The Bogleheads' Guide to Retirement Planning (54 page)
Read The Bogleheads' Guide to Retirement Planning Online
Authors: Taylor Larimore,Richard A. Ferri,Mel Lindauer,Laura F. Dogu,John C. Bogle
Tags: #Business & Economics, #Investing, #Personal Finance, #Business, #Business & Money, #Financial, #Non-Fiction, #Nonfiction, #Retirement, #Retirement Planning
BOOK: The Bogleheads' Guide to Retirement Planning
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estate planning:
The preparation of a plan of administration and disposition of one’s estate using a will, trusts, gifts, power of attorney, and so forth.
The preparation of a plan of administration and disposition of one’s estate using a will, trusts, gifts, power of attorney, and so forth.
exchange-traded fund (ETF):
An investment product similar to a mutual fund only it trades on a stock market during the day rather than with the mutual fund company at the end of the day. New ETF shares are created and redeemed during the day by the fund company through a special trading relationship with authorized participants.
An investment product similar to a mutual fund only it trades on a stock market during the day rather than with the mutual fund company at the end of the day. New ETF shares are created and redeemed during the day by the fund company through a special trading relationship with authorized participants.
ex-dividend date:
The date when a distribution of dividends and/or capital gains is deducted from a mutual fund’s assets or set aside for payment to shareholders. On the ex-dividend date, the fund’s share price drops by the amount of the distribution (plus or minus any market activity).
The date when a distribution of dividends and/or capital gains is deducted from a mutual fund’s assets or set aside for payment to shareholders. On the ex-dividend date, the fund’s share price drops by the amount of the distribution (plus or minus any market activity).
executor:
The person responsible for settling your estate when you die.
The person responsible for settling your estate when you die.
expense ratio:
The percentage of a portfolio’s average net assets used to pay its annual expenses. It includes management fees, administrative fees, and any 12b-1 fees, and it directly reduces returns to investors.
The percentage of a portfolio’s average net assets used to pay its annual expenses. It includes management fees, administrative fees, and any 12b-1 fees, and it directly reduces returns to investors.
Federal Reserve:
The central bank that regulates the supply of money and credit throughout the United States. Its seven-member board of governors, appointed by the president, has significant influence on U.S. monetary and economic policy.
The central bank that regulates the supply of money and credit throughout the United States. Its seven-member board of governors, appointed by the president, has significant influence on U.S. monetary and economic policy.
fee-only adviser:
An arrangement in which a financial adviser charges a set hourly rate or an agreed-upon percentage of assets under management for a financial plan. The adviser can also charge a flat annual fee or charge a set amount for a specific financial planning task.
An arrangement in which a financial adviser charges a set hourly rate or an agreed-upon percentage of assets under management for a financial plan. The adviser can also charge a flat annual fee or charge a set amount for a specific financial planning task.
fiduciary relationship:
The relationship between a financial adviser and the client in which the adviser is legally obligated to do what is best for the client.
The relationship between a financial adviser and the client in which the adviser is legally obligated to do what is best for the client.
Fitch Ratings:
One of five agencies (A. M. Best Company, Fitch Ratings, Moody’s Investors Service, Standard & Poor’s, and Weiss Research) that issue letter-grade ratings of insurers’ financial strength.
One of five agencies (A. M. Best Company, Fitch Ratings, Moody’s Investors Service, Standard & Poor’s, and Weiss Research) that issue letter-grade ratings of insurers’ financial strength.
fixed-income annuity:
See SPIA.
See SPIA.
Form ADV:
Forms financial advisers must file with the SEC or state securities department that include fee structure and background about the adviser.
Forms financial advisers must file with the SEC or state securities department that include fee structure and background about the adviser.
front-end load:
A sales commission charged at the time of purchase by some mutual funds and other investment vehicles.
A sales commission charged at the time of purchase by some mutual funds and other investment vehicles.
full faith and credit:
A pledge to pay interest and principal on a bond issued by the government.
