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Your Nest Egg: How to Max It Out

Aug 20, 2018 5 min read George Mannes

Key Takeaways

  • The sooner you set up goals, the sooner your cache can grow.
  • If you’ve got a 401(k) at work, avoid the pain and automate your savings.
  • Don’t forget about asset allocation!


Katherine, recently retired from a career in publishing, is enjoying every moment of this new phase of her life. A resident of New York City, she goes to museums. She takes long walks. She volunteers in local schools. She’s planning a trip to England and Scotland later this year.



What makes this retirement especially sweet for Katherine (not her real name) is that she was able to launch it when she was only 60 — well under the age at which many Americans can retire in comfort. Starting out with no family money and never marrying, she laid the financial groundwork based only on her own earnings, and without living a life of self-denial: “I take nice vacations, and I go out to eat whenever I want,” says Katherine. She owns her apartment outright, too. “I’ve just always been a saver,” she says, “but I don’t go nuts over it.”

While Katherine’s situation may not match yours, you could follow her lead by taking these steps to help build your nest egg into one that will help finance a satisfying retirement. 


Setting realistic goals

When it comes to saving for retirement, pay attention to the fabled tortoise and the hare: Slow and steady wins the race. The sooner you start saving, the more time your investments will have an opportunity to grow — and the smaller the percentage of your earnings you’ll likely need to set aside to reach your goal. Boston College’s Center for Retirement Research, for example, suggests that if you’re an average earner and you want to retire comfortably at age 65, setting aside 10% of your total income starting at age 25 could be a good place to start. Wait until 35, and you’ll likely need to save 15%. Those percentages include any employer contributions to your retirement account.

Those percentages line up with Katherine’s efforts. Between her and her employer’s contributions to her retirement account, she steadily put away 13% of her paycheck over nearly three decades. She also banked income she earned outside her regular job, and for many years put an extra $400 a month in the bank.


Automating your savings

Saving that much of your salary may seem impossible — especially if you have other obligations, like student debt, a mortgage or childcare — but there are ways to help make it easier. As of March 2016, 62% of American workers in non-government jobs had access to a 401(k) or similar retirement plan, according to the Bureau of Labor Statistics Opens in new window. (82% of workers at companies with 500 workers or more employees had an available plan.) 

If you have a 401(k) or other retirement account at work, the amount you choose could be deducted from your paycheck automatically, either before taxes with a traditional account or after-tax if your employer offers a Roth option. (In both cases, money you contribute has the potential to grow tax-free; with a traditional account you pay tax only upon withdrawal generally at retirement; with a Roth, withdrawals after age 59 1/2 from accounts held at least five tax years are free of federal taxes.) 

Is money tight? If your employer offers a match, setting aside enough pay to earn your employer’s full contribution could be a good place to start—it’s like “free money”, so you may not want to leave it on the table. For example, if your employer matches 50 cents for every dollar on the first 6% of pay you contribute — a common setup — your 6% contribution immediately becomes 9% in your account. Then, once a year, or anytime you get a raise, consider bumping up your contribution slightly. 

“Fifteen percent is a big chunk of money to a lot of people,” says Jill Gianola, a certified financial planner in Columbus, Ohio. “But if you can raise your contribution by a percentage point each year, you could get there, and you likely won’t even notice it.”


Considering a Roth IRA

Don’t have access to a workplace plan, or want to supplement your savings? Consider setting up regular transfers from your bank account to an Individual Retirement Account (IRA) or a regular brokerage account. 

Unlike the case with a traditional IRA, contributions to a Roth IRA aren’t tax-deductible. But money has the potential to grow tax-free and qualified distributions are free from federal taxes upon withdrawal.  There are income limits for direct contributions to a Roth IRA.  But, if you have no other traditional IRAs, you can make a contribution to a traditional IRA and convert to a Roth IRA for the same result.

Roth IRAs (and Roth 401(k)s) could make the most sense if you don’t need a current tax break or expect your tax rate to be higher when you withdraw than when you contribute — a common situation if you’re early in your career. 

Also, Roth IRAs could be particularly good choices for younger adults who may want to access some of their savings sooner than later, says Gianola. The reason: You can withdraw contributions (but not earnings) well before retirement without facing taxes or penalties. “It isn’t money you’re locking up for 30 years,” she says.


Choosing your investments

Once you’ve committed to saving, the next step is actually choosing what to invest in — specifically, what portion of your savings you’ll invest in stocks, what portion you’ll put in bonds and what amount you’ll leave in cash or in other assets. 

That aspect of investing — “asset allocation,” as it’s formally known — can be crucial, says Jeremy Stempien, portfolio specialist at QMA, an asset manager owned by Prudential Financial. “Outside of saving enough,” Stempien says, “it’s one of the most critical factors in successfully saving for retirement.” 

The reason is that different kinds of investments pose different risks and different potential rewards, which means they can perform differently at different times. The goal is to try to create a mix of investments appropriate for your risk tolerance (how well you stomach the market’s inevitable ups and downs) and time horizon (how long until you’ll need your money). So, to help temper the risk of one investment dragging down your whole portfolio, you may want to consider investing across the major asset classes (stocks, bonds and cash equivalents) and diversifying within them (e.g., large, small and foreign stocks).   Asset allocation does not guarantee a profit or protect against a loss in declining markets and investing and it is possible to lose money when investing.


Narrowing your options — broadly

But choosing well can be a challenge, particularly if you’re faced with an overwhelming number of options. The average 401(k) plan, according to a 2014 study  by BrightScope and the Investment Company Institute PDF opens in new window , has 25 different mutual funds — enough to create what Gianola calls “analysis paralysis.” In such a situation, her solution is often to choose from what are known as target-date funds. Each of these funds, intended for people planning to retire and start withdrawing their money roughly around a certain year (for example, 2040 or 2045), generally contain a mix of stocks, bonds and other assets that typically shift from a more aggressive equity-based stance to a more conservative fixed income one as the target year approaches. When that retirement date is decades away, these funds tend to be heavily invested in stocks, which typically offer the greatest opportunity for long-term growth; as the target approaches, the mix shifts more toward bonds, which are generally more stable than stocks.

For younger adults putting money in a Roth IRA or taxable account — which they might want to access before retirement — Gianola says considering what’s known as a balanced fund might be a good option. Balanced funds tend to have a stable 60%/40% stock/bond mix, which is typically less aggressive than those of target-date funds aimed at younger people. Another potential option: Investing half your money in a broad-market stock fund and half in a broad-based bond.

For many, the investments to avoid are individual stocks, whose risks — starting with lack of diversification — might simply outweigh their potential rewards. “The idea that you’re going to make a killing in stocks is usually a fantasy,” Gianola says. “This isn’t your full-time job. Don’t overestimate your abilities.”

Katherine says her investments were “nothing fancy.” More important, she says, was the fact that she didn’t panic and bail out of the market whenever stocks went down.

And what’s her life like now? “I don’t think about money much,” she says. Her biggest concern: finding more opportunities to volunteer. 


What you can do next

Want to know whether you’re on track for retirement? Jill Gianola has a rough guide for determining whether you’re way ahead of the game, on track, or way behind.

Start with your net worth: the value of all your assets (savings, retirement plan, and home, if you own one) minus debts (including credit card debt, car loans and mortgage balances). Then compare that to your current annual pre-tax earnings.



George Mannes, a former editor at Money, has been writing about investing and personal finance since 1998.


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