In the 17th century, farmers pioneered the “nest egg” strategy. To encourage hens to lay more eggs, they placed real and fake eggs inside nests to encourage hens to lay more eggs thus creating more income for the farmer.
A nest egg has since become, by definition, money or assets that you have saved or invested for a particular purpose. While your long-term plans might include education, buying a property, or retirement, nest eggs often refer to retirement accounts. Let’s take a look at how to build a nest egg, review different types of retirement accounts, and understand why it’s important to plan for the future.
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How to build a nest egg
While you may be concerned about preserving your nest egg, the main goal is to compound your savings by investing for retirement. To invest the money you have saved, you can choose a suitable investment account to execute your strategy and then select appropriate financial instruments.
Your first step is to save. The earlier you save, the longer you have for your investments to grow. Consistent savings in a retirement account with diversified investments can help you build that nest egg significantly.
Not only can you create an income for retirement, but you’ll combat the negative effect of inflation, which is the rising costs of goods. When you feel comfortable with your own retirement you might also feel comfortable about saving money for your children.
Types of retirement accounts to consider
Trying to figure out which retirement account is best for you can be pretty challenging, especially when these terms are unfamiliar to you. However, choosing the right retirement account for you can make the difference between getting tax-free withdrawals or paying the government more taxes and penalties.
Let’s take a look at which retirement accounts are more convenient for you:
A 401(k) is a retirement fund offered by a company to you as an employee. In 2020, employees can contribute up to $19,500 to a 401(k). Employers usually provide company matching for a specific percentage of that contribution. If you don’t contribute, you don’t get the matching contribution! You snooze, you lose.
The 401(k) plan will offer a select group of investments you can choose from. If you’ve ever felt like investing seems like gambling, you’ll find comfort that the investment choices are pre-selected.
A solo 401(k) is just like a 401(k), except that it’s only for self-employed business owners with no employees. According to the IRS, you can use the solo 401(k) for yourself and your spouse, but you cannot qualify for a solo 401(k) even if you have a single full-time employee working for you. Contributions can go up to $57,000 per person.
A 403b is similar to a 401k, though it’s for non-profits or tax-exempt organizations like hospitals, religious groups, or public schools. If you’re a teacher at a public school, this is the retirement account you’ll get.
A 457b is similar to a 401(k), but for state and local government workers. While 401(k) plans are qualified retirement plans subject to the Employee Retirement Income Security Act (ERISA), 457 plans are not. The biggest difference is that the IRS does not charge early withdrawal penalties for money taken out before age 59.5. 457(b) plans also allow employees close to retirement to double their contributions in a year.
Roth 401(k)s are employer-sponsored plans with the Roth tax benefit. Roth plans take after tax contributions, meaning that you contribute money you’ve already been taxed on. The advantage is that when you do withdraw money, you don’t have to pay any tax. Earnings and investment growth accumulate tax-free.
The tax benefits of a Roth IRA are similar to a Roth 401(k), but this retirement account is an individual account that you open on your own. If the company you’re working for doesn’t offer a retirement plan, or if you’re self-employed, you can open a Roth IRA. Roth IRA contributions are subject to income limits, meaning that you might not be eligible to contribute if you make above the IRS determined amounts.
Two features make this retirement plan special. Number one is that you can usually take a tax deduction when you contribute, but you have to pay taxes on withdrawals, including on any earnings and growth. The second feature is that you can’t keep your money forever in a traditional IRA. You have to start withdrawing money at the age of 72, also known as RMD (required minimum distributions).
Self-directed IRAs allow you to directly manage the investments yourself. You have the ability to invest in alternative investments like real estate that are not permitted in other retirement plans.
Simple IRAs are tax-deferred retirement savings plans meant for small businesses. Setting up this retirement account is intended to be straightforward with low paperwork and startup costs. Employers can also deduct contributions for employees. Together with your employee, you will contribute money here until you can afford a real retirement plan.
SEP IRAs are also a retirement savings plan for business owners. Contributions are eligible for tax deductions, and both employers and employees can contribute. The annual contribution limits are higher than typical individual retirement accounts.
Health care savings accounts are highly tax-advantaged savings accounts for people with high medical expenses. You can deduct your contributions on your taxes, and withdrawals are also tax-free.
What does tax-advantaged mean for retirement accounts?
Tax-advantaged accounts give you tax benefits or savings either when contributing to the account or when you withdraw money at retirement. Americans are encouraged to save for retirement using beneficial tax rules from the IRS.
When should I start to build my nest egg?
Start saving as soon as you can. Perhaps you go through your budget and decide to cut down on shopping or start cooking at home instead of eating out. Every little bit counts, even if you start out with $1000 of savings and stash away just $100 per month. Assuming you earn 5% per year on your savings, in 40 years you will have nearly $152,000!
Should I start investing to secure my retirement?
Absolutely. Creating a diversified retirement plan with a smart investment strategy can help you secure your financial future. Not sure how to start? It’s quick and easy with MoneyLion investment accounts. For just $1 a month you can auto-invest money in professionally curated portfolios without lifting a finger. Want to invest in what you believe in? You can even choose thematic portfolios if you like, at no additional cost.
Nurturing your nest egg
Saving for the future will likely never be an outdated concept. Building a nest egg is easier with tax-advantaged strategies such as contributing to retirement accounts. Looking for more ways to save? Choose RoarMoney, where you pay only $1 a month to save on withdrawal fees, get paid up to 2 days early, and earn cashback rewards for everyday spending.