What is a nest egg and how can you build one?

A nest egg is a stockpile of money you save up over the long term for a large financial goal, like retirement. People usually start their nest egg with a small amount, then add to their savings a bit at a time. To help a nest egg grow, most people keep the money in a savings account, investment account, or retirement account that can earn income in the form of interest or investment returns. 

Why’s it called a nest egg? The term comes from the old poultry farming practice of placing an egg into a nest to encourage hens to lay more eggs. Because more eggs meant more income for the farmer, the phrase eventually became associated with finance. And it’s an apt metaphor: Just like a hen laying more eggs and protecting them, you continue adding assets to your nest and keep them safe from spending. 

This guide will walk you through the what, why, and how of bulking up your nest egg, plus show you how to build a retirement nest egg for your golden years.

Here’s what we’ll cover:

• What a nest egg is
• Where to store your nest egg 
• Nest eggs for retirement
• How to build a retirement nest egg 

What is a nest egg?

Your nest egg is there to fund something important in your future. Think of it as your savings, but with a very specific purpose: money for a defined financial goal, built up over a long period, that you won’t touch until a predetermined time. 

Reasons to build a nest egg

Building up retirement savings is one of the most common reasons to start a nest egg, but many people start saving for other big financial goals, or simply with the aim of achieving more financial security. Common examples of nest egg goals include:

• Paying for higher education
• Buying a home
• Saving for a child’s education
• Creating an emergency fund for unexpected expenses
• Providing a financial safety net when you reach retirement age

What all these savings goals have in common is that they’re large expenses that many people can’t afford without long-term financial planning and a commitment to ongoing savings. 

How much money to save in your nest egg

Ultimately, the amount that represents a good nest egg depends on your financial goals, as well as how much you can realistically save based on your current income and assets. Think about the specifics of your savings goal: how much money you’ll need for it and your ideal timeline. Based on that, you can come up with a target amount and plan for saving over time. You might start by creating a financial plan, which will help you understand your financial landscape and identify how you can start tucking money away for the future.  

When to start saving

If you’re wondering when to start your nest egg, the answer is: now. The sooner you start saving up money, the more time it has to benefit from compounding. Compounding is what happens when the money you’ve saved or invested earns returns, and then those returns themselves earn money. Even if you don’t have much money to start your nest egg, saving or investing now lets you take advantage of the power of compounding to grow your money faster.

For example, say you earn $10 in dividends from a stock you own, then you re-invest that $10 in more stock and earn a return on that investment. You’ve earned compound returns. It works the same with interest: If you put $100 in a savings account that earns 10% interest annually, you’d have $110 at the end of the first year. Then you’ll start earning interest on your principal $100 and your $10 in interest earnings.

Where to store your nest egg savings

If you want to build a substantial nest egg, you need your money to grow over time and protect it from the impact of inflation. Where you store your savings can make a big difference. 

Savings accounts

Storing your nest egg in an interest-bearing bank account gives you the advantage of compound interest, especially if you choose a high-yield savings account. Money in a savings account is also easy to access, so this option can be valuable if you plan to use your nest egg for large unexpected expenses or shorter-term goals. The downside is that interest rates rarely keep up with inflation over the long term, so this may not be the most advantageous choice for reaching retirement goals. 

Brokerage accounts

A brokerage account allows you to invest money in securities like stocks, bonds, and funds. The stock market can be volatile, so an investment account isn’t usually recommended for short-term savings goals. But if you’re planning to build your nest egg over the long haul, a brokerage account has a distinct advantage: based on historic stock market returns, your earnings are likely to be higher than savings accounts and outpace inflation. 

Retirement accounts

Like a brokerage account, a retirement account lets you invest your nest egg in securities that could earn a return that’s higher than inflation. And they come with a unique benefit: tax savings. Retirement plans like 401(k)s and IRAs have a variety of tax benefits that allow your money to grow tax-deferred or tax-free, further feathering your nest. But with those tax advantages comes a catch: you generally can’t withdraw money until you’re 59½ without incurring penalties. So a retirement account is generally ideal if you plan to use your nest egg after you reach retirement age.  

