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Tripped up by some of the investing terms we've used in the lessons? Use this handy cheat sheet for a brief description of some key definitions. For a more detailed discussion of retirement plans, see our Retirement Plan Primer.


A - C |  D - G |  H - L |  M - R |  S - Z


A

Active investing
Investing in individual companies

Advance medical directive
Also called a living will, this document says you want the right to die a natural death, free of all costly, extraordinary effort to maintain your life when that life can only be sustained by artificial means.

American Association of Retired Persons (AARP)
AARP is a nonprofit, nonpartisan association dedicated to shaping and enriching the experience of aging.

Amortization
The period of time during which you will owe interest and principal to your lender.

Amortization Method
One of the three ways you can take a penalty-free distribution from your retirement accounts before age 59 ½. The distribution calculation is determined by amortization of the account balance over a number of years equal to the life expectancy of the account owner or joint life expectancy of the account owner and beneficiary at an interest rate that does not exceed a reasonable interest rate on the date payments commence.

Annuity
An annuity is a contract between you and an insurance company wherein you pay today and the insurance company agrees to pay you an income for specified period of your life. Those payments may start at some date in the future or they may start the day you buy the contract.

Annuity Factor Method
One of the three ways you can take a penalty-free distribution from your retirement accounts before age 59 ½. The distribution calculation is determined by dividing the account balance by an annuity factor derived using a reasonable mortality table and an interest rate on the date payments commence

Asset allocation
Dividing your investment portfolio into each of the three primary investment vehicles: stocks, bonds, and cash. By having a portion of our money in all three areas, we minimize the downside risk while achieving necessary portfolio growth.

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B

Bonds
When you buy a bond, you are actually loaning your money to the organization that issued the bond. That is why bonds are often called "debt instruments." The principal (the "face value" of the bond) is repaid on the maturity date.

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C

Cash flow statement
When looking at companies, cash flow is literally the cash that flows through a company during the course of a quarter or the year after taking out all fixed expenses. In this case, you are putting together a personal cash flow statement, which is a listing of your monthly/annual income and expenses.

COBRA
Consolidated Omnibus Budget Reconciliation Act of 1985 -- this legislation provides for continued coverage under your employer's group medical insurance when you leave your job for reasons other than gross misconduct.

Compound interest
When you earn interest not only on your initial investment, but also on any interest you have already earned.

Consumer Price Index (CPI)
This is used to calculate inflation. Each month, the Bureau of Labor Statistics gathers pricing information on dozens of consumer products; the total is then compared with the price of the same items from the previous year. The percentage increase in price over the one-year period is the inflation rate that is published for that month.

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D

Deductible
The amount of money you have to pay toward a loss before your insurance company starts to pay.

Defined benefit plan
Provides a specific and guaranteed retirement income, typically based on the number of years of employment, an average of the final few years of salary, and a percentage multiplier. This benefit is normally paid out as a monthly pension for life with a certain percentage payable to a surviving spouse after the death of the pensioner.

Defined contribution plan
Retirement plan in which the contribution is defined, but the ultimate benefit is not. Each participant has an individual account to which (s)he and the employer may contribute and within which the participant may choose between a limited number of investment options. The amount in that account at retirement depends on the total amount contributed and its investment performance throughout the years. Examples: 401(k) and 403(b) plans.

Durable power of attorney
Legal power granted by you to someone you trust to act in your behalf in case you become physically or mentally incapable of acting for yourself.

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E

Early distribution penalty
Tax penalty of 10% on amounts taken from your qualified retirement account or tax-deferred account before a certain age, usually age 59 ½.

Early retirement
In this case, we're talking about the period of time right after you have retired. Typically, newly retired people spend more money than those that have been retired for a few years.

Education IRA (EIRA)
An IRA established on or after Jan. 1, 1998, to provide funds that will allow a beneficiary to attend a program of higher education.

Employee Stock Ownership Plan (ESOP)
A qualified defined contribution plan in which the assets are invested mostly in qualifying employer stock.

Employer and Employee Association Trust Account
Also known as a Group IRA, is an IRA set up by employers, unions, and other employee associations for employees or members.

Equity-index annuity
A form of a fixed annuity contract tied to a stock index that provides the opportunity to earn returns better than those in a traditional fixed annuity, but less than those of a direct investment in the market itself. The purchaser has no choice in the investment itself, but if the stocks fall the contract guarantees a minimum return.

