You’ve probably heard people use the term nest egg when they talk about saving money. It’s an oft-bemoaned fact that 1 out of 3 Americans has no retirement savings. But while it’s easy enough to make excuses for why we’re not saving, the truth is that if more workers don’t step up their games, they’re going to face a rather harsh reality once retirement rolls around.

One reason why so many people neglect their long-term savings is that they find the idea overwhelming. After all, it’s almost impossible to predict how much any of us will need to retire comfortably, or what things will cost down the line.

With that in mind, here are some simple methods for establishing a nest egg — even if you’re not sure exactly how much you ought to be aiming for.

• What is a Nest Egg?
• What is a Good Nest Egg?
• What can you do with Nest Eggs?
• How can you Build a Nest Egg?
• How long will a Nest Egg last?
• What is a Reasonable Amount of Money to Retire with?
• Can I Retire at 60 with 500k?
• How can you Fix a Retirement Shortfall?
• What Percent of Retirees are Millionaires?

What is a Nest Egg?

Nest egg refers to an amount of money that someone saves for the future, usually for retirement. The idea is that by setting aside money, little by little, it will multiply over time through compound interest.

Read Also: The top 5 Things you Forgot to Consider While Planning your Retirement

The idea is that farmers would leave an egg in the hen’s nest, which would encourage the hen to lay more eggs. By setting aside some eggs (instead of using them all up), the farmer’s stash would grow. In the same way, if you set some of your money aside, it will grow over time.

What is a Good Nest Egg?

What is the size of the average retirement nest egg? It depends on what you mean by “average.”

A 2019 analysis of more than 30 million retirement accounts by Fidelity Investments found that the average balance in corporate-sponsored 401(k) plans at the beginning of 2019 was $103,700.

For traditional, Roth, and rollover IRAs, the figure was $107,100. And for 403(b)s and other defined-contribution retirement plans in the non-profit sector, it was $85,800. Those numbers were roughly unchanged from the same quarter of the previous year, due largely to a downturn in the stock markets in late 2018.

A better question to ask instead of “What is the size of the average retirement nest egg?” would be: “How much will I need in retirement?”

Everyone is different. Some might need $100,000 a year to live in retirement, but others might need more or less depending on their lifestyle requirements. If a so-called expert says you need a nest egg of $1,000,000 or $2,000,000 and they know nothing about you, then this is inaccurate.

To calculate how much you need to save, first determine what you suspect you will spend in retirement. Then, add up your expected future income, such as from a pension plan or Social Security, and subtract that from your spending budget. The discrepancy is what you will need to make up.

Be sure to factor inflation into this amount as well, as purchasing power will inevitably decrease, especially for services like healthcare.

What can you do with Nest Eggs?

Many people go through their careers without planning for retirement correctly, and without building a proper nest egg. It leaves many people disadvantaged and panicked by the time they start coming close to retirement. By this time, it is too late to reap the full benefits of compounding.

It is important to start saving early and often and that is where a nest egg comes into play. Life is unpredictable, and having a strong nest egg can increase security and reduce the stress of a person and their family.

A nest egg can be stored in various asset classes – cash, bonds, stocks, real estate is real property that consists of land and improvements, which include buildings, fixtures, roads, structures, and utility systems.

Property rights give a title of ownership to the land, improvements, and natural resources such as minerals, plants, animals, water, etc., etc. Consulting with a financial planner and utilizing tax-free savings accounts are methods to ensure that your nest egg is being saved up as efficiently as possible.

How can you Build a Nest Egg?

You can build a nest egg in many ways, but you should do it purposely and carefully. You want to preserve the money that you’ve been accumulating and ensure that it’s not lost on a poor investment, for example. That doesn’t mean it has to be only in the least risky investments, but it should mean that you’re carefully weighing your alternatives and balancing out the risks.

Here are some key steps to follow as you think about building your nest egg:

1. Choose the right account

You’ll need to tailor your account type to how you intend to use the money.

• If your nest egg is for retirement, then consider an employer-sponsored plan such as a traditional 401(k) or Roth 401(k). Your employer may match your contributions – free money! – and you’ll receive valuable tax advantages for saving in the account.
• If you max out your employer-sponsored plan, you also have an IRA – either the traditional or Roth version. An IRA also offers huge tax advantages.
• If you need the money sooner than retirement age – say for a special purchase – then you can turn to a taxable account. You won’t get a tax advantage, but you’ll have complete flexibility with the money.
• If you’re looking to save for college, a 529 college savings plan can offer tax advantages and other benefits.

