What Is a Nest Egg?
If you have a financial goal and you’re trying to save for retirement, then you may have heard the term nest egg used to describe your accumulated savings. It could have been said in reference to an account set aside for future purposes, or even the home you own. But what is a nest egg exactly, and how can you grow yours to a large enough figure where you’ll meet your savings goal and be comfortable in the future?
Put simply, a nest egg is a sum of money that’s been set aside with a specific purpose in mind to guide your wealth management—such as education, an investment objective, or, most often, retirement needs.1
With a large enough nest egg, retirement can be a time to relax and attain peace of mind, rather than fretting over finances. If you’re contributing to or contemplating building a nest egg, consider these key insights that can help you understand and increase your savings.
How Does a Nest Egg Work?
When a financial advisor or nest egg advisor refers to a nest egg, they’re generally talking about a separate bank account you contribute to for retirement. Unlike a regular checking account, the money inside remains untouched until you’re finished working for good.
Generally, contributions to a retirement nest egg come from a couple of different sources:
- Paychecks – Workers will often contribute a percentage of their earnings to their nest egg. 401(K)s and Individual Retirement Accounts (IRAs) are prime examples of accounts that act as nest eggs for many Americans. Contribution sizes vary based on each individual’s income and expenses, but the key is to start early and deposit consistently to take advantage of interest.
- Interest – Interest is the fee banks pay you for keeping your money in an inaccessible account, and it’s a key method of increasing the size of your nest egg. Over the years, compounding interest can turn a small investment into astronomical returns, so it’s important to start building your retirement savings as early as possible.2 A $200 investment will turn into more than $1500 in 35 years with a 6% interest and no further contributions.
Other assets people own—such as property, automobiles, and collectibles—may be relied upon in retirement and referred to as nest eggs. However, if they’re not listed on a ledger, they’re not considered contributing to a particular nest egg account.
Nest Egg vs Traditional Savings Account
If you’re already contributing to a savings account, you may find yourself wondering: what is a nest egg retirement account and how is it different from what I have currently?
If you’re not touching it until retirement age, then a traditional savings account may be considered a nest egg as well. Generally, however, the goals for a savings account dictate whether or not it’s a nest egg:
- Short-term savings goals – When an account is set aside for purposes in the more immediate future, such as saving for next year’s vacation or a new motorcycle, it’s generally a traditional savings account. Such accounts usually aren’t held in escrow for investments, meaning you can access your money without penalties. They usually offer a lower interest rate than long-term savings accounts, however.
- Long-term savings goals – Sums saved up for retirement planning goals far down the road are generally considered nest egg accounts. Whether it’s for investing in your grandchild’s education, purchasing a retirement property, or maintaining quality of life as you age, if money’s not being used for the next few decades, it should be in a long-term savings account accruing high interest. Be aware that such accounts usually have a minimum period of active time before you can access your money and may carry penalties for early withdrawals.3
Building and Growing a Nest Egg
When it comes to retirement planning, there are a few key ways to maintain healthy growth for your nest egg and reach a robust, comfortable figure before retirement. If you want to build your nest egg up to your retirement goal sooner, consider:
- Starting early – As mentioned, the earlier, the better is a common rule for investing. This goes double for retirement nest eggs, as compound interest can lead to significantly higher monetary increases by withdrawal time than contributions alone.
- Investing in assets – While a savings account is a common strategy for building a nest egg, asset allocation and investing in said assets, usually property, is also an effective way to put away for retirement. Consider inflation and retirement trends—over the last two years alone, home prices have risen over 40%.4 Putting your nest egg in real estate can pay heavy dividends come retirement time. As a bonus, a house provides the value of shelter and comfort as it increases in value.
If you go the real estate route to save for a nest egg, you’re going to need to sell your property to open up and get a return on its funds for use. If you’ve always dreamt of retiring in the house you currently own but could benefit from the value it would add to your nest egg, there’s an option to sell your home and lease it back. This allows you the best of both worlds: unlocking financial freedom for retirement and living comfortably in your home.
Maximize Your Nest Egg With a Sale-Leaseback
If you want to continue living in your home as you age but also have big retirement plans that require more cash than your nest egg currently has, a sale-leaseback could be helpful.
A residential sale-leaseback allows you to sell your home and keep living in it as a renter by converting your home equity to cash to help you better prepare for retirement. Using home equity for retirement income can add hundreds of thousands of dollars to your nest egg that would allow you to travel, pay off debts, cover medical and living expenses, and provide for yourself as you age in ways you didn’t previously think were possible.
If you’re getting closer to permanently clocking out of your career and your nest egg isn’t as developed as you’d hoped, there’s still a chance to bolster it and enjoy a worry-free retirement.
Both a nest egg and a nest egg retirement account refer to ways of saving for the future, particularly for retirement.
Investing early and capitalizing on interest is a savvy way to grow a nest egg account to a comfortable sum before retirement. Another salient method is investing in property and selling it down the road.
- Corporate Finance Institute. Nest Egg. https://corporatefinanceinstitute.com/
- SmartAsset. What Is a Nest Egg for Retirement?. https://smartasset.com/
- The Balance. What Is a Nest Egg?. https://www.thebalancemoney.com/
- Federal Reserve Bank of Saint Louis. Median Sales Price of Houses Sold for the United States. https://fred.stlouisfed.org/