Estate taxes
These are taxes that have to be paid on your assets when you die and the market value of those assets exceeds $675,000 this year. Basically, your estate includes everything you own, including the face value of life insurance policies and the current value of all your retirement plans.

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F

401(k) plan
A retirement plan in which an employer permits an employee to defer part of his or her compensation pre-tax to a retirement account. A 401(k) generally offers participants an opportunity to direct their account contributions to a broad range of investment options.

403(b) plan
Also known as a tax-sheltered or tax-deferred annuity program. This plan is for educational, religious, and charitable organization employees. Investment options in the 403(b) are limited only to annuities and mutual funds. Under limited circumstances certain participants may contribute more than the normal annual limit of $10,500.

457 plan
Retirement plan established for the benefit of state and local government employees or the employees of tax-exempt organizations. Participants can defer up to $8000 in wages per year into the plan, which remain untaxed until they are withdrawn.

Fixed annuities
An annuity that provides a locked-in, guaranteed rate of return on your investment and a fixed, stable income in its payout phase.

Fixed income vehicles
These offer secure ways to make sure that your savings grow at a limited rate. You won't make much off any money put into these vehicles, but you don't stand much chance of losing any either as they consist mainly of certificates of deposit or U.S. Treasury securities.

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H

Health Insurance Portability and Accountability Act of 1996 (HIPAA)
A law that provides for certain rights to health insurance coverage. See www.hcfa.gov/medicaid/HIPAA/topics/more.asp

Home equity line of credit
Loan that allows you to borrow money against the value of your house

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I

Index mutual fund
An index mutual fund owns a full participation in some portion of the stock market. An index fund matches the shareholdings of a target index, such as the Standard & Poor's 500 Composite Stock Price Index (S&P 500).

Individual Retirement Accounts (IRAs)
Individual Retirement Accounts are tax-deferred retirement savings vehicles available to all persons regardless of age who receive taxable compensation (i.e., wages from a job) during the year. Contributions may or may not be tax deductible.

Individual Retirement Annuity
An IRA set up with a life insurance company through the purchase of a special annuity contract

Inflation
The increase in the cost of living, expressed as a percentage increase over the previous year's prices.

Inflation-adjusted accounts
A savings account that provides a higher rate of return during times of high inflation.

Inheritance taxes
A tax levied by some states on the value of property you inherit from someone.

Inherited IRA
IRA acquired by the non-spousal beneficiary of a deceased IRA owner.

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K

Keogh (HR-10) Plan
These retirement plans may be set up by self-employed persons, partnerships, and owners of unincorporated businesses as either a defined benefit or defined contribution plan.

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L

Late retirement
We're talking about the later years of retirement here. Expenses usually shoot back up during this time due to growing medical expenses.

Life Expectancy Method
One of the three ways you can take a penalty-free distribution from your retirement accounts before age 59 ½. A distribution calculation is based on either the life expectancy of the IRA owner or the joint life expectancy of the IRA owner and the owner's designated beneficiary.

Life insurance
A form of insurance that pays a fixed amount of money to beneficiaries if a specific person dies during the period when the policy is in force and premiums have been fully paid.

Living will
Also called an advance medical directive, this document says you want the right to die a natural death, free of all costly, extraordinary effort to maintain your life when that life can only be sustained by artificial means.

Long-term care insurance
A form of insurance that pays part of the cost of certain services provided as a result of an inability to perform certain activities necessary to daily living

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M

Medicaid
The government's welfare program for medical and health care for the poor and indigent.

Medical power of attorney
Legal power granted to someone that allows that person to make medical decisions on behalf of the grantee they become physically or mentally incapable of doing it themselves.

Medicare
The federal government's health insurance for the 65 and over crowd.

Medicare Supplemental Insurance
Private insurance that covers items not covered by Medicare. For tips on choosing such a policy, see the AARP's series, "Selecting Medicare Supplemental Insurance." [Link: http://www.aarp.org/hcchoices/medicare/supplement/home.html]

Middle retirement
This is the second and usually longest phase of retirement. It is usually marked by a decrease in spending and a larger emphasis on budgeting.

Minimum required distributions (MRD)
Amount that you must take out of your traditional IRA or qualified retirement plan after you attain the age of 70 ½.