Whichever way you go, make sure that you’re using the account type that makes the most sense for the purposes of your nest egg.

2. Choose the right investments for your needs

You’ll also want to tailor your investment plan to how you intend to use your nest egg and when you’ll need the money.

• Do you have decades before you need the cash? You can be more aggressive with the account and invest in higher-return assets such as stocks. While they may fluctuate more in the short term, over time they tend to outperform other major asset classes.
• Do you have more than five years before you need the money? It could still make sense to have some of your investment in stocks, but you might want to balance that against assets that have less risk but still offer some upside.
• Do you need your nest egg in just a few years? In this situation, you probably want to stick mostly to safer assets such as bonds or high-yield savings accounts, so that your money is there when you need it.

Regardless of how you intend to spend your money, make sure your investment is aligned with that goal. Otherwise, the amount of money may not be there when you need it. For the long term, you’ll likely come out better investing aggressively, while a short-term goal may require more conservative investing.

3. Add to the account regularly

Once you have money in your account, it’s important to keep adding to it. Regularly adding to the account helps it to continue to climb in the longer term. A 401(k) allows you to save easily by withdrawing money from your paycheck before it even reaches you, helping you amass more.

And it’s vital that you protect your nest egg so that it’s there when you need it. If you’re saving for retirement, it’s critical that you stick to your plan so that you can have comfortable golden years. Avoid the temptation to spend your nest egg on something other than your real goal.

How long will a Nest Egg last?

The 4% rule is based on research by William Bengen, published in 1994, that found that if you invested at least 50% of your money in stocks and the rest in bonds, you’d have a strong likelihood of being able to withdraw an inflation-adjusted 4% of your nest egg every year for 30 years (and possibly longer, depending on your investment return over that time).

The approach is simple: You take out 4% out of your savings the first year, and each successive year you take out that same dollar amount plus an inflation adjustment.

Bengen tested his theory across some of the worst financial markets in U.S. history, including the Great Depression, and 4% was the safe withdrawal rate.

The 4% rule is simple, and the likelihood of success is strong, as long as your retirement savings are invested at least 50% in stocks. Here’s how to approach investing in stocks.

Dynamic withdrawals

The 4% rule is relatively rigid. The amount you withdraw each year is adjusted by inflation and nothing else, so finance experts have come up with a few methods to increase your odds of success, especially if you’re looking for your money to last a lot longer than 30 years.

These methods are called “dynamic withdrawal strategies.” Generally, all that means is you adjust in response to investment returns, reducing withdrawals in years when investment returns aren’t as high as expected, and — oh, happy day — pulling more money out when market returns allow it.

There are many dynamic withdrawal strategies, with varying degrees of complexity. You might want help from a financial advisor to set one up.

The income floor strategy

This strategy helps you preserve your savings for the long haul by making sure you don’t have to sell stocks when the market is down.

Here’s how it works: Figure out the total dollar amount you need for essential expenses, like housing and food, and make sure you’ve got those expenses covered by guaranteed income, such as Social Security, plus a bond ladder or an annuity.

A word about annuities: While some are overpriced and risky, using the right annuity can be an effective retirement-income tool — you fork over a lump sum in return for guaranteed payments for life. In the right circumstances, even a reverse mortgage might work to shore up your income floor.

That way, you always know your basics are covered. Then, let your invested savings be responsible for your discretionary expenses. For instance, you’d settle for a staycation when the stock market’s tanking.

What is a Reasonable Amount of Money to Retire with?

A key part of retirement planning is to answer the question: “How much do I need to retire?” The answer varies by individual, and it depends largely on your income now and the lifestyle you want in retirement. Research published by Schwab Retirement Plan Services in 2019 illustrates two things. First, 401(k) participants believe they need $1.7 million, on average, to retire. And second, many are not on track to get there.

Why is that the case? There may be multiple causes. But not knowing how much to save, when to save it, and how to make those savings grow can create shortfalls in your nest egg.

Saving vs. Investing

Schwab research shows that most people—64%—see themselves as savers, not investors. As a result, 54% of 401(k) participants tend to put additional retirement funds in a savings account instead of another investment account such as an IRA, brokerage account, or health savings account (HSA). The trouble with this strategy is that savings accounts typically pay much lower returns (or nothing at all) compared to investment accounts.

When it comes to 401(k) accounts, many people take a “set it and forget it” approach to saving and investing, according to the Schwab study. A third of the study participants who auto-enrolled in their 401(k) plan have never increased their contribution level. And 44% have never made a change to their investment choices.

