Definition and Examples of Nest Egg
The nest egg is a large sum of money that an individual or family saves or invests for a specific future goal. Typically, the nest egg is designated for long-term savings goals such as retirement. In fact, saving for retirement is often referred to as “growing the nest egg.”
How Does a Nest Egg Work?
A nest egg usually involves appropriate saving and investment strategies. However, knowing how to invest and how much to invest can sometimes be challenging.
Tools like online retirement calculators can provide a rough estimate to help you determine how much you need to save. Talking to a financial advisor can help you tailor 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 could work: let’s say you want to save a nest egg of $1 million for retirement. You are 35 years old and plan to retire at age 67.
Suppose you already have $30,000 set aside 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 per year, so your total annual contribution to your retirement account would be $9,000. If your investments yield about 6% annually, you would reach $1 million in your retirement account by the time you retire.
Note that even though you only invested $288,000, your nest egg grows to $1 million thanks to the power of compound interest.
Potential Issues
Since the nest egg is designated for future expenses, you should also consider factors like inflation. Saving $1 million may seem like a lot, but in a few decades, rising inflation rates could significantly erode your savings. In other words, if your savings and investments do not grow at a rate that exceeds at least the inflation rate, it could mean that a $1 million portfolio will barely be enough to cover your living expenses and other costs when you’re ready to retire (depending on your specific lifestyle).
Another thing to keep in mind is protecting the nest egg. For instance, if you have saved tens of thousands of dollars for retirement, it’s essential not to withdraw that money for other purchases, like a down payment on a house or a luxurious vacation. Furthermore, early withdrawals typically come with significant taxes and penalties, and you may not leave enough funds in your nest egg to provide adequate retirement income.
Create separate savings and/or investment accounts for short-term financial goals such as buying a car or taking a once-in-a-lifetime vacation. This way, you can avoid relying on your retirement account and disrupting your retirement goals.
Your spending habits are not the only thing you need to protect your nest egg from. Scammers and thieves might try to persuade you to give up your savings by giving them control of your money or selling you unnecessary products or services. Carefully vet anyone who handles your money and ensure they are acting in your best interest.
Nest Egg vs. Traditional Savings Account
Nest Egg Traditional Savings Account
Usually designated for a specific long-term goal, such as retirement. Typically used to save money for short-term goals, such as buying a car or going on vacation. Often includes an investment component. Generally does not involve investing. Designed to generate a higher rate of return and growth of savings over time. Subject to bank interest rates, which are usually low. Early withdrawals may be subject to taxes or penalties. Usually does not carry a penalty.
What
What Does a Nest Egg Mean for Individual Investors
If you don’t have a nest egg in the works yet, now is the perfect time to start thinking about saving for the future. If you are already saving and building your nest egg, it’s important to stay on track whether you’re in the early stages of saving or gearing up to withdraw money as you enter retirement.
Ultimately, the goals you choose for your nest egg are your responsibility. Preferences and needs vary from person to person and family to family. The good news is that you don’t have to do it alone. Utilizing resources like online retirement calculators or speaking with a financial advisor about retirement planning can help you determine 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.
Key Takeaways
A nest egg is generally considered a collection of assets earmarked for a long-term goal such as retirement. Withdrawing from your nest egg too early can derail your retirement goals and incur early withdrawal penalties. Protecting your nest egg from theft and fraud ensures that the assets are preserved for their intended purpose. The amount you should save in your nest egg depends on your individual circumstances; it is not a “one size fits all.”
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Source: https://www.thebalancemoney.com/what-is-a-nest-egg-5201229
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