Sick And Tired Of Confusing Retirement Jargon?
I’ve been helping people make their retirement income strategies for over 12 years and have met with thousands of individuals in that time. One thing I’ve learned is that the entire process can often be overwhelming and confusing. They feel like there are so many variables (pensions, IRAs, SEPs, Social Security, and more) and a complete set of new jargon to go along with each option. No wonder it can feel confusing!
While the government, investment companies, and plan sponsors have tried to make things simpler, confusion still prevails. I’d like to give you a reference sheet of sorts that you can use the next time you sit down to evaluate your situation and come across a term that stumps you.
Although we can’t cover all terms here, I’ve compiled some of the terms I feel are most important. We used notable sources like www.investopedia.com, www.thebalance.com, Social Security’s website (www.ssa.gov), and www.dictionary.com to help us create the definitions.
BASIC RETIREMENT INVESTING TERMS
Annuity – An insurance product that offers a fixed sum of money paid to someone each year, typically for the rest of his or her life. There are fixed and variable annuities.
Defined Benefit Plan – A retirement plan that provides workers with a fixed amount upon retirement, regardless of their contribution. Examples include pensions and annuities. These plans have become less common outside of the government and military.
Defined Contribution Plan – This is the most common type of a qualified retirement plan and is based on employer and/or employee contributions.
Full Retirement Age – This is a Social Security term for the age in which a person is fully entitled to his or her Social Security benefits without any penalty or reduction. Your full retirement age is based on your date of birth.
Non-Qualified Retirement Plan – A retirement plan that does not meet the requirements set by the U.S. tax code to make the contributions tax-deductible. Examples of a non-qualified retirement plan include deferred-compensation plans, executive bonus plans and more.
Pension – A regular payment made during a person’s retirement from an investment fund that the person or their employer contributed to during their working life.
PIA (Primary Insurance Amount) – This is a Social Security term for the benefit a person will receive when he or she decides to begin receiving the Social Security benefit at full retirement age.
Qualified Retirement Plan - A retirement plan that meets the requirements set out in the Section 401(a) of the U.S. tax code, making the contributions tax-deductible. Examples of a qualified retirement plan include 401(k), 403(b), 457(b), IRAs, profit sharing plans, defined benefit plans and more.
Rollover – Although a rollover can involve several actions, when talking about retirement savings, it usually refers to transferring the holdings of one retirement plan to another without creating a taxable event.
BASIC INVESTING TERMS
Bear Market – A sustained period of time when stocks generally decline, with the threshold being typically a 20% decline.
Benchmark – This is a standard or point of reference against which things are compared or assessed. In investing conversations, the benchmark is often a market index (see “Index” below).
Bull Market – A sustained period of time when stocks generally rise at least 20% without a subsequent decline. We are currently in a bull market.
Fiduciary – A fiduciary is a person or organization acting on the behalf of another investor to manage assets in a way that is in the best interest of the investor without regard to the personal gain of the fiduciary.
Index – A group of stocks that have something in common that serves to represent the overall market. An example is the S&P 500, which tracks the stocks of 500 of the largest publicly traded companies in the United States.
Mutual Funds – This is a financial vehicle made up of a pool of money from individuals to invest in diversified holdings and is professionally managed. You will often buy mutual funds within your retirement plans.
Sector – This is a group of companies that represent a segment of the overall economy. Sectors include things such as communication services, health care, and utilities.
Stock Market – Where traders buy and sell shares of companies on a public exchange. The three major U.S. stock exchanges are the New York Stock Exchange (NYSE), National Association of Securities Dealers Automated Quotation System (Nasdaq), and the American Stock Exchange (AMEX).
Valuation – An estimate of what a company is worth.
Volatility – The amount and frequency that an investment fluctuates in value.
There is a saying that a confused mind does nothing, so I hope that this list will help you continue on your path of saving for retirement with a bit more clarity.
Jason LaBarge, Managing Partner and Financial Consultant at Premier Planning Group
115 West Street, Suite 400 Annapolis, MD 21401 443-837-2520
Registered Representatives offering securities through Cetera Advisor Networks LLC, member FINRA/SIPC. Cetera is under separate ownership from any other named entity.
Opinions expressed are that of the author and are not endorsed by the named broker dealer or its affiliates. The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor.
Indexes are unmanaged and cannot be invested into directly. Investing in mutual funds is subject to risk and loss of principal. There is no assurance or certainty that any investment strategy will be successful in meeting its objectives.