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Retirement Risk Management: Protecting Your Nest Egg

Updated on April 25th, 2023
Retirement protecting your nest egg

Where did the term “nest egg” originate? To encourage the hens to lay more eggs, farmers used to leave one egg in the henhouse. Today, nest eggs typically refer to retirement savings that you do not touch until you retire. It’s the money you save for the future so that you have something to fall back on when you retire. In many financial plans, the stated objective is to grow your nest egg.

Nest eggs come in a variety of types. Often, the strategy involves saving or investing a sum of money or other assets for long-term objectives such as retirement, paying for college, and buying a house. Additionally, nest eggs can be used to cover emergency expenses for medical care, dentistry, repairs to cars and homes, and job loss.

Many employees contribute part of their paycheck to a long-term retirement savings plan in order to build a nest egg for retirement. In terms of saving for retirement, there is no single right amount. Some retirees may be able to live on less than a $500,000 nest egg, for example. Other people may need more, depending on their location, lifestyle, and number of dependents they have. You can use a retirement calculator to figure out how much to save.

Unfortunately, not all Americans have access to long-term savings. Despite Americans’ awareness of the need to save and build a nest egg, many are unprepared for retirement. As a matter of fact, 47% of households nearing retirement report financial insecurity, including 20% who are dependent heavily on Social Security to support their retirement. In addition, 27% are financially unable to maintain their standard of living from their working years.

The good news? Just like predator-proofing a chicken coop, there are effective ways to protect your nest egg.

1. Set retirement goals.

According to Gallup, seven in 10 U.S. adults are planning to set goals for themselves at the beginning of the new year, one-third are “very likely” to do so, and 38% are “somewhat likely.”

Most Americans intend to set goals, but younger Americans are more likely to do so than older Americans. About eight out of ten (18-34-year-olds) and 72% of those 35-54 years old say they’re likely to set goals, compared to 62% of those 55 and older. There is also an age difference among those who are “very likely” to set goals, with the youngest group being 40% and the oldest being 25%.

College graduates and high-income adults also have a higher rate of goal-setting than their counterparts, regardless of gender.

There has been a link between financial goal setting and positive outcomes, according to research from Lincoln Financial. It is more likely that participants who set goals will save money.

  • Three times as many participants contribute 15%+ to retirement when they have a retirement savings goal.
  • Deferral rates are almost 2x higher among participants who set savings goals other than retirement.
  • Those who set a debt payment goal are almost twice as likely to contribute 15%.

In short, you should always set and stick to financial goals regardless of your age if you want to protect your nest egg. Your nest egg should not be dipped into without your permission by friends or family members. Likewise, don’t let family members guilt you into withdrawing money from your nest egg too early.

You need a clear financial goal when you’re setting your nest egg goals. Put your all into it, and don’t let anything but absolute emergencies sway you. Ultimately, it is you that has the greatest chance of ruining your nest egg.

2. Take advantage of employer-based savings.

Your main savings tool will often be employer-sponsored retirement plans such as a 401(k), 403(b), and others. Taking advantage of employer matching funds multiplies your savings for free. Suffice it to say, try to find jobs that offer them.

401 (k) investment options.

The majority of 401(k) plans offer a variety of investment options for you to choose from. Typical investment options include:

  • Money market funds
  • Bond mutual funds
  • Stock mutual funds
  • Deposit accounts with stable values, such as guaranteed investment contracts (GICs)
  • Stock in your own company

There are different levels of risk and reward associated with different types of investments. As an example, money market funds and stable value accounts typically invest in certificates of deposit (CDs) and U.S. Treasury securities. Although they have lower earnings potential than other types of investments, they don’t always keep up with inflation. Over a long period of time, stocks and bonds can earn much more than they risk losing their value.

You can usually mix and match different options to manage your account balance. Please review your plan documents to determine if any restrictions apply to when or how often you can request changes. It is easy to make these kinds of changes online with most plans.

In addition to age and how early you start saving for retirement, other factors will influence your tolerance for risk. Consult a financial advisor to determine the right mix for your 401(k) investment options.

Tax advantages of a 401(k).

You contribute directly to a traditional 401(k) before federal income taxes are withheld. You may owe less in income taxes because the contributions are pre-tax, regardless of whether you itemize or take the standard deduction. There is even a possibility that it will lower your tax rate.

When you withdraw your pre-tax contributions in retirement, they are tax-deferred. It is assumed that you will be in a lower tax bracket in retirement compared to now.

Don’t forget that there are limits on 401(k) contributions.

Contributions to 401(k)s for 2023 are limited to $22,500 for employees and $66,000 for employers and employees combined. A catch-up contribution of $7,500 is available to people over 50, raising the employee contribution limit to $30,000.

