Retirement Planning Glossary

4% Rule

A guideline stating you can withdraw 4% of your portfolio in year one of retirement, adjust for inflation annually, and your money should last 30+ years. Based on the 1998 Trinity Study.

401(k)

An employer-sponsored retirement savings plan that allows employees to contribute pre-tax dollars. Contributions grow tax-deferred until withdrawal. 2026 limit: $23,500 (under 50), $31,000 (50+).

403(b)

A retirement plan similar to a 401(k) but offered by public schools, nonprofits, and some government employers. Same contribution limits as a 401(k).

457(b)

A deferred compensation retirement plan available to state and local government employees and some nonprofits. Unique benefit: no 10% early withdrawal penalty before age 59½.

Annuity

A contract with an insurance company that provides guaranteed income payments, either immediately or at a future date. Can be fixed, variable, or indexed. Useful for longevity protection but often high-fee.

Asset Allocation

The distribution of investments across asset classes (stocks, bonds, cash, real estate). A common rule of thumb: subtract your age from 110 to get your stock percentage.

Backdoor Roth IRA

A strategy for high earners who exceed Roth IRA income limits. You contribute to a Traditional IRA (non-deductible), then convert it to a Roth IRA. Allows Roth benefits regardless of income.

Beneficiary

The person(s) designated to receive your retirement account assets upon your death. Beneficiary designations override your will — keep them updated after major life events.

Bond Ladder

A strategy of buying bonds with staggered maturity dates so that a portion matures each year. Provides predictable income and reduces interest rate risk in retirement.

Catch-Up Contribution

Additional retirement account contributions allowed for people age 50 and older. For 2026: $7,500 extra for 401(k), $1,000 extra for IRA. Ages 60–63 can contribute up to $11,250 extra to a 401(k).

COLA (Cost of Living Adjustment)

An annual increase to Social Security benefits tied to the Consumer Price Index (CPI). In 2025, the COLA was 2.5%. This inflation protection is one of Social Security's most valuable features.

Compound Interest

Earning returns on both your original investment and previously earned returns. The foundation of long-term wealth building. $10,000 at 7% for 30 years grows to ~$76,000.

Defined Benefit Plan

A traditional pension plan where the employer promises a specific monthly benefit at retirement, typically based on salary and years of service. Rare in the private sector today.

Defined Contribution Plan

A retirement plan (like a 401k) where the employee and/or employer contribute a defined amount, but the final benefit depends on investment performance. Most common retirement plan today.

Diversification

Spreading investments across different asset classes, sectors, and geographies to reduce risk. A diversified portfolio reduces the impact of any single investment performing poorly.

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, reducing average cost over time.

Early Withdrawal Penalty

A 10% federal tax penalty on withdrawals from tax-advantaged retirement accounts (401k, IRA) before age 59½, in addition to ordinary income tax. Several exceptions exist.

Emergency Fund

Liquid savings covering 3–6 months of expenses, kept in a high-yield savings account. Essential before investing for retirement — prevents forced early withdrawals during financial emergencies.

Expense Ratio

The annual fee charged by a mutual fund or ETF, expressed as a percentage of assets. A 0.03% expense ratio on a $100,000 investment costs $30/year. Index funds typically have the lowest ratios.

FIRE (Financial Independence, Retire Early)

A movement focused on aggressive saving and investing to achieve financial independence and retire well before traditional retirement age. Variants include Lean FIRE, Fat FIRE, and Barista FIRE.

Full Retirement Age (FRA)

The age at which you qualify for 100% of your Social Security benefit. For anyone born in 1960 or later, FRA is 67. Claiming before FRA permanently reduces your benefit; delaying past FRA increases it.

Glide Path

The gradual shift from aggressive (stock-heavy) to conservative (bond-heavy) asset allocation as you approach and enter retirement. Target-date funds automatically follow a glide path.

Guardrails Strategy

A flexible withdrawal approach that adjusts spending based on portfolio performance. If your withdrawal rate drops below 3% (portfolio grew), you can spend more. If it rises above 5%, cut spending 10%.

Health Savings Account (HSA)

A triple-tax-advantaged account for those with high-deductible health plans. Contributions are pre-tax, growth is tax-free, and withdrawals for medical expenses are tax-free. After 65, can be used for any purpose.

Inflation

The rate at which prices rise over time, eroding purchasing power. The Federal Reserve targets 2% annual inflation. At 3% inflation, $60,000 today costs ~$121,000 in 25 years.

IRA (Individual Retirement Account)

A personal retirement savings account with tax advantages. Two main types: Traditional (pre-tax contributions, taxed on withdrawal) and Roth (after-tax contributions, tax-free withdrawal). 2026 limit: $7,000 ($8,000 if 50+).

Longevity Risk

The risk of outliving your retirement savings. A 65-year-old couple has a 50% chance one spouse lives to 90. Planning for a 30-year retirement is prudent; 35+ years for early retirees.

Marginal Tax Rate

The tax rate applied to your last dollar of income. Not all income is taxed at this rate — only income in that bracket. Understanding your marginal rate helps optimize Roth conversions and withdrawal timing.

Medicare

Federal health insurance for Americans 65 and older. Part A covers hospital care (usually free), Part B covers outpatient care (monthly premium ~$185 in 2026), Part D covers prescriptions.

