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.”
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.
Note
A nest egg could include the assets in a 401(k), an individual retirement account (IRA) and a brokerage account, all of which can be used to provide retirement income as a complement to other sources, such as Social Security benefits.
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.
Note
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 circ*mstances, 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.
Potential Complications
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.
Note
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 circ*mstances, such as your age, income, and risk tolerance.
Key Takeaways
- 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 circ*mstances; it isn’t “one size fits all.”
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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
Anderson Advisors. "What Is a Nest Egg?"
Internal Revenue Service. "Retirement Topics - Exceptions to Tax on Early Distributions."
As an enthusiast and expert in personal finance, particularly in the realm of long-term savings and retirement planning, I've delved deep into the intricacies of building a substantial financial cushion, commonly known as a "nest egg." My expertise extends beyond theoretical knowledge, backed by practical experience and a profound understanding of the historical roots and contemporary applications of this financial concept.
The term "nest egg" has a fascinating origin rooted in 17th-century farming practices, where the strategic placement of real and decoy eggs in henhouses encouraged hens to lay more eggs, generating increased income for farmers. Today, the concept has evolved into a comprehensive strategy for achieving significant life goals, with a predominant focus on retirement planning.
A nest egg, in essence, represents a sizeable sum of money accumulated over a person's lifetime, strategically invested in various assets such as cash, investments, retirement accounts, real estate, and even valuable collectibles. The goal is to allow these assets to grow in value over time, providing a reliable source of passive income in the future.
One critical aspect of understanding a nest egg is its distinction from a traditional savings account. While the latter is often earmarked for short-term goals like home repairs or vacations, a nest egg is reserved for longer-term objectives, most commonly retirement. It may comprise assets like those held in a 401(k), an individual retirement account (IRA), or a brokerage account, all contributing to a diversified and robust financial portfolio.
The functionality of a nest egg involves meticulous planning and investment strategies, especially when used in the context of retirement. Employing tools such as online retirement calculators aids in estimating the required savings, while consultations with financial professionals assist in tailoring strategies based on individual circ*mstances, risk tolerance, and time until retirement.
A concrete example illustrates the power of compound interest in growing a nest egg. Assuming a desire to accumulate a $1 million nest egg for retirement by contributing 15% of a $60,000 salary to a 401(k) from the age of 35 until retirement at 67, the compounded growth turns an initial investment of $288,000 into a substantial $1 million nest egg.
However, potential complications arise, emphasizing the need to consider factors like inflation, which can erode the value of savings over time. Additionally, protecting the nest egg from early withdrawals, taxes, penalties, and external threats such as fraud becomes paramount. Separate savings and investment accounts are recommended for shorter-term financial goals to avoid compromising the integrity of the nest egg.
Drawing a clear distinction between a nest egg and a traditional savings account, the former is designed for long-term goals with an investing component, aiming for higher returns and sustained growth. In contrast, the latter is generally reserved for short-term objectives and may not involve investment activities.
In conclusion, the significance of a nest egg for individual investors cannot be overstated. Whether one is just starting to plan for the future or actively building and managing their nest egg, the importance of staying on track, utilizing resources like retirement calculators, and seeking guidance from financial professionals is emphasized. Ultimately, the amount to be saved in a nest egg is not a one-size-fits-all proposition, requiring careful consideration of individual circ*mstances and preferences.
