Learn the lingo and take better control over managing your finances. This glossary can help you understand common investing and retirement planning terms.
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403(b) Plan
A voluntary retirement plan available to certain employees of public schools and other tax-exempt organizations. Used by educators to supplement their state pension benefits, 403(b) plan benefits are based on how much money an individual contributes through payroll deductions and any investment gains (or losses). Named after the section of the IRS code that governs it.
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Annuity
A contract sold by an insurance company which provides regular payments (usually monthly) to an individual (the annuitant). Often used for retirement income, payments can be fixed or variable and continue for life or a specified period of time.
Asset Allocation
The process of allocating (dividing) assets (invested money) among a mix of asset classes, such as stocks, bonds and cash. Asset allocation is an important way to manage risk because asset classes tend to perform differently from one another at any point in time.
Asset Class
A term that describes a particular category or type of investment, such as stocks, bonds, real estate, precious metals, etc. Each major asset class has many sub-asset classes. For instance, large cap stocks, small cap stocks, government bonds, corporate bonds and many more.
Average Annual Return
A percentage figure used to report the average historical return of an investment, such as a mutual fund, over a period of time, such as one year, three years, five years or longer.
Basis Point
One-hundredth of one percent, or 0.01%. For example, 40 basis points equal 0.40%. This measure is often used to express investment expenses and yields on bond investments, among others.
Bond
A debt instrument issued by a company or government agency for the purpose of raising money from the investors who buy the bond. Basically, bond buyers are lending money to the bond issuer. In exchange, the issuer promises to repay the loan on a specific date and make interest payments periodically until that date.
Capital Gain
The increase in value of an investment, such as stock or real estate, in excess of what an investor paid for the asset. A capital gain is not realized until the investor sells the investment and takes the profits. A capital gain may be short-term (one year or less) or long-term (more than one year). See capital loss.
Capital Loss
The decrease in value of an investment, such as stock or real estate, below the original purchase price. A capital loss is not realized until the investor sells the investment. A capital loss may be short-term (one year or less) or long-term (more than one year). See capital gain.
Catch-Up Contributions
A provision in qualified retirement plans that allows a person age 50 or older to make pre-tax contributions over and above the regular annual IRS dollar limit. In 2014, the regular limit is $17,500 and the catch-up limit is $5,500. If you have 15 or more years of service with your current employer, you may be able to make additional catch-up contributions, subject to IRS limits.
Compounding
The process whereby investment earnings—such as bond or bank savings account interest payments or dividend payments from a stock—are reinvested in the investment account so that the earnings then have the potential to generate additional earnings.
Defined Benefit Plan
A type of retirement plan that pays a certain, or defined, amount of income at retirement based on a specific formula. State pension plans for educators are defined benefit plans with benefits generally pegged to the number of years you’ve worked and your highest average salary.
Diversification
The process of spreading money among different investments within various asset classes in an effort to manage risk. A stock mutual fund may invest in a single asset class, such as U.S. large cap stocks, but will be diversified because it invests in the stocks of many different large cap companies.
Dividend
A distribution from an investment fund or company paid to its shareholders, typically from profits. The dividend amount is usually expressed as a dollar amount each share receives.
Fee Compensation
A compensation arrangement whereby the financial representative is paid on an hourly rate or as a percentage of the overall assets under management.
Fiduciary
Any person who has legal authority or control over the financial assets of another person and who is obligated to act in that person’s best interest.
Fixed Annuity
An insurance product that pays a fixed dollar amount, usually monthly, for a certain period of time.
Hardship Withdrawal
A provision that allows you to take a withdrawal from a qualified retirement plan before age 59-1/2 for certain IRS-defined financial hardships, providing you have no other readily available resources to meet the financial need.
Investment Risk
The risk that an investment may lose value and be worth less than the purchase price when it comes time to sell. Generally, as investment risk goes up, potential investment returns also go up, and vice versa.
Life Annuity
An insurance product that makes regular payments to the annuitant until his or her death, at which point all payments stop. You cannot name a joint annuitant or beneficiary on a life annuity.
Market Capitalization
Often shortened to simply “cap,” as in, large cap stocks, it’s a measure of the total market value of a company. It’s calculated by multiplying a company’s total number of outstanding shares by the share price. If a company has 1,000,000 shares in the market, with a share price of $10 a share, the company’s market capitalization is $10,000,000. Market cap is used to categorize stocks as large, mid and small.
Market Risk
The risk that investors might lose some of their principal due to downturns in a volatile market. Stock prices can rise or fall sharply which means stocks have high market risk.
Mutual Fund
An investment company registered with the Securities and Exchange Commission that pools money from individual investors and invests in a portfolio of securities with a specific investment objective. There are thousands of different mutual funds that invest in certain asset classes and that have specific investment philosophies, objectives and fee structures.
Portfolio
A mix of investments, such as stocks, bonds and cash, held by an individual in an investment account or retirement plan, for a specific investment goal, such as retirement income.
Pre-Tax Contributions
Sometimes called before-tax contributions, these are contributions made to a qualified retirement plan, such as a 403(b) plan, which reduce taxable income on a dollar-for-dollar basis and subsequently lower current income taxes. When pre-tax contributions and any investment earnings on the contributions are withdrawn, the money will be taxed as regular income.
Rollover IRA
An individual retirement account into which an investor directly transfers a distribution from a qualified retirement plan, such as a 403(b) plan, to maintain tax-deferred growth potential.
Roth 403(b)
A separate account within a 403(b) Plan that provides a way to accumulate money that can be withdrawn tax-free in retirement. Roth 403(b) contributions are made on an after-tax basis.
Sales Commission (Broker/Agent)
A percentage payment a broker/agent receives for selling a particular investment or insurance product to an investor.
Security
A stock, bond or other type of investment.
Surrender Charge
Any payment required for terminating an investment or insurance contract prior to a scheduled maturity date.
Target Date Fund
A single fund choice offered through many qualified retirement plans that is a fully diversified portfolio with an asset allocation appropriate for the investment time horizon indicated by the year in the fund’s name. For example, a target date 2045 fund would have an asset allocation appropriate for an investor who plans on starting withdrawals in the year 2045. Target date funds gradually change their asset allocation, becoming more conservatively invested (meaning fewer stocks and more bonds and cash), as the target date nears.
Tax-Deductible
An expense that can be deducted from your adjusted gross income to reduce the amount of income subject to tax. Pre-tax contributions to a 403(b) are tax-deductible and will reduce taxable income on a dollar-for-dollar basis.
Tax-Deferred Account
An investment where taxes owed on earnings are postponed (deferred) until withdrawal from the account. A traditional IRA and a 403(b) plan are examples of tax-deferred accounts.
Tax-Deferred Compounding
A process where any taxes that would be owed on investment earnings are postponed (deferred) until withdrawal, allowing the investment earnings to be reinvested (compounded) to help the investment grow further.
Tax-Sheltered Annuities (TSAs)
Insurance products sold by agents through 403(b) plans primarily to educators.
Total Return
The actual rate of return of an investment, including interest, capital gains, dividends and distributions, over a specific period of time.
Variable Annuity
An insurance product that invests in a portfolio of securities (stocks, bonds and cash) and which pays a guaranteed minimum monthly benefit payment with additional income that can vary depending on the performance of investment portfolio.
Vesting
The process of gaining ownership of pension or retirement benefits over a stated period of time. You are immediately vested in all contributions to a 403(b) plan (your own and any employer contributions). State pension plans require that you work for a certain number of years before you vest in pension benefits. This varies by state.