How to Build a Nest Egg

When thinking about retirement, you will have to make several financial decisions that will significantly impact your lifetime income and the long-term security of your beneficiaries. One of the decisions is to build a nest egg - a special sum of dollars invested or saved for a specific future purpose, including retirement plans. The major idea here is that the money you saved should only be spent for the things you saved it for.

How much you can save

If you are eligible, you should prioritize investing the maximum in the well-known employer-sponsored retirement programs - 401(k) and 403(b) plans. You can put the maximum $15,500 (which can be indexed to inflation) into these plans. You can make your contributions in 401(k)s with pre-tax money, with your employer matching a part of what you put in. Thus many people find the benefits of 401(k) hard to pass up. In addition, the law speeds up the vesting of employers' matching contributions, i.e., the full rights to an employer's match.

According to Bill Arnone, director of employee financial education at Ernst & Young in New York, "In the past, company matches had to be fully vested after five years, or according to a phase-in schedule lasting seven years." At present, employers must grant their employees 100% vesting following 3 years at most. Alternatively, employers can follow this phase-in timetable: 20% after 2 years, 40% after 3 years, 60% after 4 years, 80% after 5 years, and a full 100% after 6 years.

No 401(k)?

What if you are not eligible for a 401(k)? If this is the case, you should prioritize contributing to any retirement plan offered by your employer - for example, a 403(b), SIMPLE, or SEP (simplified employee pension) plan. You can save in a SIMPLE or SEP plan if you are self-employed. Similar to the 401(k) plan, these plans enable you to make pre-tax contributions, making your money grow tax deferred. Pat yourself on the back if you do contribute the maximum to a 401(k) or a similar retirement plan.

IRA

As soon as you have maxed out, check if you can make some more investments for an IRA. The current contribution limits for Roth IRAs and regular IRAs are $5,000. The best bet is to save in a Roth IRA, since your savings grow free of tax - you can also take out the money free of tax. However, Roth IRAs have some income restrictions.

In both deductible IRAs and non-deductible IRAs, your investments grow tax-deferred. Your contributions for deductible IRA are tax-deductible. If you are not qualified for another retirement plan, you can make contributions to a deductible IRA irrespective of income. On the other hand, if you are qualified for an employer-sponsored retirement savings plan, you can lose all or part of your deduction depending on your income. Non-deductible IRAs have no income restrictions.