3. Put money in an IRA.

A 401(k) plan is one of the most popular retirement plans, with 72% of Americans having access to it in 2022, according to the Bureau of Labor Statistics. An IRA can help you avoid some 401(k) problems, even if you already have one.

For instance, you cannot own 401(k)s; for example — you can only participate. Without your consent, your employer can change or limit the investment options of your plan. Additionally, leaving your job means losing your ability to contribute to your 401(k).

You can, however, keep an IRA. Even if you switch jobs, you can continue to access your 401(k) and roll it over into an IRA. Stocks, bonds, mutual funds, and exchange-traded funds (ETFs) are among the investment options offered by quality IRAs.

And a self-directed IRA lets you customize your portfolio to meet your financial needs, risk profile, and retirement objectives.

Tax benefits are also unique to IRAs.

A traditional IRA offers the advantage of tax-deferred growth until age 73 when you must begin taking minimum distributions. Traditional IRAs involve greater upfront investment than regular brokerage accounts. Investing now (and over time) may result in you having to withdraw more when you retire.

Depending on your income level and whether you have a workplace retirement savings plan (or your spouse if you’re married), your traditional IRA contributions may be deductible.

When you reach retirement age, a Roth IRA will give you that tax break you’d receive from a traditional IRA. In retirement, you do not pay taxes on your earnings and withdrawals since you contributed after-tax dollars. Young investors, in particular, benefit from this.

But, as with a 401(k), there are contribution limits. For 2023, you can contribute up to $6,500, or $7,500 if you’re 50 or older.

4. Ensure your retirement goals and insure your money.

You can prepare for your financial future and for unexpected situations regardless of your generation, life stage, or financial goal. For example, when you or your family suffers an illness or injury, you might be able to use nonmedical employee benefits to cover the costs.

It’s likely that your employer offers several insurance benefits, which can help cover unexpected medical expenses or accidents. As an example, accident insurance helps pay for deductibles and copayments not covered by medical insurance.

A critical illness policy provides the cash you can use for everyday expenses, such as a mortgage, childcare, and food. In the meantime, disability insurance can help protect your paycheck in case you become sick or injured and are unable to work.

Additionally, you may want to invest in long-term care insurance.

According to Martin Insurance Agency, 70% of people will require some kind of long-term care after 65 – and it can be costly. In general, a home health aide costs around $20 an hour. That’s the equivalent of hiring a full-time employee at $42,000 a year. In addition, a private nursing home can cost up to $100,000 per year.

The problem is that many people believe their health insurance will cover that or that a government program will take care of it. However, that isn’t true for the most part. In most cases, health insurance pays only for doctor and hospital bills. You can only receive Medicare coverage for short-term skilled nursing home care, and Medicaid only covers care if you have very limited assets. Your savings or retirement fund will most likely be used to pay for your care, which can be costly.

Make sure your retirement nest egg is protected with Long-Term Care Insurance. Rather than delaying this, consider getting long-term care insurance at a time when you’re healthy, and your premiums are affordable.

Your employer, an association, or a membership group may offer long-term care insurance. Alternatively, you can consult with an agent to ensure you get the best plan suited to your budget and needs.

5. Set aside a buffer amount.

You might also want to consider setting aside a certain amount of cash in your nest egg as a buffer. Consider saving $2 million for retirement, for example. You might want to consider saving $2.50 million for retirement instead if you have the financial capability.

In the event of a family emergency or a medical crisis, having a bit of a buffer, regardless of how much, can prevent your nest egg from being depleted. Your retirement nest egg may help you keep your $2 million retirement goal if you need to use some of it right now for an unexpected surgery.

In short, the buffer amount may prevent you from losing too much of your nest egg.

Don’t know where to begin or how much to pursue? To figure out the following, use a portfolio analysis tool:

  • What is the performance of your portfolio in relation to your goals?
  • What other portfolios can you invest in, such as mutual funds, to get better returns?
  • Are you paying more than you should in hidden fees or other expenses?

When you use the right portfolio analyzer tool, you can significantly increase the growth rate of your nest egg and improve the stability of your financial situation.

6. Delay filing for Social Security.

Getting your biggest benefit doesn’t mean waiting until you’re 70. It does, however, mean waiting until full retirement age (“FRA”), which is currently 67 for those born after 1960. In the first three years after age 67, you’ll have to pay 6.67%, and for the next two, you’ll have to pay 5%, which can amount to a reduction of 30%.

In times of high inflation, it is even more imperative to get the most out of your Social Security benefits. It can substantially reduce the need to withdraw from personal savings when you know you will receive a certain amount of guaranteed income for the rest of your life. Future growth prospects can be undermined when stocks are sold in a falling stock market.

