What Is a Nest Egg and How Do I Build One?

You’ve probably heard people use the term nest egg when they talk about saving money. It has a cozy feel to it, doesn’t it? But what does it actually mean? And what in the world is a retirement nest egg? 

WHAT IS A NEST EGG?

Nest egg refers to an amount of money that someone saves for the future, usually for retirement. The idea is that by setting aside money, little by little, it will multiply over time through compound interest.

The phrase itself comes from an old farming trick. Now, even though I’m a Kentucky boy, I don’t know too much about chickens, so y’all hang with me. The idea is that farmers would leave an egg in the hen’s nest, which would encourage the hen to lay more eggs. By setting aside some eggs (instead of using them all up), the farmer’s stash would grow. In the same way, if you set some of your money aside, it will grow over time.

Okay, enough talk about chickens and eggs. It’s making me hungry.

Let’s talk about five things you can do to build a nest egg for your future!

How to build a nest egg

There’s a proven method for building wealth. Take these steps in the right order and stay focused for the long haul. You’ll see your savings multiply in big ways—trust me!

1. BUILD A BUDGET

A budget is like the nest itself that creates structure for your savings. Without a budget, your money will fly away quicker than a feather on a windy day. But your budget will look different depending on your current money goals.

  • If you’re in debt, you need to create a budget that will get you out of the red as soon as possible.
  • Once you’re debt-free (except for the house), your budget needs to focus on building wealth.
  • When you stop working, you’ll still need a budget. In fact, this is the phase of life when you’ll be living off the savings in your nest egg. A budget will help you stay on track and make sure you’re not withdrawing too much money every month.

2. set up a retirement savings account

Once you’re out of debt, start investing in a retirement account. You’ll have lots of things to learn about investing, but I recommend that you start with one (or more) of these options:

  • 401(k): A 401(k) is a retirement plan your employer offers that allows you to contribute a set amount or percentage from your paycheck. The money you put in your 401(k) is taken out of your paycheck before you pay taxes, lowering your taxable income—that’s a tax break, baby! I recommend investing the money you contribute in mutual funds, because they’re the best way to build up your retirement savings long term.
  • Roth 401(k): This is another employer-sponsored retirement account, but instead of contributing pre-tax dollars, you contribute after-tax dollars. That means your savings grows tax-free. And when you withdraw your money starting at age 59 ½, you won’t pay taxes on it!
  • 403(b): The 403(b) is the same as a 401(k), but it’s for tax-exempt organizations, like public schools, hospitals or religious groups.
  • 457(b): This plan is the like the 401(k), but it’s for state and local governments and some nonprofits.
  • Roth IRA: A Roth IRA (Individual Retirement Arrangement) is a retirement account you open on your own. Like the Roth 401(k), you contribute to the Roth IRA with after-tax dollars. This is a great option if you’re self-employed, or if your company doesn’t offer a retirement plan. But even if you do have a plan through your employer, you can—and should—have a Roth IRA as well.
  • Traditional IRA: A traditional IRA is another account that you can open apart from an employer. It functions like a 401(k)—you invest pre-tax dollars in mutual funds.  

If you have access to a retirement account through work, see if your company offers a match (a fancy phrase for free money). Many employers will match the amount you contribute to your 401(k) up to a certain percentage of your income. Now, that’s a good deal!

I just threw a whole lot of information at you at once, so don’t worry if it doesn’t all make sense yet. The best thing to do before you start investing is meet with a financial advisor so you can fully understand how these investment accounts work and the best ways to invest your money. Even if all you do is invest in your company retirement plan, an experienced pro will make sure you’re making the most of it.

3. invest 15% of your income

Once you’re debt-free, you should invest 15% percent of your income to build your retirement nest egg. If you’re contributing to your workplace account, take advantage of the employer match, but don’t count it toward your 15%. You should also make the most of a 401(k) and a Roth IRA to meet your 15% match.

Now, let’s have some fun and do an example calculation (oh hush—you know I’m a math nerd).

  • You’re 35 years old, and you have nothing saved for retirement.
  • You make $55,000 a year.
  • You start contributing 15% of your annual salary toward retirement. (That’s $8,250 a year, or $687.50 a month).
  • You invest until age 65 at an annual return rate of 10%.
  • When you reach your retirement goal, you’ll have a nest egg of $1,554,085!

A bar graph showing the impact to your nest egg over 30 years with compound interest

This example shows the power of compound interest, baby! If you start investing early and often, it will pay off big time down the road.

Lots of people ask me why they need to invest 15%. Why not 10%? Or 12%? The short answer is this: With the rising cost of living and the reality of inflation down the road, your best bet is to save 15%. Don’t rely on Social (in)Security to take care of you when you no longer have paychecks arriving in your bank account.

A graph that says "Don't rely on Social (In)Security to take care of you in retirement."

For a workplace retirement account, your contributions are usually deducted automatically from your paycheck. When you automate your savings, it helps you flex your wealth-building muscles every day. It becomes second nature! But hear me on this: Don’t go on autopilot. You need to stay engaged and connected with your investments and regularly review how they’re performing.  

4. PAY OFF THE HOUSE EARLY

After you’ve developed your investing habit, get serious about paying off your mortgage early. Yes, you’ll have to make sacrifices. But ask yourself this question: How much faster could you build your nest egg if your house payment was going toward retirement instead? That’s a game changer!

Here's another way to look at it: Your house is an asset that contributes to your net worth. Your net worth is the amount that you own minus the amount that you owe. Owning your house completely before you retire will significantly increase your net worth. Check out my net worth calculator if you’re curious about your number.

Now, here’s where I need to lay down some truth: If you’re in your 50s or 60s and don’t have enough saved for retirement, you may need to downsize your home. Sell the house and pay off your mortgage. Then pay cash for a smaller, less expensive place and use the rest of the money to reinforce that nest egg. You may have a lot of memories attached to your house, but those memories won’t pay the electric bill.

5. ADD TO THE NEST EGG EVERY YEAR

Contributing 15% consistently to your nest egg over the long-term—and I’m talking 20 to 30 years—will allow you to retire with a significant amount of money saved. I can’t emphasize enough how important it is to make consistent contributions.

As you grow in your career, your salary will grow too. It’s tempting to upgrade your car or house or wardrobe along the way. But what if you increased your level of savings instead of your level of spending?

Remember the chart we looked at just a minute ago? That scenario was based on a $55,000 salary that never changed over 30 years. Chances are, if you show up to work and get your job done, you’ll get a raise. Can you imagine how much more you’d have in savings if you increased your contribution amount every year?

Time and compound interest are the two most powerful forces in all of finance. Get them working for you instead of against you.

A graphic that says "Time and compound interest are the two most powerful forces in all of finance."

START BUILDING YOUR NEST EGG TODAY

The bottom line is this: If you want a secure nest egg, you need to practice self-control and think long term. It might be tough right now, but one day you’ll be grateful you made those sacrifices.

And chances are, you’re not the only one who will benefit from your wise decisions! Having savings in retirement allows you to be generous with your family and friends, or with people in your community who need help, or with organizations you want to support. 

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