A pledge to pay interest and principal on a bond issued by the government.
full retirement age:
The age when you can receive unreduced Social Security retirement benefits, between 65 and 67, based on your year of birth.
The age when you can receive unreduced Social Security retirement benefits, between 65 and 67, based on your year of birth.
fund family:
A group of mutual funds sponsored by the same organization, often offering exchange privileges between funds and combined account statements for multiple funds.
A group of mutual funds sponsored by the same organization, often offering exchange privileges between funds and combined account statements for multiple funds.
government pension offset:
The Social Security provision for reducing or eliminating a person’s benefit as a spouse if that individual also earned a government pension from work that was not covered by Social Security.
The Social Security provision for reducing or eliminating a person’s benefit as a spouse if that individual also earned a government pension from work that was not covered by Social Security.
gross domestic product (GDP):
The value of all goods and services provided by U.S. labor in a given year. One of the primary measures of the U.S. economy, the GDP is issued quarterly by the Department of Commerce.
The value of all goods and services provided by U.S. labor in a given year. One of the primary measures of the U.S. economy, the GDP is issued quarterly by the Department of Commerce.
guaranteed period (also period certain, term certain):
A specified period of time, such as 10 years, during which an annuity is guaranteed to make payments, if not to the annuitant, then to the annuitant’s beneficiary or estate.
A specified period of time, such as 10 years, during which an annuity is guaranteed to make payments, if not to the annuitant, then to the annuitant’s beneficiary or estate.
guaranty association:
See state guaranty association.
See state guaranty association.
health savings account (HSA):
An account in which contributions are tax-deductible and withdrawals are tax-free if used for qualifying medical expenses. Contributions can be made only when the contributor is enrolled in a high-deductible health plan that meets IRS limits.
An account in which contributions are tax-deductible and withdrawals are tax-free if used for qualifying medical expenses. Contributions can be made only when the contributor is enrolled in a high-deductible health plan that meets IRS limits.
hedge:
A strategy in which one investment is used to offset the risk of another security.
A strategy in which one investment is used to offset the risk of another security.
immediate annuity (immediate income annuity):
An annuity in which the payments begin as soon as the premium has been received and processed, for example, an annuity purchased in January 2010 that makes its first payment in February 2010.
An annuity in which the payments begin as soon as the premium has been received and processed, for example, an annuity purchased in January 2010 that makes its first payment in February 2010.
income annuity:
See SPIA.
See SPIA.
index fund:
An investment fund that attempts to match the performance of a market index such as the Standard & Poor’s 500-Stock Index.
An investment fund that attempts to match the performance of a market index such as the Standard & Poor’s 500-Stock Index.
index provider:
Companies that construct and maintain financial market indexes.
Companies that construct and maintain financial market indexes.
indexing:
Indexing is an investment strategy to match the average performance of a market or group of stocks. Usually this is accomplished by buying a small amount of each stock in a market.
Indexing is an investment strategy to match the average performance of a market or group of stocks. Usually this is accomplished by buying a small amount of each stock in a market.
individual retirement account (IRA):
A tax-advantaged account in which contributions are made with the intent of withdrawing funds upon retirement.
A tax-advantaged account in which contributions are made with the intent of withdrawing funds upon retirement.
inflation-indexed annuity:
A fixed annuity whose payments are contractually linked to the consumer price index (CPI); not to be confused with equity-indexed annuity.
A fixed annuity whose payments are contractually linked to the consumer price index (CPI); not to be confused with equity-indexed annuity.
inflation risk:
The possibility that increases in the cost of living will reduce or eliminate the returns on a particular investment.
The possibility that increases in the cost of living will reduce or eliminate the returns on a particular investment.
interest rate risk:
The possibility that a security or mutual fund will decline in value because of an increase in interest rates.
The possibility that a security or mutual fund will decline in value because of an increase in interest rates.
investment adviser:
A person or organization that makes the day-to-day decisions regarding a portfolio’s investments. Also called an investment manager or portfolio manager.
