Annuities and Retirement Planning Lecture Review

Flashcards covering types of annuities, IRA regulations, retirement plan structures (DB vs. DC), vesting standards, and common investment risks based on the lecture transcript.

Joint life annuity

An annuity covering both lives that ends at the first death.

Variable annuity

An annuity where the price of accumulation units and the value of annuity units fluctuate, primarily used to hedge inflation.

Traditional IRA

A retirement account where required minimum distributions apply and withdrawals are generally fully taxable.

Roth IRA

A retirement account involving after-tax contributions where qualified distributions are tax-free and minimum distributions do not apply.

Longevity annuity

An annuity where the purchaser forfeits the investment if death occurs during the deferral period.

Defined benefit (DB) plan

A retirement plan where the employer bears the investment risk, benefits are calculated via a unit-benefit formula, and older entrants are favored.

Defined contribution (DC) plan

A retirement plan where the employee bears the investment risk, the contribution is fixed, and benefits are difficult to estimate for older entrants.

Life annuity (no refund)

A payout option that provides the highest monthly income compared to options with installment refunds or period guarantees.

Excessive longevity

The specific risk pooled by insurers through the use of annuities.

Graded vesting

A vesting standard where an employee is $20\%$ vested after $3$ years and $100\%$ vested after $7$ years.

Cliff vesting

A vesting standard where an employee receives no benefit before a set time (e.g., $4$ years) regardless of service length until the cliff is reached.

403(b) plan

A retirement plan for public school or tax-exempt employees where contributions reduce taxable income and matching contributions are permitted.

Immediate annuity

An annuity characterized by being simple to manage and providing lifetime income security, though payments are not tax-free.

Vesting

The right of an employee to the employer's contributions in a retirement plan.

IRA rollover

A strategy used to avoid immediate taxation when moving funds between retirement accounts.

Unit-benefit formula

A type of pension formula used to determine the benefit amount in defined benefit plans.

Annuity

A financial product that is the opposite of life insurance, designed to replace income lost due to outliving one's assets.

Deferred annuity

An annuity where payments to the annuitant begin at a future date rather than immediately.

Common investment mistake

Panicking and selling assets at low prices during market volatility.

Retirement participation

A significant issue in retirement planning where employees do not participate enough in available plans.

Life income 10-year guarantee

An annuity payout option that provides lower monthly income than a life annuity (no refund) because it guarantees payments for at least $10$ years.

Joint-and-survivor annuity

An annuity covering both lives that continues to provide payments after the first death occurs.