Glossary
Accounts and Structures
401(k) — Employer-sponsored retirement savings plan allowing pre-tax or Roth contributions. Named after the section of the Internal Revenue Code that created it.
403(b) — Similar to a 401(k) but for employees of public schools, nonprofits, and certain religious organizations.
457(b) — Deferred compensation plan for government and some nonprofit employees. Unique feature: no early withdrawal penalty.
Backdoor Roth IRA — A strategy for high-income earners to fund a Roth IRA by contributing to a non-deductible traditional IRA and then converting it.
Brokerage account — A taxable investment account with no tax advantages but no contribution limits or withdrawal restrictions.
HSA (Health Savings Account) — Triple-tax-advantaged account available to those with high-deductible health plans. Contributions are tax-deductible, growth is tax-free, and withdrawals for medical expenses are tax-free.
IRA (Individual Retirement Account) — A personal retirement savings account. Comes in traditional (pre-tax) and Roth (post-tax) varieties.
Roth IRA — An individual retirement account funded with after-tax dollars. Qualified withdrawals are completely tax-free. No RMDs during the owner's lifetime.
SEP IRA — Simplified Employee Pension. A retirement account for self-employed individuals and small business owners with high contribution limits.
Solo 401(k) — A 401(k) for self-employed individuals with no employees. Allows both employee and employer contributions.
Traditional IRA — An individual retirement account where contributions may be tax-deductible. Withdrawals are taxed as ordinary income.
Investment Terms
Asset allocation — How your portfolio is divided among different asset classes (stocks, bonds, cash, etc.). The primary driver of long-term portfolio performance.
Bond — A debt instrument where you lend money to a company or government in exchange for regular interest payments and return of principal. Generally lower risk and lower return than stocks.
Compound interest — Interest earned on both the original principal and previously earned interest. The mechanism that makes long-term investing so powerful.
Diversification — Spreading investments across many different assets to reduce risk. The principle behind index funds.
Dollar-cost averaging — Investing a fixed amount at regular intervals regardless of market conditions. Automatically buys more shares when prices are low and fewer when prices are high.
Expense ratio — The annual fee charged by a fund, expressed as a percentage of assets. An expense ratio of 0.10% means you pay $10 per year for every $10,000 invested.
Index fund — A mutual fund or ETF that tracks a market index (like the S&P 500) rather than trying to beat it. Characterized by low costs and broad diversification.
Rebalancing — Periodically adjusting your portfolio back to its target allocation by selling overweight assets and buying underweight ones.
Target-date fund — A fund that automatically adjusts its asset allocation from aggressive (stocks) to conservative (bonds) as the target retirement date approaches.
Total return — Investment gains from both price appreciation and income (dividends, interest).
Retirement Income
4% rule — A guideline suggesting you can withdraw 4% of your portfolio in your first year of retirement, then adjust for inflation each year, with a high probability of not running out of money over 30 years.
Annuity — An insurance product that converts a lump sum into guaranteed income payments, often for life.
Bucket strategy — Dividing retirement savings into short-term (cash), medium-term (bonds), and long-term (stocks) buckets based on when the money will be needed.
Guardrails method — A flexible withdrawal strategy that adjusts spending up or down based on portfolio performance, within predetermined limits.
Income floor — The amount of guaranteed income (Social Security, pensions, annuities) that covers essential expenses in retirement.
RMD (Required Minimum Distribution) — The minimum amount you must withdraw annually from traditional retirement accounts starting at age 73. Failure to take RMDs results in severe penalties.
Sequence-of-returns risk — The risk that poor investment returns early in retirement will permanently damage your portfolio, even if average returns are fine over the full period.
Withdrawal rate — The percentage of your portfolio you withdraw each year in retirement.
Social Security
COLA (Cost-of-Living Adjustment) — Annual increase to Social Security benefits based on inflation.
FRA (Full Retirement Age) — The age at which you receive your full, unreduced Social Security benefit. Age 67 for those born in 1960 or later.
PIA (Primary Insurance Amount) — Your full Social Security benefit at FRA, calculated from your 35 highest-earning years.
Spousal benefit — A Social Security benefit equal to up to 50% of your spouse's PIA, available if higher than your own benefit.
Survivor benefit — The Social Security benefit available to a surviving spouse, equal to the deceased spouse's benefit amount.
Healthcare
COBRA — Continuation of employer health insurance for up to 18 months after leaving a job. You pay the full premium.
HDHP (High Deductible Health Plan) — A health plan with higher deductibles and lower premiums. Required for HSA eligibility.
IRMAA (Income-Related Monthly Adjustment Amount) — Higher Medicare Part B and Part D premiums charged to beneficiaries with income above certain thresholds.
Medicare — Federal health insurance program for people 65 and older. Consists of Parts A (hospital), B (medical), C (Advantage), and D (drugs).
Medigap — Private supplemental insurance that covers gaps in original Medicare, such as the 20% Part B coinsurance.
Tax and Planning
Capital gains — Profit from selling an investment. Long-term capital gains (assets held over 1 year) are taxed at lower rates than ordinary income.
MAGI (Modified Adjusted Gross Income) — A calculation used to determine eligibility for various tax benefits, Roth IRA contributions, and ACA premium subsidies.
Marginal tax rate — The tax rate applied to your next dollar of income. Not the rate applied to all your income.
Pro-rata rule — IRS rule that treats all traditional IRA balances as one pool when calculating the tax impact of Roth conversions. Complicates backdoor Roth conversions for people with existing traditional IRA balances.
Roth conversion — Moving money from a traditional retirement account to a Roth account. You pay income taxes on the converted amount but future growth and withdrawals are tax-free.
Tax diversification — Maintaining retirement savings in multiple tax treatment categories (pre-tax, post-tax, and taxable) for withdrawal flexibility.
Other Terms
FIRE (Financial Independence, Retire Early) — A movement focused on aggressive saving and investing to achieve financial independence and early retirement.
Fiduciary — A financial advisor legally required to act in your best interest, not just recommend "suitable" investments.
Net worth — Total assets minus total liabilities. A snapshot of your overall financial position.
Reverse mortgage (HECM) — A loan available to homeowners 62+ that converts home equity into income without requiring monthly payments. Repaid when the homeowner sells, moves, or passes away.
Safe withdrawal rate — The maximum percentage you can withdraw from your portfolio annually with high confidence that your money will last through retirement.
Social jet lag — In the context of this book's Sleep companion: the circadian disruption from inconsistent schedules. In retirement planning: the psychological adjustment to a new daily rhythm after leaving work.