When you’re young, the idea of saving for retirement can seem as abstract as the idea of someday not working. But there are tangible numbers to aim for. When it comes to retirement savings, experts recommend setting a savings goal that’s 10 times your pre-retirement income.1
In other words, if you’re making $50,000 annually, you’ll want to save $500,000 come retirement age.
What is a nest egg? Building a nest egg—or, a strategy to save and invest money for the sole purpose of a long-term financial goal, such as retirement—can help future retirees grow capital and support themselves post-employment, with enough funds to cover medical bills, home payments, and everyday expenses.
That said, knowing how to build a nest egg comes down to two overarching tasks: leveraging your current income and planning for your future.
Step 1: Determine Your Retirement Goals
The average American spends 20 years in retirement.2 While it’s recommended that you save 10 times your pre-retirement income, increasing your savings beyond that metric to 70–90% of your annual income can maintain your current standards of living well throughout retirement.2
To flesh out your retirement planning, assess your situation by analyzing your current expenses, taxes, payments, and savings, including any retirement funds you may already have, which you can then subtract from your total goal. These may include:
- 401(k) accounts
- Roth IRAs
- High-yield savings accounts
To solidify your retirement savings goals, the Social Security Administration provides an online calculator to help estimate your personal retirement planning options. As of 2020, Social Security retirement benefits can cover about 40% of your pre-retirement income.2
Step 2: Assess Your Current Savings
As you determine your goals, you must parse through the savings accounts you already have, such as 401(k) accounts, Roth IRAs, and high-yield savings accounts. But numerous types of retirement plans exist, and you’ll want to calculate the totals of each as you assess your current savings. These may include:3
- 403(b) plans
- Employee stock ownership plans
- Profit-sharing plans
- Simplified employee pension plans (SEP)
- Cash balance plans
If you’re unsure of the type of pension plan your company offers, request an individual benefit statement from your employer.
If your employer does not offer a plan, consider setting up a meeting with your supervisor to discuss potential savings options. SEP plans are particularly popular in these cases, since they’re owned by employees and subject to minimal disclosure requirements.3
Once you’ve calculated your total current savings, subtract it from your target nest egg. From there, you can begin to adjust future contributions to meet your goals and project the growth of your savings more accurately.
What Is a Good Nest Egg?
The size of your nest egg will depend on your lifestyle, financial situation, and retirement plans—that is, whether you’re considering the pros and cons of downsizing your home, moving into a retirement home, or traveling the globe after you retire.
As we discussed, however, it’s generally recommended that you save at least 10 times the amount of your current income.1 If you’re unsure how to calculate your financial projections, consult with a financial advisor. A professional can help you identify a number that will meet your current and future needs.
Step 3: Create a Budget
After determining your nest egg goal, you must allocate your funds accordingly.
To create a monthly budget, determine which living expenses are critical and which can be reduced. While your mortgage, car, and tax payments are necessities, you can map out a spending plan to reduce costs associated with expenses like eating out, traveling, and buying clothes. Similarly, to cut your utility bill, consider investing in energy-efficient appliances and light bulbs.
Also, consider which expenses may change during your retirement years. For example, if you plan on downsizing for retirement, you can account for smaller mortgage payments and utility bills.
Then, add funds to your savings, retirement, and investment accounts consistently. For some, setting up an automatic transfer can ensure that your nest egg continues to grow. However, those with less disposable income can opt to contribute to a retirement fund on their own time.
As you continue to earn, save, and spend, review your monthly budgets and retirement plan regularly to ensure your nest egg is growing fast enough to hatch come retirement.
Step 4: Choose the Right Savings and Investment Options
When planning for retirement, choosing your savings and investment options wisely is essential. As a future retiree, it’s critical that you invest in plans that align with your retirement goals and risk tolerance. These may include:
- Employer-sponsored retirement plans – Oftentimes, employers provide their employees with pension programs that allow employees to automatically invest in tax-advantaged retirement accounts. These types of plans include 401(k)s, in which employees of private, for-profit companies can contribute a percentage of their paycheck to an investment account. 403(b) plans also fall under this category, but they are allocated to employees who work for tax-exempt or non-profit organizations.
- Individual retirement arrangements – Also known as IRAs, individual retirement arrangements allow individuals to set up retirement savings accounts individually. That said, there are six types of IRAs: traditional IRA, Roth IRA, Payroll Deduction IRA, SEP, SIMPLE IRA plan, and SARSEP. While traditional IRAs and Roth IRAs are set up outside of one’s place of employment, typically through a financial institution, Payroll Deduction IRAs, SEPs, SIMPLE IRA plans, and SARSEPs are set up through your employer.4
- Mutual funds – Mutual funds are professionally managed stocks, bonds, and short-term debt.5 Essentially, they’re a portfolio of investments that can be used to grow your retirement savings. When you invest in a mutual fund, the investment research is done for you. Additionally, participants can diversify their assets across a range of industries to lower the risk of loss.
- Exchange-traded funds – Similar to mutual funds, exchange-traded funds, or ETFs, pool investments. However, the investments are then traded, similar to stocks. When you invest, you’ll receive a bundle of shares that you can then buy and sell based on market price.
