
|Often have an investing component||Generally do not include investments|
|Designed to generate a higher rate of return and grow your savings over time||Subject to bank interest rates, which are typically low|
|Early withdrawals may be subject to taxes or penalties||Withdrawals usually don’t carry a penalty|
What a Nest Egg Means for Individual Investors
If you don’t have a nest egg in the works yet, now may be a good time to start thinking about saving for the future. If you’re already saving and building your nest egg, it’s important to stay on track, whether you’re in the early stages of saving or getting ready to unwind the money as you enter retirement.
Ultimately, the goals you choose for your nest egg are up to you. Preferences and needs differ from person to person and family to family. The good news is, you don’t have to go it alone. Using resources like online retirement calculators or speaking with a financial professional about retirement planning can help you figure out what your nest egg should look like and how to adjust your investments based on your specific circumstances, such as your age, income, and risk tolerance.
- A nest egg is generally considered to be a collection of assets earmarked for a long-term goal such as retirement.
- Tapping your nest egg early can derail your retirement goals and result in early-withdrawal penalties.
- Protect your nest egg from theft and fraud to make sure you preserve the assets for their intended purpose.
- The amount you should save in your nest egg depends on your individual circumstances; it isn’t “one size fits all.”