What’s a Nest Egg?

“Nest egg” is a term you’ve probably heard at one point or another. It refers to a stockpile of savings and investments you’re setting aside for a long-term goal—like funding your retirement. 

Building a solid nest egg can help you live the life you want when you’re no longer working. And thanks to the power of compound interest, the sooner you begin saving, the more time your money will have to grow. Want to build a nest egg but don’t know where to start? We’ve got some ideas that can help.  

How do I build a nest egg for retirement? 

Tax-advantaged retirement accounts are ideal for building your nest egg. Contributions may be tax-deductible, and money can grow tax-deferred—increasing the potential for compounding interest. That essentially means you can earn interest on interest, which allows your money to grow even more over time. Here are some popular retirement savings vehicles: 

401(k) 

A 401(k) is an employer-sponsored retirement account.  Your contributions may be tax-deductible, which could reduce your taxable income. This is good news if you expect your tax bracket to be higher today than it will be in retirement. Your employer might also match some or all of your contributions. 

Traditional IRA 

A traditional IRA is an individual retirement account you open on your own, apart from your employer. Like a 401(k), an IRA may allow for tax-deductible contributions, and it benefits from tax-deferred growth. You won’t be taxed until you take money out in retirement.  

Roth IRA 

A Roth IRA is funded with after-tax dollars, so you won’t get a tax break on your contributions. The main benefit is that you can withdraw your money (contributions plus growth) generally tax-free at any time as long as you’ve had the account for at least five years and are 59½ or older. 

Pension 

Pensions provide guaranteed income in retirement. They’re typically funded and managed by the employer, so employee contributions rarely come into play. Every pension is different, but many provide monthly payments that last a lifetime once you stop working. If you have a pension, you’ll want to account for it when determining how big your nest egg should be. 

Pensions are commonly offered to government employees. They used to be more common, but nowadays, most companies instead offer defined contribution plans like a 401(k).  

How do I grow my nest egg?  

The best way to grow your assets is by investing. With most retirement accounts, you’ll invest your money in different kinds of assets, including:   

• Mutual funds: A mutual fund allows you to invest in a collection of assets like stocks, bonds and other securities that can provide built-in diversification. Some mutual funds have a fund manager who makes investment decisions on behalf of investors.  Others track an index, like the S&P 500.  

• Exchange-traded funds (ETFs): Like mutual funds, ETFs provide access to a mix of different investments. They typically have lower fees and can be traded like stocks in a single transaction throughout the trading day. 

• Target-date funds: A target-date fund chooses investments for you based on your age. It automatically rebalances to become more conservative as you get closer to your target date. 

• Certificates of deposit (CDs): When you put money into a CD, typically at a bank, you agree to give up access to your funds for a predetermined amount of time. You’ll get your money back, plus interest, when the term ends. CDs are considered a safe place to put your money, and returns generally lag those of stocks.

You may also choose to supplement your savings with other assets that can help you generate income in retirement, like: 

• Annuities: After purchasing an income annuity, you’ll receive regular payments in retirement that could last the rest of your life. It’s a guaranteed form of income that’s available through insurance companies. 

• High-yield savings accounts: As the name implies, high-yield savings accounts offer higher than average interest rates. This type of account might be a good place to keep your emergency fund before and during retirement.  

• Cash value from a permanent life insurance policy: A permanent life insurance policy accumulates cash value, which is something you could access to help generate income in retirement.  

• Dividends from a permanent life insurance policy: If you have a permanent life insurance policy, your insurer may pay out annual dividends. This may happen if the company finishes the year with better than expected financial results. 

Why is it called a nest egg? 

Fun fact: A “nest egg” is a real or artificial egg that’s put in a hen’s nest to encourage her to lay there. By putting an egg in the hen’s nest, she’ll ideally lay more eggs and increase a farmer’s fortune.  

This concept is an analogy used to refer to building your financial future: The more “eggs” (or money) you put in your “nest” (retirement savings and investments), ideally, the more assets you’ll accumulate, growing your own fortune. Though a nest egg is commonly used when referring to retirement, it can include any long-term savings. 

How Much Should I Have Saved for Retirement?  

The average person in the 60s age range has $112,500 saved for retirement, according to the 2023 Northwestern Mutual Planning & Progress Study. Overall, most people think they’ll need more than $1 million to retire comfortably. But the right amount for you will depend on your retirement goals. What do you expect your lifestyle to look like when you’re no longer working—and roughly how much will it cost each year? These are things you’ll want to think about when determining how much you’ll need.  

Building a nest egg that can go the distance requires some forward thinking. The right financial advisor can help you clarify your retirement goals and help you make a plan to get there. 

At Northwestern Mutual, our advisors use a broad range of financial options—including both growth and protection strategies. Thinking beyond just how you’ll grow your nest egg, you’ll also want to consider how to protect it if life doesn’t go as planned. We’ve found that a plan that integrates a range of financial options leads to better financial outcomes in the long run. 

When working with Northwestern Mutual, an advisor will get to know you and what matters to you. We don’t just ask the basic questions—we dig deeper to really get to the bottom of what’s important to you. This foundation guides our recommendations and your financial decision-making: We’ll give you the information you need to make better decisions to live the life you want—especially in retirement.