Motley Fool
0
All posts from Motley Fool
Motley Fool in Motley Fool,

How to Build Your Nest Egg in 5 Easy Steps

It's an oft-bemoaned fact that 1 out of 3 Americans has no retirement savings. But while it's easy enough to make excuses for why we're not saving, the truth is that if more workers don't step up their games, they're going to face a rather harsh reality once retirement rolls around.

One reason why so many people neglect their long-term savings is that they find the idea overwhelming. After all, it's almost impossible to predict how much any of us will need to retire comfortably, or what things will cost down the line. With that in mind, here's a simple step-by-step guide for establishing a nest egg -- even if you're not sure exactly how much you ought to be aiming for.

IMAGE SOURCE: GETTY IMAGES.

1. Create a budget

The first step in building a nest egg is freeing up a portion of your income to save, which you can't easily do if you don't know where your money is going. That's why it's crucial to create a budget that maps out your monthly expenses. Once you determine how much you'll need to cover the basics and how much you're currently spending on non-essentials, you'll be able to find ways to cut corners and free up some cash to contribute to a retirement account.

2. Live below your means

It's hard to save for the future when you're blowing your entire paycheck on the present. Having a budget will help you track your spending, but it won't necessarily stop you from maxing out your earnings on things like rent, car payments, clothing, and entertainment. Rather, it's up to you to decide which expenses you're willing to minimize in order to free up more cash for savings. You don't need to limit yourself to an excessively frugal existence, but make sure there's enough wiggle room in your budget to not only consistently set money aside, but allow for some unplanned expenses, whether it's a car repair, or a larger-than-usual utility bill.

3. Ramp up your retirement plan contributions

Most people don't begin by maxing out their IRAs or 401(k)s. Rather, they start small and use the power of compounding to turn years of modest contributions into larger sums. That said, it stands to reason that, as you progress in your career, your earnings level will also increase, so if you make it a point to consistently bank every raise or bonus you get, you'll amass even more of a nest egg as retirement draws closer.

4. Snag employer-matching dollars

Though not everyone has access to a 401(k), 92% of companies that sponsor a retirement plan also provide matching incentives for employees. If your employer offers such a benefit, be sure to contribute enough of your own money to take advantage of your company match in full. Surprisingly, of those who have access to a 401(k) with an employer match, only 75% put in enough of their own money to take full advantage. The other 25% of workers inevitably wind up leaving $24 billion in unclaimed cash on the table every year -- ouch.

5. Invest your money wisely

Though contributing to a retirement plan is clearly a good start, you can't just ignore that cash once it's in your account. Rather, you'll need to adopt a strategy that maximizes growth. Your investment approach will probably depend heavily on your age and appetite for risk, but if you're younger and have time to ride out the market's ups and downs, you'd be wise to load up on stocks -- even if that means pushing yourself a bit outside your comfort zone.

While stocks are riskier than other investments, they've historically delivered an average yearly return of about 9%. Safer investments might lower your risk of losing principal, but you'll get less out of them in the long run.

Here's a table that shows what your nest egg might grow to if you were to consistently sock away $300 a month for 30 years and adopt a variety of investment strategies:

Average Annual Return on Investment

Ending Balance (Assumes $300 Monthly Contribution Over 30 Years)

2% (cash and bonds)

$146,000

4% (bonds)

$202,000

6% (bonds and stocks)

$284,000

8% (mostly stocks)

$408,000

TABLE AND CALCULATIONS BY AUTHOR.

You can't help but notice the difference between the ending balance at the top of that chart versus the ultimate balance all the way at the bottom. In both scenarios, you're laying out the same amount of cash for retirement -- yet the results point to a 2,000 gap.

Building a nest egg doesn't have to be difficult or complicated. Follow these steps, and you'll soon be headed in the right direction toward a financially stable future.

The $16,122 Social Security bonus most retirees completely overlook
If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $16,122 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Simply click here to discover how to learn more about these strategies.

The Motley Fool has a disclosure policy.