You need to pay attention to and actively manage a 401(k) to really make it grow. That also applies to other investment accounts, including IRAs, brokerage accounts, and HSAs. To accomplish this, you likely will benefit from professional help. In fact, 95% of Schwab survey participants said they would be “somewhat” or “very” confident about making investment decisions with help from a pro versus 80% if they had to do it on their own.

How Much Do I Need to Retire?

Most experts say your retirement income should be about 80% of your final pre-retirement salary. That means if you make $100,000 annually at retirement, you need at least $80,000 per year to have a comfortable lifestyle after leaving the workforce.

This amount can be adjusted up or down depending on other sources of income, such as Social Security, pensions, and part-time employment, as well as factors like your health and desired lifestyle. For example, you might need more than that if you plan to travel extensively during retirement.

Retirement Savings: The 4% Rule

There are different ways to determine how much money you need to save to get the retirement income you want. One easy-to-use formula is to divide your desired annual retirement income by 4%, which is known as the 4% rule.

To generate the $80,000 cited above, for example, you would need a nest egg at retirement of about $2 million ($80,000 ÷ 0.04). This strategy assumes a 5% return on investments (after taxes and inflation), no additional retirement income (i.e., Social Security), and a lifestyle similar to the one you would be living at the time you retire.

Retirement Savings by Age

Knowing how much you should save toward retirement at each stage of your life helps you answer that all-important question: “How much do I need to retire?” Here are two useful formulas that can help you set age-based savings goals on the road to retirement.

Percentage of Your Salary

To figure out how much you should have accumulated at various stages of your life, it can be useful to think in terms of a percentage or multiple of your salary.

Fidelity suggests you should have an amount equal to your annual salary in accumulated savings by age 30.⁴ This requires saving 15% of your gross salary beginning at age 25 and investing at least 50% in stocks.

Interestingly, half of the participants in the Schwab study said they contributed 10% or less of their income to their 401(k)s.⁵ Unless some combination of an employer match, additional savings, and debt repayment makes up the difference, those study respondents may fall short. Additional savings benchmarks suggested by Fidelity are as follows:

• Age 40—two times annual salary
• Age 50—four times annual salary
• Age 60—six times annual salary
• Age 67—eight times annual salary

A More Aggressive Formula

Another, more aggressive formula holds that you should save 25% of your gross salary each year, starting in your 20s. The 25% savings figure may sound daunting. But keep in mind it includes not only 401(k) withholdings and matching contributions from your employer, but also the other types of savings mentioned above.

If you follow this formula, it should allow you to accumulate your full annual salary by age 30. Continuing at the same average savings rate should yield the following:

• Age 35—two times annual salary
• Age 40—three times annual salary
• Age 45—four times annual salary
• Age 50—five times annual salary
• Age 55—six times annual salary
• Age 60—seven times annual salary
• Age 65—eight times annual salary

Many Americans likely have room to boost their savings at most stages of their lives. If you’re like most Schwab respondents, a 401(k) might be a good place to start if you have access to one. Upping your savings rate may even reduce financial stress, which mostly comes from worrying about saving enough for retirement, Schwab reports.

Sometimes you’ll be able to save more—and sometimes less. What’s important is to get as close to your savings goal as possible and check your progress at each benchmark to make sure you’re staying on track.

Can I Retire at 60 with 500k?

When people talk about retirement, they often quote round numbers and rules of thumb. For example, you might hear somebody say that you need $2 million to retire (or more). But the real amount you need depends on circumstances like your spending and other sources of income. So, here’s how it looks to retire on $500k.

Not everybody is going to save several million dollars during their working lives. At some point, you may face a choice: Do you work longer to accumulate more savings, or can you retire with less?

Yes, You Can Retire on $500k

The short answer is yes—$500,000 is sufficient for some retirees. The question is how that will work out, and what the conditions need to be for this to work well for you. With retirement income, relatively low spending, and some good fortune, this is feasible. If you have two people in your household receiving Social Security or pension income, it’s even easier.

Clearly, more money results in more security and more options. But when you’re ready (or forced) to stop working, it’s smart to check the numbers and see what your options are. The key is to understand roughly how much you need to spend each year, and determine if you have the resources to support that spending.

Let’s walk through an example of exactly how that works.

Your Spending Level

One of the most critical pieces of a retirement plan is the amount you spend each year. The less, the better, when it comes to financial planning calculations. I’ve worked with clients who withdraw less than $2,000 per month from their retirement savings, and that lifestyle allowed them to retire comfortably—well before traditional “retirement age.”