Money Purchase Plan
A qualified defined contribution plan in which the employer is required to make an annual contribution to each employee's account regardless of the firm's profitability for the year.

Mortgage
A loan from a financial institution used to buy a house.

Mutual funds
Mutual funds are financial intermediaries set up to receive your money, and then having received it, to make investments with the money. When you buy mutual fund shares, you are a shareholder -- an owner -- of that mutual fund, with voting rights in proportion to your ownership of the fund.

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N

Net worth statement
Current listing of your assets and liabilities

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P

Profit sharing plan
The most popular type of a qualified defined contribution plan, a profit-sharing plan permits employers to make a discretionary annual contribution of up to a maximum of 15% of pay or $30,000 to each employee's account.

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R

Rate of return
The amount you earn on your investments.

Required beginning date (RBD)
The date when the minimum required distribution (MRD) must start. This is April 1 of the year following the year one reaches age 70 ½.

Reverse mortgage
A special type of mortgage that allows one to convert the equity in his home into a lump sum payment, monthly income, or a line of credit

Rollover (Conduit) IRA
A traditional IRA set up by an individual to receive a distribution from a qualified retirement plan.

Roth IRA
An IRA authorized on or after January 1, 1998, in which: (1) Contributions to the account are not deductible; (2) "qualified" distributions (i.e., withdrawals) from the account are not taxable; and (3) earnings on the account are taxable only when a withdrawal is not a "qualified" distribution.

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S
Safe withdrawal rate
The amount as adjusted each year for inflation that you can withdrawal and does not exhaust your capital in your lifetime.

SEPP
Substantially Equal Periodic Payments -- a way you can take distributions out of your retirement plans or traditional IRAs without having to pay an early withdrawal penalty.

SIMPLE IRA
Savings Incentive Match Plan for Employees (SIMPLE) IRA is an IRA set up by a small employer for a firm's employees.

Simplified Employee Pension (SEP-IRA)
Any traditional IRA designated to receive employer contributions under a Simplified Employee Pension (SEP) agreement set up by the employer. An employer may contribute up to $30,000 or 15% of an employee's compensation annually to each employee's IRA.

Social Security benefit
Social Security benefits are determined by a percentage of your earnings averaged over most of working lifetime. There are five major categories of benefits paid for through your Social Security taxes: retirement, disability, family benefits, survivors' benefits, and Medicare

Spousal IRA
An IRA funded by a married taxpayer in the name of his or her spouse who has less than $2000 in annual compensation.

Standard and Poor's 500 Index
The S&P 500 Index is usually considered the standard for benchmarking U.S. equity performance. This is partially due to its 70% representation of total U.S. public equity capitalization, and partially due to its close association with the largest mutual fund by assets in the world, the Vanguard S&P 500 Index Fund.

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T

Target Benefit Plan
A defined contribution plan wherein the employer sets a target benefit for employees based on actuarial assumptions that project the annual funding need to reach that benefit. The actual earnings on the individual accounts may differ from the estimated earnings used in the assumptions.

Taxable accounts
An investment or savings account that is taxed normally. Taxable accounts may include CDs, mutual funds, stocks, and/or savings deposits.

Tax-Deferred investments
If you own a tax-deferred retirement account, you may "defer" or postpone your tax payments until you withdraw your money. Tax-deferred investments include among others, 403(b), 401(k), SEP (Simple Employee Pension), SIMPLE (Savings Incentive Match Plan for Employees), Keogh, IRAs, Roth IRAs, Individual Retirement Annuity, and Individual Retirement Bonds.

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V

Variable annuity
An annuity that allows the purchaser to decide how to invest the money within a range of mutual fund look-alike investment options offered by the insurance company.

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W

Weiss Safety Rating
This is a financial safety measure that gives an opinion of an insurance company's current financial security and its ability to deal with changing economic conditions. The rating is derived through analysis of (a) public annual and quarterly statutory financial data, (b) company surveys, (c) other financial data, and (d) management meetings and discussions. Ratings may be modified by a plus or minus sign to indicate the possibility of an upgrade or downgrade.

Wilshire 5000 Index
Started in 1974, the Wilshire 5000 is often referred to as the Total Stock Market Index because it seeks to track the returns of practically all publicly traded U.S.-headquartered stocks. It has a total market value of $16.6 trillion and, despite its name, is currently comprised of more than 7000 companies.

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