A person or organization that makes the day-to-day decisions regarding a portfolio’s investments. Also called an investment manager or portfolio manager.
investment policy statement (IPS):
A written statement describing an investor’s goals and preferences.
A written statement describing an investor’s goals and preferences.
joint annuitant:
A second person, usually the annuitant’s life partner, who serves as one of the measuring lives in a joint annuity; payments continue for as long as either annuitant lives.
A second person, usually the annuitant’s life partner, who serves as one of the measuring lives in a joint annuity; payments continue for as long as either annuitant lives.
joint annuity:
An annuity that pays out as long as either of two annuitants lives.
An annuity that pays out as long as either of two annuitants lives.
life annuity:
An annuity in which the payments continue for the lifetime of the annuitant or for the lives of either of two joint annuitants.
An annuity in which the payments continue for the lifetime of the annuitant or for the lives of either of two joint annuitants.
life cycle fund:
A fund that decreases its equity allocation over time based on a glide path, with a target date on which it will have become sufficiently conservative for an investor who starts withdrawals on or about that date. Also called a target date fund.
A fund that decreases its equity allocation over time based on a glide path, with a target date on which it will have become sufficiently conservative for an investor who starts withdrawals on or about that date. Also called a target date fund.
life expectancy:
The average remaining years of life at a given age, based on a certain mortality table or experience study.
The average remaining years of life at a given age, based on a certain mortality table or experience study.
lifetime payout income annuity (LPIA):
See SPIA.
See SPIA.
limited partnership:
An investment with a small number of general partners and a large number of limited partners. The maximum risk to a limited partner is the loss of the initial investment.
An investment with a small number of general partners and a large number of limited partners. The maximum risk to a limited partner is the loss of the initial investment.
living trust:
A living trust allows assets to pass directly to heirs without going through the probate process. Assets in a living trust are subject to estate tax.
A living trust allows assets to pass directly to heirs without going through the probate process. Assets in a living trust are subject to estate tax.
load fund:
A mutual fund that levies a sales charge when shares are either bought (a front-end load) or sold (a back-end load).
A mutual fund that levies a sales charge when shares are either bought (a front-end load) or sold (a back-end load).
long-term capital gain:
A profit on the sale of a security or mutual fund share that has been held for more than one year.
A profit on the sale of a security or mutual fund share that has been held for more than one year.
long-term care insurance:
This type of health insurance picks up costs that traditional health insurance and Medicare do not, such as an extended stay in a nursing home and home care assistance.
This type of health insurance picks up costs that traditional health insurance and Medicare do not, such as an extended stay in a nursing home and home care assistance.
management fee:
The amount a mutual fund pays to its investment adviser for the work of overseeing the fund’s holdings. Also called an advisory fee.
The amount a mutual fund pays to its investment adviser for the work of overseeing the fund’s holdings. Also called an advisory fee.
marginal tax rate:
The rate at which each additional dollar of taxable income is taxed. Also referred to as the tax bracket.
The rate at which each additional dollar of taxable income is taxed. Also referred to as the tax bracket.
market capitalization:
A determination of a company’s value, calculated by multiplying the total number of company stock shares outstanding by the price per share. Also called capitalization.
A determination of a company’s value, calculated by multiplying the total number of company stock shares outstanding by the price per share. Also called capitalization.
market risk:
The possibility that an investment will decline in value because the entire investment market (usually the stock market) declines.
The possibility that an investment will decline in value because the entire investment market (usually the stock market) declines.
maturity/maturity date:
The date when the issuer of a money market instrument or bond agrees to repay the principal, or face value, to the buyer.
The date when the issuer of a money market instrument or bond agrees to repay the principal, or face value, to the buyer.
Medicaid:
Government health insurance that provides free coverage for low-income people of any age.
Government health insurance that provides free coverage for low-income people of any age.
medical underwriting (of an annuity):
A lower premium granted in exchange for evidence that the annuitant has a serious life-shortening medical condition.