The goal here isn’t to spend as little as possible and suffer through your golden years watching every penny. You need to be comfortable, and surprises (such as healthcare events) cost money. But if you’ve developed the habit of keeping your spending relatively low, you may be able to make this work.

How much will you spend? One way or another, you need to estimate how much you’ll spend each year. There are several ways to determine your retirement spending need, which we can summarize as:

• Actual budget: Use your current spending level, and adjust for any changes (such as a paid-off home at retirement).
• Income replacement method: Pick a percentage of your current income, such as 80%, that you need to maintain throughout retirement. It may be less than 100% because you’ll stop saving for retirement and paying payroll taxes.
• Lifestyle estimate: Choose a round number, such as $50,000 or $100,000 per year, that you think you need. This method is somewhat dangerous because people tend to estimate high (which makes sense, and is better than picking a number that’s too low!).

Each of those methods has pros and cons, so it’s wise to look at more than one to see if you’re missing anything. Retiring on $500k does not leave most people with significant room for error, so take your time with this process. Once you have a reasonable number in mind, you know what your goal is. Next, we figure out what it takes to reach that goal.

Retirement Income

You probably have at least one source of retirement income that will cover a portion of your spending needs.

Social Security

90% of people age 65 and over receive Social Security benefits, and for at least half of them, Social Security makes up 50% or more of their household income. That makes your Social Security payment a critical piece of your plan. The average Social Security benefit in retirement is $1,503 per month, or about $18,000 per year. 

If you’ve been fortunate enough to have high earnings during your working years, you might receive as much as $34,000 per year—or more, if you wait beyond your Full Retirement Age. Delaying your benefits typically provides a raise until you reach Age 70.

Pension Income

Pensions are still a thing for people retiring today. You might get income from a private employer, the federal government, a state-run pension, or another organization. That money comes in monthly, replacing your regular wages once you stop working.

Depending on a variety of factors, those pension benefits can be quite generous. In some cases, the income might cover all of your monthly expenses, minimizing the need to tap into your $500k of retirement savings.

Other Sources of Income

The possibilities here are endless, but any other sources of income help reduce the amount you need to save for retirement. Those might include royalties, consulting or part-time work, rental income, and more.

How can you Fix a Retirement Shortfall?

Besides cutting your spending, there are several other ways to close the gap. None of them are ideal, but it’s important to know your options in case you find yourself with expectations that can’t be fulfilled (yet). Several tips to help you retire are below.

Work longer: From the category of Least Popular Solutions, you can work longer. Doing so is surprisingly powerful:

• Builds up savings: That time allows you to accumulate more, allowing you to retire on more than $500k.
• Increase retirement income benefits: Extra working years might lead to a higher pension or Social Security benefit. Those calculations often reward you for extra years late in life. As a result, you narrow the gap between your retirement income and your spending need.
• Shorten your withdrawal period: A year working is one year less that you have to pay for out of your savings, which is why your retirement age matters so much.
• Taper down: If possible, you can work less. That allows you to reduce your retirement need while providing time to do what matters most.

Withdraw more: Using our example, you could take your chances and withdraw the extra $2,000 per year. This results in a 4.4% withdrawal rate on your $500,000 of savings. That’s a bit higher than the traditional 4% rule, but it’s not off the charts, and it could work—especially if you’re willing to adjust your spending in response to market crashes.

Consider safety nets: Generally, using your home equity to fund retirement is risky. But when there’s a substantial difference between what you have and what you need, it can make sense. Sometimes it’s smart to consider your home equity as a backup plan. If you face major medical expenses or other unexpected costs, that money can help you out of a tight spot. Whether you use a home equity loan or a reverse mortgage, you may have additional assets.

Combine strategies: Cutting spending, working longer, or withdrawing more—on its own—may not solve your problem. It’s best to combine several different strategies. That way, the changes don’t need to be as drastic. For example, if you move to a slightly less expensive area and work part-time for an extra year or two, you might only need to withdraw 4.1% of your savings each year to make the numbers work.

There are several other approaches, including trying to earn more on your investments, but that requires some good fortune (and it can end up badly). The point here isn’t to show you every possible way to retire on $500k, but instead, to demonstrate that it’s possible and show how it might look.

What Percent of Retirees are Millionaires?

Congratulations, you’ve graduated from college! Good news: You have the potential to amass millions of dollars by the time you retire if you’re in your early to mid-twenties, like most college graduates. It will require hard work, discipline, and the ability to stick to a budget, but it can be done.

Using a time value of money formula, $111 per paycheck invested at average rates of return over a typical career could turn into more than $4 million in wealth and hundreds of thousands of dollars a year in passive income.