Monte Carlo Simulation

A computational method that runs thousands of random market scenarios to estimate the probability a retirement plan succeeds. More realistic than single-projection calculators because it accounts for sequence of returns risk.

Net Worth

Total assets minus total liabilities. Your retirement nest egg is a subset of net worth. Tracking net worth over time is the best measure of financial progress.

Pension

See Defined Benefit Plan. A guaranteed monthly income from an employer in retirement, based on salary and years of service. Increasingly rare; primarily found in government and union jobs.

Portfolio Rebalancing

Periodically buying and selling assets to restore your target asset allocation. If stocks outperform and grow from 60% to 70% of your portfolio, rebalancing sells stocks and buys bonds to return to 60/40.

Primary Insurance Amount (PIA)

The Social Security benefit you'd receive at your Full Retirement Age, calculated from your 35 highest-earning years. Claiming early reduces PIA; delaying past FRA increases it by 8% per year.

Required Minimum Distribution (RMD)

The minimum amount the IRS requires you to withdraw annually from Traditional IRAs and 401(k)s starting at age 73. Calculated by dividing your account balance by your IRS life expectancy factor. Failure to take RMDs results in a 25% penalty.

Retirement Number

The total portfolio value needed to retire. Calculated as annual expenses × 25 (using the 4% rule). Subtract guaranteed income sources like Social Security before calculating.

Rollover

Moving retirement funds from one account to another (e.g., old 401k to IRA) without triggering taxes or penalties. Direct rollovers go account-to-account; indirect rollovers give you 60 days to redeposit.

Roth Conversion

Moving money from a Traditional IRA or 401(k) to a Roth IRA. You pay income tax on the converted amount now, but future growth and withdrawals are tax-free. Most beneficial in low-income years.

Roth IRA

An individual retirement account funded with after-tax dollars. Qualified withdrawals in retirement are completely tax-free. No RMDs during your lifetime. 2026 income limits: phase-out begins at $150,000 (single) / $236,000 (married).

Rule of 55

An IRS provision allowing penalty-free withdrawals from your current employer's 401(k) if you leave your job in the year you turn 55 or later. Does not apply to IRAs or old 401(k)s from previous employers.

Safe Withdrawal Rate (SWR)

The percentage of your portfolio you can withdraw annually without running out of money over a given retirement period. The 4% rule is the most cited SWR for 30-year retirements; 3.5% is recommended for 40+ year retirements.

SEP IRA

Simplified Employee Pension IRA, primarily for self-employed individuals and small business owners. 2026 contribution limit: up to 25% of compensation or $70,000, whichever is less. Much higher limit than a regular IRA.

Sequence of Returns Risk

The danger that poor market returns early in retirement permanently damage your portfolio. Selling shares at low prices to fund living expenses depletes capital that can't recover. The biggest threat to a retirement withdrawal strategy.

SIMPLE IRA

Savings Incentive Match Plan for Employees. A retirement plan for small businesses (100 or fewer employees). 2026 limit: $16,500 ($20,000 if 50+). Employers must contribute either a 2% non-elective or 3% matching contribution.

Social Security

A federal program providing retirement, disability, and survivor benefits. Funded by payroll taxes. You can claim as early as 62 (reduced benefit) or as late as 70 (maximum benefit, ~77% more than at 62).

Spousal Benefit

A Social Security benefit available to spouses of workers, equal to up to 50% of the worker's PIA. The surviving spouse receives the higher of their own benefit or the deceased spouse's benefit.

Stock Market Index

A benchmark measuring the performance of a group of stocks. The S&P 500 tracks 500 large US companies and has returned ~10% annually on average since 1926. Index funds that track it have very low fees.

Stretch IRA

Formerly, a strategy allowing non-spouse beneficiaries to take RMDs over their lifetime. The SECURE Act (2019) eliminated this for most beneficiaries, requiring full withdrawal within 10 years of the account owner's death.

Target-Date Fund

A mutual fund that automatically adjusts its asset allocation from aggressive to conservative as you approach a target retirement year. Simple, low-cost, and appropriate for most investors. Example: Vanguard Target Retirement 2040.

Tax-Deferred Growth

Investment growth that is not taxed until withdrawal. Traditional 401(k)s and IRAs grow tax-deferred. This allows compound growth on the full pre-tax amount, which is more powerful than taxable accounts.

TIPS (Treasury Inflation-Protected Securities)

US government bonds whose principal adjusts with inflation (CPI). Provide a guaranteed real (inflation-adjusted) return. Useful as an inflation hedge for the bond portion of a retirement portfolio.

Traditional IRA

An individual retirement account funded with pre-tax dollars (if you qualify for the deduction). Contributions reduce taxable income now; withdrawals in retirement are taxed as ordinary income. RMDs required starting at 73.

Vesting

The process by which you earn ownership of employer contributions to your retirement plan over time. Cliff vesting: 100% after a set period. Graded vesting: gradual ownership over several years. Your own contributions are always 100% vested.

Withdrawal Rate

The percentage of your portfolio you withdraw annually in retirement. A 4% withdrawal rate on a $1,000,000 portfolio = $40,000/year. Rates above 5% significantly increase the risk of running out of money.