94+ terms explained in plain English
A retirement withdrawal guideline suggesting you can withdraw 4% of your portfolio in the first year of retirement, then adjust for inflation annually, with a high probability of not running out of money over 30 years.
Learn moreAn employer-sponsored retirement savings plan that allows employees to contribute a portion of their wages on a pre-tax or after-tax (Roth) basis. Employers may offer matching contributions. The 2026 contribution limit is $23,500 ($31,000 for those 50+).
Learn moreA retirement plan similar to a 401(k) but offered by public schools, tax-exempt organizations, and certain ministers. It has the same contribution limits as a 401(k) and may offer additional catch-up contributions for long-tenured employees.
A deferred compensation retirement plan available to state and local government employees and some non-profit workers. Unlike 401(k) and 403(b) plans, there's no 10% early withdrawal penalty before age 59½.
A method for taking penalty-free early withdrawals from retirement accounts before age 59½ using Substantially Equal Periodic Payments (SEPP). Payments must continue for 5 years or until age 59½, whichever is longer.
Learn moreContributions made to a retirement account with money that has already been taxed. While you don't get an immediate tax break, qualified withdrawals (including earnings) may be tax-free, as with Roth accounts.
A financial product that provides a stream of payments over time, typically used in retirement. Annuities can be immediate (payments start right away) or deferred (payments start at a future date). They can provide guaranteed lifetime income.
The strategy of dividing investments among different asset categories such as stocks, bonds, and cash. Proper asset allocation helps manage risk and can be adjusted based on age, risk tolerance, and time horizon.
A strategy allowing high-income earners who exceed Roth IRA income limits to contribute to a Roth IRA by first making a non-deductible Traditional IRA contribution, then converting it to a Roth.
A person or entity designated to receive the assets from a retirement account or life insurance policy upon the account holder's death. It's important to keep beneficiary designations up to date.
A fixed-income investment where you lend money to a government or corporation for a set period at a fixed interest rate. Bonds are generally less risky than stocks but offer lower potential returns.
A retirement withdrawal approach that divides savings into separate 'buckets' based on when the money will be needed. Typically includes short-term (1-2 years in cash), medium-term (3-10 years in bonds), and long-term (10+ years in stocks) buckets.
Learn moreThe profit from selling an investment for more than you paid for it. Long-term capital gains (assets held over one year) are taxed at lower rates than short-term gains, which are taxed as ordinary income.
Additional retirement plan contributions allowed for people age 50 and older. For 2026, the catch-up limit is $7,500 for 401(k) plans and $1,000 for IRAs, on top of regular contribution limits.
A financial independence milestone where you have saved enough that, even without additional contributions, your investments will grow to support retirement by your target age. After reaching Coast FIRE, you only need to earn enough to cover current expenses.
Learn moreInterest calculated on both the initial principal and accumulated interest from previous periods. Often called the 'eighth wonder of the world,' compound interest is the primary driver of long-term investment growth.
Learn moreThe maximum amount you can contribute to retirement accounts annually, as set by the IRS. Limits vary by account type and age. For 2026: 401(k) is $23,500 ($31,000 if 50+), IRA is $7,000 ($8,000 if 50+).
The original value of an asset for tax purposes, usually the purchase price. When you sell, capital gains taxes are calculated based on the difference between the sale price and cost basis.
An increase in benefits, such as Social Security, to account for inflation. Social Security COLAs are based on the Consumer Price Index and help maintain purchasing power over time.
An arrangement where a portion of an employee's income is paid out at a later date, typically retirement. The deferral delays income taxes until the money is received.
A retirement plan where the employer promises a specific monthly benefit at retirement, calculated based on salary history and years of service. Traditional pensions are defined benefit plans.
A retirement plan where contributions are defined but the final benefit depends on investment performance. 401(k)s and IRAs are defined contribution plans. The employee bears the investment risk.
The practice of spreading investments across various asset classes, sectors, and geographies to reduce risk. A diversified portfolio is less vulnerable to any single investment's poor performance.
A distribution of a company's profits to shareholders. Dividends can provide income in retirement and may be reinvested to purchase additional shares. Qualified dividends receive favorable tax treatment.
An investment strategy of regularly investing a fixed amount regardless of market conditions. This approach reduces the impact of volatility by buying more shares when prices are low and fewer when prices are high.
A 10% tax penalty applied to withdrawals from retirement accounts before age 59½ (with some exceptions like the Rule of 55 or 72(t) distributions). This is in addition to regular income taxes owed.
Learn moreContributions an employer makes to an employee's retirement account based on the employee's own contributions. A common match is 50% of contributions up to 6% of salary. Always contribute enough to get the full match—it's free money.
Learn moreThe process of arranging for the management and disposal of a person's estate during their life and after death. Includes wills, trusts, beneficiary designations, and powers of attorney.
An investment fund traded on stock exchanges, similar to stocks. ETFs typically track an index and offer low expense ratios, tax efficiency, and trading flexibility compared to mutual funds.
The annual fee charged by mutual funds and ETFs, expressed as a percentage of assets. An expense ratio of 0.20% means you pay $20 per year for every $10,000 invested. Lower is generally better.