Learn how a portfolio of stocks, bonds, mutual funds, real estate, and other assets can keep your family living comfortably during your lifetime and serve as an inheritance for your children and grandchildren (or, perhaps, your favorite charity).

Set Aside Savings

To illustrate your possible path toward wealth, let’s try a math exercise.

Imagine after graduation you go to work for a company such as Starbucks and earn $40,000 a year in salary (which is considerably less than the average food service manager salary of $59,820).

The coffee giant matches 401(k) contributions dollar-for-dollar up to either the first 4% or 6% of your salary, depending on the year. Further, imagine your effective combined tax rate for federal, state, local, and payroll taxes is 28%. 

You decide you want to put aside 20% of your earnings each year, which is ambitious but not extreme. That’s $8,000 per year. However, most 401(k) plans are pre-tax, traditional 401(k)s (as opposed to Roth 401(k)s, which use post-tax money). That means you’re going to get $2,240 taken off your tax bill at tax time.

In effect, you actually only need to save a net $5,760 out of your pay each year, or less than $111 per weekly paycheck, as the government subsidizes your good behavior.

Leverage Your Money

That’s not all. With the varying 401(k) matching schedule, in some years, Starbucks is going to deposit $1,600 in tax-free matching contributions, while in others, it will kick in $2,400 in tax-free cash. This results in a total of $9,600 to $10,400 in fresh money being added to your account every 12 months, even though you’ve only parted with $5,760 out of your own pocket.

How Your 401(k) Helps

As long as the money remains within the protective confines of your 401(k), the dividends, interest, rents, and capital gains you earn aren’t subject to taxes. Rather, you pay taxes on withdrawals, as if they were a paycheck, when you enter retirement.

If you attempt to tap the money early, you are subject to a 10% penalty on top of the regular tax hit, although you can take a 401(k) loan or hardship withdrawal if absolutely necessary. The government requires you to take distributions at age 72 to keep you from perpetually compounding the money within the tax-shelter. But before that, you can get nearly a half-century of tax-deferred growth.

If you were to find yourself in bankruptcy court, it’s possible some or all of your 401(k) could be protected from creditors, as the courts have been hesitant to invade retirement principal. This is one of the reasons you should not draw down your retirement account balances without talking to a qualified adviser first.

The Power of Compound Interest

In a typical year, your 401(k) would receive an average of $10,000 in fresh cash. Your net adjusted out-of-pocket savings is $5,760; a much smaller chunk of your salary.

That $10,000 will be invested in the securities or funds you select, with the interest compounding until you retire or you reach the age of 72, at which time the government requires you to take distributions.

Imagine you opt for a low-cost equity index fund approach. Take the long-term historical equity returns earned by large, blue-chip stocks (which dominate index funds) and figure a 9.5% annualized rate of return, on average, with dividends reinvested.

Say you invest like this for 40 years, between the ages of 25 and 65, and never, in all that time, enjoy a meaningful raise. You fail to get promoted. You forget about adjusting your contributions for inflation. In other words, your contributions remain exactly the same for 40 years.

How would you fare? Ignoring any other assets you accumulated in life—your home equity, savings accounts, cars, personal investments in a brokerage account, annuities, businesses you started—your 401(k) balance could contain about $4.2 million after 40 years. That’s $10,000 a year (or $833 a month), compounded at 9.5% interest annually, for 40 years.

If your funds did exceptionally well and earned 12.5% a year in interest, you’d have about $9 million. If they only averaged 6.5% a year, you could expect about to have $1.9 million. If they managed 3.5% average annual returns, you’d still have more than three-quarters of a million—$885,757.

Read Also: I Received an Early Retirement Offer: Should I Quit my Job?

Plus, by the time you reached 65, you’d statistically have another two decades or so in life expectancy to enjoy the money.

Alternatively, if you had built other wealth along the way, you could attempt to hang onto the 401(k) cache by using a rollover IRA for as long as possible so your children, grandchildren, or favorite charity ended up with the amount as it continued to grow. Then, they could extend the tax benefits upon your death using an inherited IRA.

All from only $5,760 net out-of-pocket savings per year, or $111 out of each weekly paycheck.

Finally

Because your nest egg is money that you’re saving for a special purpose, you want to carefully protect it. For some people, that may mean taking on a financial adviser – one who has your best interests at heart – to manage the money.

For others, it may mean guiding and tracking the investments yourself so that you see where you stand each month. Regardless of how you approach it, however, you’ll want to ensure that your nest egg is there when you need it.