A lower premium granted in exchange for evidence that the annuitant has a serious life-shortening medical condition.
Medicare:
Government health insurance program for people age 65 and older at little to no cost. It does not include prescription drugs or routine doctor visits.
Government health insurance program for people age 65 and older at little to no cost. It does not include prescription drugs or routine doctor visits.
medigap insurance:
This is a supplemental insurance policy that fills the gap between the health care that people need and the services not covered by Medicare.
This is a supplemental insurance policy that fills the gap between the health care that people need and the services not covered by Medicare.
Monte Carlo analysis (or simulation):
A mathematical model that predicts the future based on the historical variation in past asset class returns.
A mathematical model that predicts the future based on the historical variation in past asset class returns.
Moody’s Investors Service:
One of five agencies (A. M. Best Company, Fitch Ratings, Moody’s Investors Service, Standard & Poor’s, and Weiss Research) that issue letter-grade ratings of insurers’ financial strength.
One of five agencies (A. M. Best Company, Fitch Ratings, Moody’s Investors Service, Standard & Poor’s, and Weiss Research) that issue letter-grade ratings of insurers’ financial strength.
mortality credit:
The amount by which an annuity payout exceeds the prevailing interest rate, made possible by contributions of unspent premiums from shorter-lived annuitants.
The amount by which an annuity payout exceeds the prevailing interest rate, made possible by contributions of unspent premiums from shorter-lived annuitants.
net asset value (NAV):
The market value of a mutual fund’s total assets, minus liabilities, divided by the number of shares outstanding. The value of a single share is called its share value or share price.
The market value of a mutual fund’s total assets, minus liabilities, divided by the number of shares outstanding. The value of a single share is called its share value or share price.
no-load fund:
A mutual fund that charges no sales commission or load.
A mutual fund that charges no sales commission or load.
nominal return:
The return on an investment before adjustment for inflation.
The return on an investment before adjustment for inflation.
nonqualified annuity:
An annuity purchased by ordinary posttax dollars, whose payouts are treated partially as taxable investment earnings and partially as untaxed return of principal.
An annuity purchased by ordinary posttax dollars, whose payouts are treated partially as taxable investment earnings and partially as untaxed return of principal.
OASDI:
The federal Old-Age, Survivors, and Disability insurance program, commonly called Social Security.
The federal Old-Age, Survivors, and Disability insurance program, commonly called Social Security.
open-end fund:
An investment entity that has the ability to issue or redeem the number of shares outstanding on a daily basis. Prices are quoted once a day, at the end of the day, at the net asset value of the fund (NAV).
An investment entity that has the ability to issue or redeem the number of shares outstanding on a daily basis. Prices are quoted once a day, at the end of the day, at the net asset value of the fund (NAV).
operating expenses:
The amount paid for asset maintenance or the cost of doing business. Earnings are distributed after operating expenses are deducted.
The amount paid for asset maintenance or the cost of doing business. Earnings are distributed after operating expenses are deducted.
option:
A contract in which a seller gives a buyer the right, but not the obligation, to buy or sell securities at a specified price on or before a given date.
A contract in which a seller gives a buyer the right, but not the obligation, to buy or sell securities at a specified price on or before a given date.
period certain (also guaranteed period, term certain):
A specified period of time, such as 10 years, during which an annuity is guaranteed to make payments, if not to the annuitant, then to the annuitant’s beneficiary or estate.
A specified period of time, such as 10 years, during which an annuity is guaranteed to make payments, if not to the annuitant, then to the annuitant’s beneficiary or estate.
portfolio transaction costs:
The expenses associated with buying and selling securities, including commissions, purchase and redemption fees, exchange fees, and other miscellaneous costs. In a mutual fund prospectus, these expenses are listed separately from the fund’s expense ratio. Does not include the bid/ask spread.
