A nest egg is a substantial sum of money or other assets that have been saved or invested for a specific purpose. Such assets are generally earmarked for longer-term objectives, the most common being retirement, buying a home, and education.
The term can also refer to money kept aside as a reserve to deal with unexpected emergencies such as a medical problem or urgent housing repairs. “Nest egg” has been used to refer to savings since the late 17th century. The term is believed to have derived from poultry farmers’ tactic of placing eggs—both real and fake—in hens’ nests to induce them to lay more eggs, thereby increasing income for these farmers.
How Nest Eggs Secure Your Future
The foremost investment objective of a nest egg is generally preserving capital, since it represents funds accumulated over a considerable time. However, the portfolio should also have a growth component to offset the effects of inflation. A nest egg should typically be invested in relatively conservative instruments such as certificates of deposit, bonds, and dividend-paying blue chips. The exact allocation of these securities within a nest egg should be based on asset allocation principles as well as the investor’s risk tolerance, time horizon, and investment objectives.
Key Takeaways
- A nest egg is a substantial sum of money or other assets that have been saved or invested for a specific purpose.
- Such assets are generally earmarked for longer-term objectives, the most common being retirement, buying a home, and education.
- A nest egg should typically be invested in relatively conservative instruments such as certificates of deposit, bonds, and dividend-paying blue chips.
It would be unwise to invest nest egg proceeds in highly volatile investments in hopes of achieving a high rate of return. These investments include commodities, small-cap stocks, and currencies since their inherent volatility makes them less suited for conservative investing.
The Importance of Building a Robust Nest Egg
For many years, a common objective for individuals was to save a nest egg of at least $1 million to live comfortably in retirement. Reaching that sum would, in theory, allow the individual to sustain themselves on their retirement investment income generated annually. However, based on annual inflation, the ideal size of a nest egg continues to increase as the purchasing power of the dollar diminishes.
In addition to cash and securities, other assets expected to grow in value and generate a positive return on investment over time might make up part of a nest egg. Prized artwork and other rare collectibles may be held as assets to appreciate and later possibly sold to provide hard currency for retirement.
Real estate in a prime location—in expectation of property value increase—could also be part of a nest egg. Even if the property owner does not develop it themselves, holding onto real estate anticipating increased value and a future lucrative offer could be a strategic move. The proceeds from such a sale could then contribute significantly to their retirement.
Investing wisely and consistently—as well as carefully considering the types of assets to include—can ensure a solid financial foundation, safeguarding your financial future and achieving long-term goals.
Related Terms: retirement planning, asset allocation, investment portfolio, financial security
