Updated: Apr 1
A nest egg is a sum of money and other assets that are saved or invested for the future for a specific purpose which is commonly tied to retirement planning. When accumulating wealth, the assets typically take many years to compile over the long-term. There are also short-term nest eggs for items such as rainy day funds to pay for unforeseen expenses such as home and automobile/car repairs, medical and dental needs, unplanned travel, pet needs and so on.
Comparison to an Emergency Fund
The emergency fund is more suited for expenses to pay for when someone loses a job and needs the money to pay the monthly bills. Commonly, this fund should be built out to handle three-to-six months worth of expenses.
In some cases there are those that consider the outright ownership of a home as a part of a nest egg, meaning that one actually owns the home and that it can be considered as real property. In turn, it has tangible value and once it is sold, proceeds from that sale can be added to retirement and brokerage accounts.
The Origin The allusion is to put a real or china egg into a hen's nest to encourage her to lay. The connection between this and the 'savings' meaning isn't exactly clear. It may be that the idea was that the egg that was put into the nest could be later retrieved, after the hen had laid. The more eggs means more income for farmers.
The practice of putting eggs into nests as an inducement to laying more is recorded from as early as the 14th century. The use of nest-egg refers to as savings goes back to least 1686.
The Goal of a Nest Egg
The imperative goal of the nest egg is to invest and build the assets over time. Most people are more aggressive with investing when they’re young, and as they near retirement, the goal is to be more convservative to create capital preservation.
For example, one may invest more aggressively in highflying stocks and more risky mutual funds in their retirement accounts such as 401(k)s, Roth IRAs, Roth 401(k)s, 403(b)s and 457(b) plans from the early 20’s to late 50’s.
How to Manage the Money
The typical plan for many investors is to take the conservative approach when they are five years or less from retirement and invest in instruments such as bonds, dividend-paying blue chip stocks and those securities associated in mutual funds that invest in these types of companies. This is why many people choose conservsative investments such as target-date based funds as they capture all of the investments in stocks, bonds and other securities in one fund. For example, if someone is planning on retiring in 10 years and the current year is 2020, he/she may choose a 2030 or 2035 fund and the fund manager will be allocating the portfolio with a conservative investment mindset.
The Importance of a Nest Egg
The nest egg mindset is that the goal of social security is to provide 40% replacement income and the goal should be to have 80% replacement income meaning people need to come up with the other 40%. For example, if someone lives off $100,000 a year, he/she will need to target $80,000 in replacement income. Hence, the nest egg on the whole, is a long-term investment.