The expenses associated with buying and selling securities, including commissions, purchase and redemption fees, exchange fees, and other miscellaneous costs. In a mutual fund prospectus, these expenses are listed separately from the fund’s expense ratio. Does not include the bid/ask spread.
power of attorney:
A written, legally binding document that gives another person the right to make financial or health-care-related decisions on your behalf.
A written, legally binding document that gives another person the right to make financial or health-care-related decisions on your behalf.
premium:
An amount that exceeds the face value or redemption value of a security or of a comparable security or group of investments. It may indicate that a security is favored highly by investors. Also refers to a fee for obtaining insurance coverage.
An amount that exceeds the face value or redemption value of a security or of a comparable security or group of investments. It may indicate that a security is favored highly by investors. Also refers to a fee for obtaining insurance coverage.
premium refund:
A feature of an annuity that guarantees that the number of dollars paid in the premium will be paid out, if not to the annuitant, then to the annuitant’s beneficiary or estate.
A feature of an annuity that guarantees that the number of dollars paid in the premium will be paid out, if not to the annuitant, then to the annuitant’s beneficiary or estate.
primary insurance amount (PIA):
The monthly retirement benefit from Social Security for a worker whose benefit begins at full retirement age. The benefit for a worker in other circumstances or for a family member is a percentage of the worker’s PIA.
The monthly retirement benefit from Social Security for a worker whose benefit begins at full retirement age. The benefit for a worker in other circumstances or for a family member is a percentage of the worker’s PIA.
prospectus:
A legal document that gives prospective investors information about a mutual fund, including discussions of its investment objectives and policies, risks, costs, and past performance.
A legal document that gives prospective investors information about a mutual fund, including discussions of its investment objectives and policies, risks, costs, and past performance.
purchase fee:
A fee charged by some mutual funds when an investor purchases shares in order to compensate current fund holders for the costs of purchasing illiquid securities. Unlike a front-end load, the fee is paid into the fund rather than to the fund company.
A fee charged by some mutual funds when an investor purchases shares in order to compensate current fund holders for the costs of purchasing illiquid securities. Unlike a front-end load, the fee is paid into the fund rather than to the fund company.
qualified annuity:
An annuity purchased by direct transfer of qualified funds from an IRA, 401(k), or similar plan, and whose payouts are treated as taxable distributions.
An annuity purchased by direct transfer of qualified funds from an IRA, 401(k), or similar plan, and whose payouts are treated as taxable distributions.
real estate investment trust (REIT):
A company that manages a group of real estate investments and distributes to its shareholders at least 90 percent of its net earnings annually.
A company that manages a group of real estate investments and distributes to its shareholders at least 90 percent of its net earnings annually.
real return:
The actual return received on an investment after discounting inflation.
The actual return received on an investment after discounting inflation.
realized capital gain/loss:
An increase (or decrease) in the value of a security that has become real because the security was sold. A realized gain is taxable to the shareholder during the tax year in which the security was sold; a realized loss is subtracted from realized gains in determining the taxable gains.
An increase (or decrease) in the value of a security that has become real because the security was sold. A realized gain is taxable to the shareholder during the tax year in which the security was sold; a realized loss is subtracted from realized gains in determining the taxable gains.
record date:
The date used to determine who is eligible to receive a company’s or fund’s next distribution of dividends or capital gains.
The date used to determine who is eligible to receive a company’s or fund’s next distribution of dividends or capital gains.
redemption:
The return of an investor’s principal in a security. Bond redemption can occur at or before maturity; mutual fund shares are redeemed at net asset value when an investor’s holdings are liquidated.
The return of an investor’s principal in a security. Bond redemption can occur at or before maturity; mutual fund shares are redeemed at net asset value when an investor’s holdings are liquidated.
redemption fee:
A fee charged by some mutual funds when an investor sells shares within a short period of time. Unlike a back-end load, it is paid to the fund itself.
A fee charged by some mutual funds when an investor sells shares within a short period of time. Unlike a back-end load, it is paid to the fund itself.
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