10 Ways to Build a Nest Egg

In 1978, Congress created what we now know as the 401(k) plan. Lawmakers named the plan for a specific section of the Internal Revenue Service Code. Originally, 401(k)s offered taxpayers a break on deferred income. In 1980, businesses began realizing that the new tax code was an easy, tax-friendly way to create retirement savings accounts by allowing people to invest in the stock market. The money becomes available without any penalties when investors reach the age 62.

Employers soon began offering their employees 401(k) plans mainly because they were less expensive than traditional pension programs. Some employers even started contributing "free money" to each employee's plan. As of 2008, there are more than 65 million 401(k) plans in the United States with more than $3 million in invested stocks, bonds and mutual funds [source: Fetini].

In order to build a nest egg, financial advisers urge people to max out the amount they contribute each year. The maximum contribution in 2010 was $16,500 for those younger than 50. Those 50 years or older could contribute $22,000 [source: CNNMoney.com]. The more money a person puts into a 401(k), the more money that person will be investing in stocks, bonds and mutual funds, and their retirement.

If you don't have a 401(k), then it's important to open up an Individual Retirement Account, or IRA. Like a 401(k), an IRA allows individuals to save money and invest in stocks, bonds and mutual funds. There are many tax advantages to an IRA. However, if you withdraw the money early, you have to pay a penalty and taxes.

There are two main types of IRAs. The first is a tax-deferred IRA. In a tax-deferred IRA you don't have to pay the taxes until you begin withdrawing the money when you retire. The second is a Roth IRA. In a Roth IRA you pay the taxes now when rates are lower, not later when taxes are higher. Maxing out the contributions to a Roth IRA is a good idea, because you can shelter more money than you can in a typical IRA [source: Updegrave].

How this all works is very complicated. In short, the more money you put into a Roth IRA the better the return on your investments. When you retire, you won't pay any taxes when you begin withdrawing money [source: Updegrave]. The maximum Roth IRA contribution in 2010 was $5,000 for those younger than 50, and $6,000 for those over 50 [source: IRS].

There are many excuses for not saving money: "I owe too much on my credit cards." "My living expenses are too high." "I just don't get paid enough to save." No matter how many bills you have, experts say you can still save, although the amount depends on your income, your debt and your living expenses. Most experts say that those in their 20s should save at least 10 percent or more of their income. Those who are older should put away more because they have less time to save before retirement.

If you think you can't save a portion of your income, consider what economists Steven Venti and David Wise say. Through their research, they discovered that people in the lowest income groups were able to save more -- for some, as much as $100,000 more -- than some of those in the middle income groups. Their research also found that people who had little to no retirement savings got that way simply because they chose to save less and spend more over their lifetimes [source: Mulrean].

Here's an important safety tip: Don't take money from your retirement savings to pay down a debt, unless you're facing foreclosure. Taking money out of your 401(k) or IRA is expensive. If you withdraw money before the age of 59 ½, you will need to pay taxes on the amount withdrawn, plus a 10 percent penalty. If you take money out of your retirement accounts it will lessen the amount of money you have to invest. As such, the return on those investments won't be as great, which can crack your nest egg.

Budgets are wonderful planning tools that can give you a clear idea of what you own and what you owe. A budget allows you to keep track of your daily expenses, forcing you not to overspend [source: Kiplinger]. A budget is also a means to reach your goals. By projecting future expenses, and recording them when they are paid, you can adjust your spending or planning habits [source: Kiplinger]. If you keep on top of how much money comes in and goes out, you won't feel like you're living paycheck to paycheck. A budget allows you to keep your fingertips on what you are spending as opposed to what you want to spend. As such, a budget will change your spending habits and allow you to make comparisons from one month to the next. Make sure, however, that a portion of your monthly income goes toward savings.

Raise your hand if you know what the average person spends on eating out. According to the U.S. Department of Labor, the average person spent $2,619 dining outside the house in 2009. How much did we spend on transportation? Would $7,658 shock you [source: Bureau of Labor Statistics]? Cutting spending is one way to feather your retirement nest. There's an entire industry built around saving money on groceries, clothing and fuel. You can do simple things like stop smoking, stop drinking or take public transportation instead of firing up the SUV.

Some experts recommend keeping your committed expenses, such as food, clothing and insurance premiums, to 60 percent of your income. It is then wise to allocate 30 percent to retirement savings accounts, long-term savings accounts, or a short-term savings for such things new appliances, vacations, gifts, car repairs and other less predictable expenses. That leaves you 10 percent to spend any way you please [source: Jenkins].