The Federal Insurance Contributions Act tax that funds Social Security and Medicare. In 2026, employees pay 6.2% for Social Security (up to $176,100) and 1.45% for Medicare on all wages.
A person or organization legally obligated to act in a client's best interest. Fee-only financial advisors are typically fiduciaries. Always ask if your advisor is a fiduciary.
Having enough passive income or investments to cover living expenses without needing to work. Often measured as having 25x annual expenses invested, allowing sustainable withdrawals indefinitely.
Financial Independence, Retire Early—a movement focused on extreme saving and investing to retire well before traditional retirement age. Variations include Lean FIRE, Fat FIRE, Barista FIRE, and Coast FIRE.
Learn moreInvestments that provide regular, predictable income, such as bonds, CDs, and annuities. Fixed income investments are typically less volatile than stocks and are used to provide stability in a portfolio.
The age at which you're entitled to full Social Security benefits. FRA ranges from 66 to 67 depending on birth year. Claiming before FRA reduces benefits; delaying past FRA increases them up to age 70.
Learn moreThe gradual shift in asset allocation over time, typically from stocks to bonds as you approach retirement. Target-date funds automatically follow a glide path based on the target retirement year.
Stock in a company expected to grow faster than the market average. Growth stocks typically reinvest profits rather than paying dividends. They offer higher potential returns but with more volatility.
Medical expenses retirees face, including Medicare premiums, supplemental insurance, prescription drugs, and potential long-term care. Fidelity estimates a 65-year-old couple needs $315,000+ for healthcare in retirement.
A tax-advantaged account for medical expenses available to those with high-deductible health plans. HSAs offer triple tax benefits: tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses.
Learn moreA type of mutual fund or ETF that tracks a market index like the S&P 500. Index funds offer broad diversification, low costs, and typically outperform actively managed funds over time.
The rate at which prices for goods and services increase over time, reducing purchasing power. A 3% inflation rate means something costing $100 today will cost $103 next year. Retirement planning must account for inflation.
An IRA inherited from a deceased account holder. Non-spouse beneficiaries must typically withdraw all funds within 10 years under the SECURE Act. Different rules apply for spouses and certain eligible designated beneficiaries.
A tax-advantaged retirement account that individuals can open independently of an employer. Traditional IRAs offer tax-deductible contributions with taxable withdrawals. Roth IRAs offer tax-free growth and withdrawals.
Learn moreAn annuity that continues payments to a surviving spouse after the primary annuitant's death. Required as the default option for married participants in defined benefit pension plans unless the spouse waives this right.
The average number of years a person is expected to live based on current age and other factors. RMD calculations use IRS life expectancy tables. Planning for longevity risk means preparing for the possibility of living longer than average.
Assistance with daily activities (bathing, dressing, eating) needed due to chronic illness, disability, or aging. Long-term care can be provided at home or in facilities and is generally not covered by Medicare.
The risk of outliving your retirement savings. Managing longevity risk involves strategies like delaying Social Security, considering annuities, and using conservative withdrawal rates.
The tax rate applied to your last dollar of income. Understanding marginal rates helps with tax planning decisions like Roth conversions and timing of income recognition in retirement.
Federal health insurance for people 65 and older (and some younger people with disabilities). Part A covers hospital stays, Part B covers medical services, Part D covers prescriptions. Most people should enroll at 65 to avoid penalties.
A strategy using after-tax 401(k) contributions above the standard limit, then converting them to Roth. Requires a plan that allows after-tax contributions and in-service conversions. Can add up to $46,000+ in Roth savings.
An investment vehicle that pools money from many investors to purchase a diversified portfolio of stocks, bonds, or other securities. Mutual funds are managed by professional portfolio managers.
Total assets minus total liabilities. Your net worth is a snapshot of your overall financial position. Tracking net worth over time helps measure progress toward retirement goals.
Investment return before adjusting for inflation. A 7% nominal return with 3% inflation equals a 4% real return. Always consider real returns when planning for retirement purchasing power.
A defined benefit retirement plan where an employer promises monthly payments in retirement based on salary and years of service. Traditional pensions have become less common in the private sector.
A collection of financial investments including stocks, bonds, mutual funds, and other assets. A well-constructed portfolio balances risk and return based on your goals, time horizon, and risk tolerance.
Retirement contributions made before income taxes are withheld, reducing your current taxable income. Traditional 401(k) and Traditional IRA contributions are typically pre-tax. Withdrawals are taxed as ordinary income.
A withdrawal from a Roth account that meets IRS requirements for tax-free treatment. Generally requires the account to be open at least 5 years and the owner to be 59½ or older (or meet other qualifying conditions).
Investment return after adjusting for inflation, representing actual purchasing power growth. If your portfolio gains 7% but inflation is 3%, your real return is approximately 4%.
The process of realigning portfolio weightings by periodically buying or selling assets to maintain your target asset allocation. Rebalancing helps manage risk and can be done annually or when allocations drift significantly.
The minimum amount you must withdraw annually from tax-deferred retirement accounts starting at age 73 (75 after 2032). Failure to take RMDs results in a 25% penalty on the amount not withdrawn.