- Stocks – Rather than owning a bundle of stocks, you can own individual stocks that give you a share of ownership in a company. In the long run, stocks often outperform other forms of investments.6
- Bonds – Think of bonds as an IOU—they’re fixed amounts of money that companies or governments issue to ask for money from investors. As an investor, you’re promised a fixed-rate interest as the bond matures. Oftentimes, bonds can provide a steady stream of income for retirees, but they may also perform more poorly than stocks.7
Step 5: Consider Additional Income Streams
If your current income is not sufficient to adequately support your retirement savings, consider other sources and passive income streams that can supplement your nest egg well into retirement:
- Social Security – If you’re eligible, the United States Social Security Administration issues monthly benefit checks to supplement a portion of your pre-retirement income. Your eligibility will depend on your age, disability status, marital status, and financial situation. That said, most American citizens can apply for Social Security benefits between the ages of 62 and 70. However, if you worked in a foreign country, for a government job, or continue to work before Full Retirement Age (66–67), your benefit payments will be temporarily reduced. Fortunately, if you continue to work after Full Retirement Age, deductions will not apply and you’ll receive your full retirement benefits, no matter your employment status.
- Annuities – Annuities are offered by insurance companies and other financial institutions. They provide retirees with a guaranteed fixed income for the remainder of their lives, in exchange for a series of payments.
- Pension plans – Many companies value loyalty, and in exchange, offer pension plans. They’re a type of employee benefit to which employers can make regular contributions, which are then set aside to fund employees after retirement. While pension plans are increasingly rare—often replaced by 401(k)s—over 6,000 private pension plans still exist in the United States.9
- Part-time jobs – If you’d still like to be a part of the workforce after retirement, consider a part-time job. Spend a few days walking customers through DIY must-knows at your local hardware store or dedicate a few hours each week to teaching community college students. No matter your interests, a part-time position can bolster your savings and income—and keep you engaged in your community post-retirement.
- Renting – Some retirees choose to downsize their home, but that doesn’t mean you have to sell your old one. Rental payments can provide consistent, passive income well into your retirement. But there are other ways to leverage your home’s value, too, like using home equity to help you prepare for retirement. A sale-leaseback program allows retirees to sell their homes and convert their equity to cash they can use to better prepare themselves for retirement by paying off debt or paying down a mortgage.
- Investments – For those looking to bolster their passive income, dividend-paying stocks and high-yield savings accounts may be the answer. So, how do they work? Dividend-paying stocks allocate a portion of a company’s earnings to investors regularly, allowing individuals to build a cash stream that’s similar to an annuity. High-yield savings accounts, on the other hand, are more of a long-term investment. Those planning for retirement can deposit money into their retirement account and earn high interest to grow their nest egg. This type of account pays about 20 to 25 times more than a standard savings account.10
Prepare for Retirement and Maximize Your Nest Egg With a Sale-Leaseback
So, what exactly does leveraging your income and planning for the future entail? Determining your goals, shaping your budget to meet those goals, and then investing in the right income sources to bolster your financial security well into retirement.
If you want to prepare for retirement using your home equity, see if a sale-leaseback may be right for you.
Residential sale-leaseback solutions allow those downsizing their homes or preparing for retirement to convert their home equity into cash that they can use to better their financial health or fund a house hunt.
If you’re looking for ways to finance your future, connect with a financial advisor to discuss your options and see what solutions might work for you.
When building your retirement nest egg, there are five essential steps to solidifying your post-employment security:
- Identify your retirement goals
- Assess your current finances
- Create a budget to reach your objectives
- Allocate your money to savings accounts and investment options
- Create passive income opportunities
- Investopedia. How Much Do I Need to Save to Retire? https://www.investopedia.com/retirement/how-much-you-should-have-saved-age/
- United States Department of Labor. Top 10 Ways to Prepare for Retirement. https://www.dol.gov/sites/dolgov/files/ebsa/about-ebsa/our-activities/resource-center/publications/top-10-ways-to-prepare-for-retirement.pdf
- United States Department of Labor. Types of Retirement Plans. https://www.dol.gov/general/topic/retirement/typesofplans
- IRS. Individual Retirement Arrangements. https://www.irs.gov/retirement-plans/individual-retirement-arrangements-iras
- U.S. Securities and Exchange Commission. Mutual Funds. https://www.investor.gov/introduction-investing/investing-basics/investment-products/mutual-funds-and-exchange-traded-1
- Investopedia. Stocks: What They Are, Main Types, How They Differ From Bonds. https://www.investopedia.com/terms/s/stock.asp
- U.S. Securities and Exchange Commission. Bonds. https://www.investor.gov/introduction-investing/investing-basics/investment-products/bonds-or-fixed-income-products/bonds
- Investopedia. Annuity. https://www.investopedia.com/terms/a/annuity.asp
- Investopedia. Pension Plans. https://www.investopedia.com/terms/p/pensionplan.asp
- Investopedia. What Is a High-Yield Savings Account? https://www.investopedia.com/articles/pf/09/high-yield-savings-account.asp
- Social Security Administration. Plan for retirement. https://www.ssa.gov/prepare/plan-retirement