What Is a Nest Egg?

“Nest egg” is a quaint term for retirement savings. The term refers to an old practice of farmers putting real or artificial eggs under hens to get them to lay more eggs for the farmers to sell. 

A nest egg provides financial stability during retirement and protects you against future economic uncertainties. Building a nest egg requires consistent saving and investing over time. 

In this article, we’ll answer the question, “What is a nest egg?” and provide financial planning strategies for building your own. 

Why is having a nest egg important? 

A nest egg is important because it determines your quality of life in retirement. A larger nest egg fund can provide a more comfortable lifestyle, whereas a smaller one limits your options. Knowing you have retirement savings growing in investment accounts can give you great peace of mind about your future financial stability. 

If this sounds intimidating, it’s not. Anyone can save for retirement. Applying basic budgeting principles and setting up the right kinds of savings products is the secret to building a solid nest egg. 

How to build your nest egg 

Like all financial goals, building a nest egg happens through a series of small steps that add up over time. 

1. Figure out your retirement goals 

To determine how much to save, you need to envision your retirement lifestyle and its costs. Decide on your retirement age, living expenses, healthcare costs, and activities. Use an online retirement calculator to check if you're on track or need to adjust your savings goals. 

2. Create a budget 

Budgeting helps you manage finances and build your nest egg. Track income and expenses to understand spending, cut back where possible, and redirect funds into savings. Develop good financial habits to cover essential expenses while consistently saving. 

➢RELATED: How to Create a Budget

3. Automate your savings 

Consider setting up automatic transfers from your checking account to a nest egg savings or retirement account. By “paying yourself first,” you won’t have to skip a contribution to your retirement because there’s no money left after spending. 

4. Start investing 

To grow your nest egg, consider investing in stocks, bonds, mutual funds, 401ks, IRAs, and HSAs. If you have an employer-sponsored retirement account, consult with a financial advisor to create an investment plan that suits your needs. 

5. Consider additional income streams 

If you’re anxious because you think you’re late to the retirement savings party, don’t panic. You can supplement your income and use that extra money to quickly grow your nest egg savings. Look for gigs, side hustles, freelance work, or a seasonal part-time job. 

6. Maximize retirement contributions 

If you have a 401k or an IRA, take full advantage of them by maxing out your contributions each year — especially if your employer matches your contributions. Contributing to these accounts can also reduce your taxable income. 

7. Choose your savings and investment products wisely 

Educating yourself about financial products, investment strategies like dollar-cost averaging, and types of interest will help you make smart decisions about which savings and investment products to use for retirement. 

8. Periodically review and adjust 

Regularly review your nest egg accounts to see how they’re doing and make adjustments if you see them going off track. Experts recommend conducting a financial wellness checkup every 12 months. 

➢RELATED: Financial Planning for Retirement 

How big of a nest egg should I build? 

This is probably the #1 question everyone has about nest eggs. The answer isn’t cut and dry because everyone’s situation is unique. What you need to save for retirement won’t necessarily be what someone else needs. 

As you plan your nest egg, you should consider these factors: 

• Your income. How much you earn affects how much you can put into savings. The more you earn, the more discretionary income you’ll have to save. Set a percentage of your earnings to save each time you’re paid and increase it as your income increases. 
• Your desired retirement lifestyle. Envision your ideal retirement and its costs. Specify your desired standard of living, location, housing, activities, travel, healthcare, hobbies, fitness, and proximity to family and friends. 
• Healthcare costs. Aging means needing more healthcare services. Factor in medical expenses, insurance premiums, and long-term care as part of your retirement savings. 
• Inflation. Factor 2-3% annual inflation into your savings so that you’re not caught short on funds once you’re in retirement. 
• Longer lifespan. Retirement lasts longer than in past generations, which means more years without an income. Plan for 20-30 years of retirement and save accordingly. 

Nest egg vs. emergency fund 

You may wonder if a nest egg and an emergency fund are the same thing. The short answer is, “No.” 

As we’ve learned so far, a nest egg is a long-term savings fund for your future retirement years. It’s a slow and steady accumulation of money built through investing and regular financial contributions. 

An emergency fund is a short-term savings account that provides stability against financial downturns, such as job loss or sudden, unexpected expenses. You build an emergency fund early in your financial planning, and once it’s established, you begin saving for retirement. 

Emergency funds are typically easier to access than nest eggs since they’re intended for situations when you need money quickly. Retirement savings tend to be harder to access because of the kind of investment products you use for retirement funds. 

While a nest egg and an emergency fund are both important parts of financial wellness, they meet very different needs. 

Start growing your nest egg 

It’s never too late to start saving for your retirement years. While saving earlier is better, you don’t need to let life setbacks or financial downturns discourage you from starting a plan for retirement today. 

Even if you have to start small, the most important thing is to start! And small acts of budgeting and saving form habits to create big changes in your finances and your future.