When we say rehearsing for retirement, we don't mean go out and star in your own theatrical production. Instead, rehearsing for retirement means coming up with a sound fiscal plan to determine how much you will need to live the life you want when retirement comes.

The first thing you want to do is set up a realistic retirement date. Most people would love to retire much younger than the official Social Security earlretirement age of 62, which is the earliest you can retire and draw benefits. Be practical. You might have to postpone your retirement a few years depending on the type of lifestyle you envision [source: Malvern401k].

Next, figure out how much you need to save and then adjust that amount for inflation [source: Malvern401k]. What do you want your life to be like after you stop working? Are you going to travel? Where are you going to live? Do you want your standard of living to increase or stay the same? Some experts say if you plan to retire at 62 you will need at least 10 times your current income [source: Malvern401k]. For example, if you currently make $100,000 a year, then you would need at least $1 million to live on during retirement.

The bottom line is to do your homework. If you plan to buy an RV to travel the nation's byways, rent one for a week or two and go on the road. This will give you a good idea of how much money you will need to live that lifestyle. If you want to move to Sun City, Ariz. or some other retirement community, check out the housing prices. Talk to other retirees who live there. Since your retirement income will be considerably less than your current earnings, try living on a reduces income for a couple of months. How much can you live on comfortably?

If you're putting your retirement savings in an ordinary savings account, it's time to rethink that strategy. Investing in stocks, bonds and mutual funds is a faster, more lucrative way, to feather your nest egg.

When you buy stock in a company, you are buying a piece of that company and have a claim on every cent that company makes. As a company's earnings improve, so does your investment. Although the economy dips from time to time, stocks are solid investments. Since 1926, the average stock has gained close to 10 percent a year. The best way to purchase a stock is through a broker [source: CNNMoney.com].

Bonds are a type of debt, or an IOU. When you purchase bonds, you become a banker. You loan that money to a city, a company and even the federal government. In return, they promise to pay you back with interest. Municipalities use bonds to build bridges, roads, buildings and other projects. The federal government sells bonds to finance its debt. Experts say that your investment portfolio should contain at least 15 percent in bonds [source: Kansas]. While most bonds are safe investments, others come with a risk. However, the riskier the bond, the more money you can earn [source: Kansas].

Mutual funds take money from thousands of small investors and use the cash to buy a combination of stocks, bonds and other types of securities. Mutual funds are good for diversifying your investment portfolio, and they're inexpensive. In most cases, you have to invest a couple of hundred dollars. There are many categories of mutual funds, and some are safer than others. The riskier the fund, the more money you stand to make -- and lose. When investing in a mutual fund, you need to consider the level of risk and how much the fund strays from its annual average return [source: CNNMoney.com]

Although they might have fancy sounding names, annuities, money market accounts and CDs are different ways of investing. Annuities, which are sold by insurance companies, are popular for retirees who want to receive a steady income. The company can dole out payments on a monthly, quarterly or annual basis. You can even get a lump sum payment. Fixed annuities make guaranteed payouts. Variable annuities can fluctuate depending on the underlying investments [source: CNNMoney.com]. Annuities provide a nice tax shelter because the money you invest grows tax-deferred. When you begin making withdraws, the amount you put into the annuity is tax free. However, the government will tax you on the earnings [source: CNNMoney.com].

Money market accounts pay a higher interest rate than traditional savings accounts. However, you have to keep a minimum balance. Certificates of deposit, or CDs, are good ways to stash away extra money for a short period. CDs are one of the safest investments, however, they pay the lowest rate of return. Like a 401(k) or an IRA, the bank will penalize you for withdrawing the money early [source: The Wall Street Journal].

Real estate is a great investment option. While the Great Recession of 2008 sucked the life out of many investments, real estate assets rocketed in value [source: Schnepper]. Many retirement plans allow investors to own various types of property including apartment buildings, co-ops, single family homes and even vacant land. People can invest indirectly in real estate investment trusts (REITs), or buy property using an IRA. Real estate is low risk over the long run with a high-rate of return [source: Schnepper].

A person cannot put property they already own into the IRA. In addition, the funds in the IRA must pay all the expenses on the property including taxes, insurance and repairs. Concurrently, the money you make from the property in sales or rent can go directly into the retirement account.