Learn moreYour ability and willingness to endure investment losses for the possibility of higher returns. Risk tolerance depends on factors like time horizon, financial situation, and emotional comfort with volatility.
Moving retirement funds from one account to another, such as from an employer 401(k) to an IRA, without incurring taxes or penalties. Direct rollovers (trustee-to-trustee) are the safest method.
A 401(k) account funded with after-tax dollars. Contributions don't reduce current taxes, but qualified withdrawals in retirement (including earnings) are completely tax-free.
Learn moreMoving money from a Traditional IRA or 401(k) to a Roth IRA. You pay taxes on the converted amount now, but future growth and withdrawals are tax-free. Can be advantageous if you expect to be in a higher tax bracket later.
An individual retirement account funded with after-tax dollars. Contributions aren't tax-deductible, but qualified withdrawals are completely tax-free, including all earnings. No RMDs during the owner's lifetime.
Learn moreA guideline suggesting you need 25 times your annual expenses saved for retirement. Based on the 4% safe withdrawal rate—if you spend $50,000/year, you need $1.25 million.
An IRS provision allowing penalty-free withdrawals from your current employer's 401(k) or 403(b) if you leave your job during or after the year you turn 55 (50 for certain public safety employees).
A quick way to estimate how long it takes money to double. Divide 72 by your expected annual return rate. At 8% returns, money doubles in approximately 9 years (72 ÷ 8 = 9).
Learn moreThe percentage of your portfolio you can withdraw annually with a low probability of running out of money. The traditional safe withdrawal rate is 4%, based on the Trinity Study, though some argue for 3-3.5% today.
Learn moreThe Setting Every Community Up for Retirement Enhancement Act (2019), which made significant changes to retirement rules including raising the RMD age and requiring most inherited IRAs to be distributed within 10 years.
Simplified Employee Pension IRA—a retirement account for self-employed individuals and small business owners. Allows higher contribution limits than traditional IRAs (up to 25% of compensation or $69,000 in 2026).
The risk that poor investment returns early in retirement will deplete your portfolio faster than expected, even if average returns over time are adequate. This is why reducing portfolio volatility near retirement is important.
Learn moreA 401(k) plan for self-employed individuals with no employees (except a spouse). Allows both employee and employer contributions, potentially enabling higher total contributions than SEP IRAs.
An IRA contribution made on behalf of a non-working or low-income spouse. Allows couples to maximize IRA contributions even if one spouse doesn't have earned income.
An ownership share in a company. Stocks offer potential for growth and dividends but come with volatility. Historically, stocks have provided higher long-term returns than bonds.
Social Security benefits paid to the surviving spouse or children of a deceased worker. A surviving spouse can receive up to 100% of the deceased's benefit amount, depending on claiming age.
Learn moreA mutual fund that automatically adjusts its asset allocation based on a target retirement year. The fund becomes more conservative (more bonds, fewer stocks) as the target date approaches.
A range of income taxed at a specific rate. The U.S. uses a progressive tax system where income is taxed at increasing rates as it rises. Understanding tax brackets helps with retirement tax planning.
Any account that provides tax benefits for retirement savings, including 401(k)s, IRAs, and HSAs. These accounts help your money grow faster by reducing or deferring taxes.
Growth on investments where taxes are postponed until withdrawal. Traditional 401(k)s and IRAs are tax-deferred—you don't pay taxes on contributions or growth until you take money out.
Investment growth that will never be taxed if withdrawn properly. Roth IRAs and Roth 401(k)s provide tax-free growth—you pay taxes on contributions but never on qualified withdrawals.
Selling investments at a loss to offset capital gains and reduce taxes. Up to $3,000 in excess losses can offset ordinary income annually. Losses not used can be carried forward.
An employer-sponsored retirement plan where contributions are made pre-tax, reducing your current taxable income. Withdrawals in retirement are taxed as ordinary income.
Learn moreAn individual retirement account where contributions may be tax-deductible (depending on income and access to employer plans). Growth is tax-deferred, and withdrawals are taxed as ordinary income.
Learn moreA 1998 academic study that analyzed withdrawal rates and portfolio success over various historical periods. The study found that a 4% initial withdrawal rate, adjusted for inflation, had a high success rate over 30-year periods.
Learn moreStock that appears undervalued based on fundamental analysis (low price-to-earnings ratio, high dividend yield). Value investing focuses on buying these 'bargain' stocks and waiting for the market to recognize their worth.
The process of gaining full ownership of employer contributions to your retirement account. Vesting schedules vary—immediate, cliff (all at once after a period), or graded (gradually over time).
The percentage of your retirement portfolio you withdraw each year. A sustainable withdrawal rate ensures your money lasts throughout retirement. The 4% rule is a common starting point.
Learn moreA plan for taking money from retirement accounts in a tax-efficient manner. Strategies consider account type (taxable, tax-deferred, tax-free), tax brackets, and timing of Social Security.
Learn moreNow that you understand the terminology, use our free calculators to plan your retirement.
Social Security
A federal program providing retirement income, disability benefits, and survivor benefits. Funded through FICA payroll taxes. Benefits are based on your 35 highest-earning years and claiming age.