Nest eggs for retirement

Now that you know the answer to “What is a nest egg?” and understand the idea behind it, let’s dive into one of the most widespread uses for a nest egg: retirement. For most people, social security benefits won’t provide enough retirement income to leave the workforce. That’s why retirement planning usually involves a strategy to invest money regularly over a long time horizon. 

If you’re not sure you’ll be able to retire at the standard age of 65, or if you’ll ever be able to retire at all, you’re not alone. According to the Federal Reserve, 28% of non-retired people don’t have any retirement savings. And those that do have money tucked away often don’t have enough saved to be on track for full retirement at 65. Experts say you’ll need an annual retirement income equal to about 80% of your pre-retirement income, but the average retirement savings is far below that, across all age groups. It’s no wonder that 34% of people in the American workforce are 65 or older. 

This is where your retirement nest egg comes in. Even if you expect to be working past the age of 65, building up a retirement fund can give you a safety net that alleviates financial stress, and may allow you to work part-time or cover unexpected expenses in your later years. It’s never too late to start, and the sooner you begin adding to your retirement nest egg, the more time you’ll have to grow that fund for the future.

How to build a retirement nest egg 

Whether you hope your nest egg will allow you to leave the workforce entirely or are aiming to give yourself more financial freedom while you’re working later in life, you can start a nest egg now to help you move toward your goals. 

Determine your retirement goals

To get a baseline for your financial goals, start by determining how much money you’d need to retire. You can use a retirement calculator to pinpoint exactly how much you’d need to invest each month to leave the workforce by a specific age. 

If the numbers seem daunting, don’t give up hope. Consider the various sources of retirement income you might have: estimate your social security benefits, consider options for passive income, and envision side hustles you might transition to after winding down from full-time work. 

Your retirement nest egg doesn’t have to provide all of your income when you’re older. Set a target financial goal that feels realistic for your current income, and review it every year to see if you can increase the amount you’re putting into your retirement account.

Choose a retirement account

If your employer offers matching contributions for a 401(k), it may be smart to take advantage of that benefit: it’s like free money to add to your nest egg. But you can also open your own individual retirement account (IRA), where you have the freedom to choose your investments. Both traditional IRAs and Roth IRAs offer tax advantages, but in different ways:

• Traditional IRAs are funded with pre-tax dollars, giving you a tax deduction now and allowing you to grow your money tax-deferred. You’ll pay income tax when you make qualified withdrawals of your contributions and earnings after age 59½.
• Roth IRAs are funded with post-tax dollars, and your money grows tax-free. Because you pay income tax before you make contributions, you don’t have to pay tax later when you withdraw that money, and you pay no taxes at all on earnings you withdraw after age 59½. 

The right type of retirement account for you depends on a variety of factors, so you’ll want to explore the differences between traditional and Roth IRAs. The good news is that you can have both types, as well as an employer-sponsored retirement account, so you have plenty of options for your nest egg. 

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Start investing 

If you’ve never purchased a stock, bond, or share of a fund before, you may want to familiarize yourself with the basics of how to start investing and get acquainted with the common types of investments. From there, you can start deciding where you want to invest the money in your retirement account.

You’re building a nest egg, but you don’t want to put all your eggs in one basket. As you build a portfolio of investments, consider options for diversification, which involves spreading your assets among a variety of different investments to reduce risk. You don’t have to make all the decisions on your own; a financial advisor or robo-advisor can help you determine the right strategy for your goals. 

Add to your nest egg regularly

Regularly investing over time, even with small amounts, is the key to growing your retirement nest egg. How much you should be investing depends on your goals, timeline, and budget. Many experts suggest putting 10-20% of your income into your retirement account, but that’s not always realistic. Start with what you can afford now, and plan to adjust over time as your circumstances evolve. 

What is a nest egg’s role in your financial future?

A nest egg can be many things: the money you need to achieve a big financial goal, a source of retirement income, a way to achieve more financial security. At the end of the day, your nest egg is where you build up the funds you need to reach your financial goals down the road. You don’t have to have a lot of money to begin; in fact, with Stash, you can open an IRA with as little as $5. What matters is that you get started now so you can put your money to work for whatever’s on your far-flung financial horizon.

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