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The 4 Essential Stages Of Building Your Retirement Nest Egg

When most people think of retirement, what comes to mind is a simple enough process: they plan on saving their money until it's time to quit working and then living off this retirement nest egg. Unfortunately, an approach this simple is how people end up never retiring or at least not getting the retirement they had expected. Follow these four essential stages, though, and this won't be a problem.


The first stage that's going to be necessary for building your retirement nest egg is earning the money. After all, if you don't have enough money to cover your basic living expenses, you aren't going to have any for saving for retirement.

Now, most people should have at least some money left over at the end of the month that they can put into savings for retirement. If you're someone who is currently spending more than they make, this is a problem you must address immediately.

Of course, some people really are up against their limit. Maybe you make minimum wage or just slightly more, but with plenty of debt eating into your earnings. If you fall into one of these two categories, no amount of cutting back on expenses is really going to help, making this conventional advice completely unhelpful.

Instead, if you're in the Earn phase, it's because you're still working on making a steady income that gives you enough extra money to put some aside for your retirement nest egg.

You could do this a few ways:

There may be other options unique to your situation worth exploring too. The point is that if you aren't currently making enough money to save for retirement, it's of no use trying to. First, you need to earn a better income.

Save for Building Your Retirement Nest Egg

With a solid income in place, the next phase you must enter into is Save. This phase is pretty self-explanatory: you need to put money aside so you can build a retirement nest egg.

However, I like to point out that this phase also involves fending off "lifestyle creep." This is where, as you begin making more money, you also look to start spending more of it on things that will improve your lifestyle. This could be things like:

  • A bigger home
  • Another home/cabin
  • A better car

The list goes on and on, but these are all things that most of us are tempted to buy on a regular basis. Once we start making enough money to afford them, it can be difficult to say "no." This is exactly what you must do to make it through this phase, though, and onto the next one.

It's also worth bringing up how you go about saving your money. Obviously, you can't just lock it up in a vault somewhere because inflation will slowly bring the total amount down considerably.

While a discussion about all your different options is best reserved for another piece, I do want to bring up fixed income securities for a moment. While they're plenty popular, they're taxed as ordinary income, which makes them hard to recommend. Instead, you should place your taxable fixed-income investment budget into a tax-sheltered account like a Fixed-income IRA.

To summarize this phase, once your income is sufficient, you need to begin saving for retirement and dismissing the temptation to simply keep spending.


retirement nest eggOnce you have saved enough, the priority for your retirement nest egg is growing it. This is where I see a lot of people who are attempting to handle retirement on their own make some serious mistakes. They don't understand that, eventually, their account is growing more so because of the existing balance than due to ongoing contributions.

For example, let's say you contribute $300 a month to retirement. By the end of the first year, you have $3,600 set aside. After the following year, that balance may grow a bit on its own, but the primary reason will be further contributions.

Now, let's visit the account a decade in the future after the same saving behavior the entire time. 10 years later, only half of the account's annual increase comes from your contributions. The remainder is simply because of the existing balance. Go 20 years into the future and 75% of the annual increase will be due to the account balance.

The point I'm driving at is that, eventually, you also need to be putting your focus on how your account is being grown. Is it being properly invested? Is asset allocation reasonable? Are the portfolio costs being managed?

If all you do is remain in the Save phase until retirement, you're almost certainly going to miss out on potential returns. In the Grow phase, start looking into the details.


As the date of your retirement nears, the dynamics shift one last time because this smaller time horizon is extremely relevant. You've spent decades earning, saving and growing your retirement nest egg.

There's always going to be a risk, of course. It's just that, as the date of your retirement approaches, managing risk needs to become your main focus. Moderate growth is now fine; there's no need to continue looking for new opportunities as that can expose you to greater risks than simply leaving your money in place.

Of course, target date funds have this kind of risk management built into their very structure. Another option is a dedicated portfolio of individual bonds. Their equity glide path actually decreases during the last years of your Growth phase to preserve the portfolio.

A lot of variable annuities that have "living benefit" riders are quite popular during these last years as well for the same reason.

In summation, as you get within a year or two of your retirement date, your only goal is preserving the same rate of growth. Now is not the time to jeopardize your retirement nest egg by looking for other growth opportunities.

Although these four essential stages may be a bit more involved than what you had originally planned for retirement, hopefully, you can also see that it's not overly complicated. Follow these simple stages and you'll be in good shape come retirement.

Additional disclosure: IncomeClub is an online investment advisor, specializing in bond investing. Whether you are new to bonds or an experienced bond investor, we provide deep expertise in fixed-income investing, individualized advice, access to global bond markets, and convenient online account management.
IncomeClub, Inc. is an SEC registered investment adviser. All IncomeClub’s customer assets are held in the customer’s name with Interactive Brokers, LLC, Member FINRA/SIPC.