While some people prefer to delay claiming their benefits, others struggle — especially in their early 60s when they have little income and need it desperately. It doesn’t matter what you decide, you’ll still receive quite a bit more if you wait until after you retire.

7. Safeguard your money against inflation.

“Inflation’s impact on your retirement funds can be scary,” writes Lyle Solomon in a previous Due article. “Suppose you’ve set aside $1 million for the future and plan to spend $50,000 annually.” If inflation and rate of return remain at 3% each year, that $1 million would last 20 years. If inflation increased to 12 percent annually, $1 million would run out in 11 years and nine months.

“People worry about running out of money while planning for their retirement, even when sailing,” he adds. “The possibility of price increases merely intensifies the already existing worries.” Regardless of how well you plan your retirement, inflation is an unpredictable factor that can disrupt it. Overall, inflation is the enemy of fixed incomes.

Fortunately, there are ways to protect your nest egg against inflation:

  • Don’t hold too much cash. Having cash on hand is a good idea for big purchases or emergencies. When inflation’s high, you shouldn’t use cash for long-term investments. As inflation increases, your ability to buy goods with cash decreases. Consider long-term investments if you have enough cash to keep your buying power.
  • Reassess your portfolio. To resist excessive inflation, you need to invest in assets that can help you preserve your purchasing power over time. In most cases, young investors should stick to a portfolio that emphasizes stocks. You can beat inflation with alternative investments like commodities and inflation-protected bonds.
  • Earn money from real estate. You can beat inflation by renting out real estate. Inflation makes property prices climb so that you can charge more rent. Compared to buying stocks, managing a property and charging the right rent takes a lot of effort. However, if you want to diversify your income during inflation, this is a great option.

8. Don’t pay unnecessary taxes.

When you retire, you may have to pay regular income taxes even if you have tax-advantaged retirement accounts. Tax-deferred accounts are recommended for stocks paying low dividends (or none), as well as stocks paying high dividends and taxable bonds.

The ideal situation is to place dividend and capital gain mutual funds in a taxable account with municipal bonds, which are not federally (and sometimes state-) taxed.

9. Track your withdrawal rate.

It is important to stay up-to-date on withdrawal rules for your retirement or investment accounts in order to protect your nest egg. For example, you shouldn’t withdraw funds from your IRA until you are 59 ½. At that point, withdrawals from such accounts are no longer penalized.

It is possible, however, that this rule will change down the road. To maximize your return, you must be ready to change your withdrawal and contribution plans if it does.

10. Take a look at single premium immediate annuities.

Annuities with a single premium (“SPIAs”) may be suitable for retirees who have a low percentage of guaranteed income relative to the size of their assets. If you don’t have a pension or limited Social Security benefits, you are more vulnerable to market changes than those who have a more stable income. Furthermore, those who rely solely on stock-related savings face longevity risk or the possibility of outliving their savings.

An SPIA allows you to annuitize part of your assets, allowing you to generate income and reduce your need to access your portfolio when the market declines. In contrast to some of the more complex annuity products, the fees are usually more affordable. In exchange for the certainty that annuitization provides, you should expect to pay something in the range of 1% to 3% annually.

11. Your retirement should be timed to coincide with your spouse’s.

I’ll be honest here. There are complicated rules for spousal benefits under Social Security. So, to ensure your savings are protected and you do not pay unnecessary income taxes by signing up for benefits at the wrong time.

In short, if you’re both nearing retirement, make sure you’re both on the same page.

12. Learn self-defense.

Not literally. Rather, this is about avoiding becoming a victim of a scam. It’s worth mentioning that there were 92,371 elderly fraud victims in 2021, and some scams cost victims more than $50,000.

Avoid being a courtesy victim.

Your good manners will be exploited by con artists. Only be courteous to friends and family.

Don’t be fooled by strangers offering strange deals.

Never make an immediate investment decision without checking out the salesperson, firm, and investment opportunity first. In your state or province securities agency’s Central Registration Depository (CRD) files, you can find extensive information about investment salespeople and firms. Click here to find the contact information for the securities regulator in your state or province.

Keep track of your money at all times.

Do not trust someone who asks you to invest in something you do not understand or who tells you to leave everything to them.

Don’t make rash financial decisions during a tragedy.

When you suddenly find yourself responsible for your own finances, get the facts before making any financial decisions. You may be able to learn about investing at your local library or university. Consult friends, family, trade associations, and state or provincial securities regulators for recommendations on finding and checking a financial professional. Insurance settlements can help with expenses, but they also make you an easy target for scammers.

Ask tough questions about your investments.

