In this article I want to explore the nest egg and ways to keep it healthy and useful.
I should probably start by saying what this and other articles like it are not. They are not financial advice. I am not a financial adviser and nothing I say should be taken to be financial advice. I’ll leave financial advice to others. What I do want to do is offer some alternatives that I think make sense, and as always to get us thinking “outside the box.”
Very few people probably think their nest egg is ever big enough. The idea might be to set some simple goals of how you want your nest egg to work for you and how you will keep it healthy. Hopefully by doing so you can achieve some relative peace of mind.
What if Your Nest Egg Isn’t in the Millions?
Ideally by the time we reach retirement our nest egg is very large. For most of our life that’s what the financial industry has told us is the goal. But what happens if your nest egg isn’t that large? In either case I think you approach your nest egg in the same way, although the emphasis may certainly be in different categories. Let’s first look at some categories and then look a little further into how to keep your nest egg healthy.
Dividing Up Your Nest Egg
There are many possible ways to divide your nest egg. How you do depends on your personal situation. Here are three possible categories:
- Income Fund
- Emergency Fund
- Adventure Fund / Little Adventure Fund
Income Fund
A large portion of your nest egg might be set aside for income. This is money that is set aside for investment and for you to live off of. You might earn interest, stock dividends or other income from these funds and use those earnings for your day to day living expenses.
Emergency Fund
This might be money you set aside for things like large car or house repairs, unexpected health expenses, or if you end up unemployed and you lose a portion of your income that comes from your job. Traditionally advisers have said your emergency fund should be anywhere from 3 to 12 months of living expenses. I think in retirement those expenses are tempered somewhat if less of your income depends on a job. On the other hand unexpected health expenses might be more common than in our younger years, and this could increase what you want in an emergency fund.
Adventure Fund / Little Adventure Fund
This is your “fun” money, and I think it is very important that everyone have this fund, even if it has to be very modest. This money might be used for travel or hobby expenses. I think it might be useful to split this further to include a Little Adventure Fund so that you set aside some funds for those little fun activities like a night out while you are still planning for that big road trip.
An Example
Let’s look at a simple example of how the divisions might work. Let’s say someone has a nest egg of $150,000 and a monthly budget of $2500. Maybe they set aside $120,000 in their Income Fund. This gives them $400/month income (using the 4% rule commonly thrown around by financial advisers.). An Emergency fund of 6 months, or $15,000 is set aside for emergencies. This leaves $15,000 for the Adventure Fund of which $1000 is used for “little” adventures.
So how is the nest egg kept healthy? Well, first the Income Fund is never touched, and ideally is built up to both increase its earning potential and allow for inflation. Next some money is set aside in the monthly budget to replenish first the emergency fund (if necessary,) and then the Adventure Fund as it is used.
Hopefully the ideas in this article will help you think about your nest egg and how to keep it working for you while you keep it healthy.
Until next time…
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