Keep an eye on the progress of your investment if you trust an unscrupulous investment professional or outright con artist. Make sure you receive regular written reports. Watch for signs that your funds are being traded excessively or without your permission.

You may have trouble retrieving your principal or cashing out your profits.

When you try to withdraw your principal or profits from a stockbroker, financial advisor, or another individual with whom you invested, they stall you. Prior to investing, make sure you are aware of any restrictions on withdrawing your funds associated with certain types of investments.

Avoid “reload” scams.

Don’t let con artists take a “second bite” of your assets after you have already been scammed by an investment scam. Those who con you know that your money is limited. Having lost funds once, some seniors who have been scammed will go along with another scheme promising to recover those lost funds and maybe even more. All too often, when you attempt to make up for lost financial ground, you end up losing whatever savings you had left.

13. Start working part-time.

In theory, retirement should mean that one’s working days are over. However, now that part-time (and often remote) jobs are becoming the norm working in retirement can be a useful way to reduce portfolio stress.

Let’s suppose that you’ve determined that $50,000 is your annual spending need in retirement. Using the 4% rule would result in an overall retirement savings requirement of $1,250,000.

You can effectively reduce portfolio withdrawals by the same amount by working a part-time job that earns $20,000 per year (just under $400 a week). In the first year, you don’t have to withdraw $50,000 from your portfolio, but only $30,000.

In other words, your savings are best protected if you make even the smallest amounts of income. By earning additional income, you can regain control over your finances by being able to adjust your spending according to unexpected market movements.

14. Avoid panic selling.

When the stock market is going down, never panic sell.

No matter how bad the economy is or how bad the market looks, it always rallies. You’ll lose your nest egg if you panic and sell your assets for less than their market value. Until the economy calms down, it may be a good idea to weather the storm.

15. Managing RMDs in retirement.

Even after retirement, keep an eye on your finances.

In this case, get your 401(k) or IRA’s spend-down plan aligned with your retirement dreams and goals before required minimum distributions (RMDs) begin at age 73.

FAQs

What is a nest egg?

Nest eggs are sums of money saved for future use. Generally, when we talk about a nest egg, we mean a retirement account. When you set money aside during your working years, you can build a strong investment portfolio so you’ll be able to support yourself financially later on.

What can you do to make sure your retirement nest egg lasts?

Although there are few hard rules when it comes to retirement, the 4% rule is one popular rule of thumb. According to this rule, you should be able to withdraw 4% of your savings every year during retirement, with simple adjustments for inflation. You are highly likely to be able to maintain your savings for the rest of your life if you follow the 4% rule.

After the age of 73, however, some accounts require required minimum distributions (RMDs).

Is there such a thing as a good retirement nest egg?

By the age of 67, Fidelity recommends saving about ten times your annual income into a retirement account. You should save one year’s salary by the age of 30, three years’ salary by the age of 40, and six years’ salary by the age of 50, based on that standard.

This sounds like a lot — I know! Forget getting all uptight about what you have to do and, perchance, not doing anything. Do the best you can — just move forward on your financial goals. Keep these thoughts top of mind and work toward your goal, and with compounded interest, you will do better than you think you can. You can do this! Be brave! Just keep going.

In case you fall behind in your IRA or 401(k) contributions, you can make catch-up contributions.

Where should I house my nest egg?

Your best option for storing your retirement savings is in a traditional IRA or 401(k), which are tax-advantaged. Contributions to both accounts are tax-free, and they also grow tax-deferred over time, which is a valuable benefit. Investment gains will not be taxed until you take withdrawals from your investments in retirement.

Alternatively, you can invest in a Roth IRA or 401(k). You won’t get an immediate tax break by doing this, but your money will grow tax-free, and your withdrawals won’t be taxed either.

To give your nest egg the best chance of growing, it’s essential that you save as much as possible as early as possible. In order to enjoy a comfortable retirement, you must have a strong nest egg.

What is the best way to start saving for retirement?

Investing early allows you to grow your money thanks to compound interest, which is one of the most important retirement rules. 401(k), IRA, and Roth IRAs are tax-advantaged retirement accounts that do not incur ordinary investing taxes.

John Rampton

John Rampton

John Rampton is an entrepreneur and connector. When he was 23 years old, while attending the University of Utah, he was hurt in a construction accident. His leg was snapped in half. He was told by 13 doctors he would never walk again. Over the next 12 months, he had several surgeries, stem cell injections and learned how to walk again. During this time, he studied and mastered how to make money work for you, not against you. He has since taught thousands through books, courses and written over 5000 articles online about finance, entrepreneurship and productivity. He has been recognized as the Top Online Influencers in the World by Entrepreneur Magazine and Finance Expert by Time. He is the Founder and CEO of Due.

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