Finance Ch. 7 Vocab

3% Rule

Investment guideline that suggests they can annually withdraw 3% of their total portfolio value at the time of retirement and not run out of funds.

4% Rule

Investment guideline that suggests retirees can annually withdraw 4% of their total portfolio value at the time of retirement and not run out of funds.

401(k)

Employer sponsored tax-advantaged retirement savings plan.

403(b)

Employer sponsored retirement plan, similar to a 401(k), but offered by tax-exempt organizations.

asset reallocation

Process of changing the ratios of different investments in a portfolio.

bond fund

Mutual or exchange-traded fund that invests in bonds.

compounding

The process of earning interest or a return on reinvested interest or returns.

defined benefit pension plan

Retirement income program where participants received a monthly payment after retirement that continues until their death.

defined contribution plan

Employer sponsored retirement plan where the employee is responsible for making their investing decisions.

emerging market fund

Stock mutual or exchange-traded fund that invests in the stock of companies in less developed but potentially faster growing countries such as Brazil, India, Indonesia, Russia, or China.

equity income fund

Stock mutual or exchange-traded fund that invests in companies whose stocks typically pay regular dividends and may also include bonds.

ESG fund

Stock mutual or exchange-traded fund that use some combination of environmental, socially conscious, or governance criteria to select potential investments.

foreign stock fund

Stock mutual or exchange-traded fund that invests primarily in companies headquartered outside the United States.

global stock fund

Stock mutual or exchange-traded fund that investments include both U.S. and foreign companies.

growth fund

Stock mutual or exchange-traded fund that invests in the stock of companies they believe will grow quickly. With that growth, should also come a rapid increase in the stock price.

individual 401(k) plan

Retirement program set up by a self-employed individual that offers tax advantages similar to those of an employer sponsored 401(k). Also known as Solo 401(k).

individual retirement account (IRA)

Tax advantaged retirement savings plan that must be set up by the individual.

large-cap funds

Stock mutual or exchange-traded fund that invests in the stock of big companies, often defined as having a market capitalization of over $10 billion.

Medicare

The basic United States government health insurance provided to all citizens at age 65.

mid-cap fund

Stock mutual or exchange-traded fund that invests in mid-sized companies often defined as having a market capitalization of between $2 billion and $10 billion.

Modified Adjusted Gross Income (MAGI)

Calculation of income determined when filing taxes used to determine eligibility for tax-advantaged individual retirement accounts.

Roth IRA

Individual retirement plan that provides a future tax benefit of allowing the principal and all earnings to be withdrawn tax-free.

Savings Incentive Match Plan for Employees (SIMPLE)

IRA plan typically offered by small businesses where the employer contributes to the plan.

sector funds

Stock mutual or exchange-traded fund that invests in a specific area of the economy.

Simplified Employee Pension (SEP)

Small business retirement plan offered to employees based on IRAs.

small-cap fund

Stock mutual or exchange-traded fund that invests in smaller companies often defined as having a market capitalization of less than $2 billion.

Social Security

Government sponsored program that provides supplementary income.

tax advantaged

Investment made in a way that defers and/or avoids income tax liability.

taxable income

Income subject to taxation by federal, state, or local governments.

Traditional IRA

Individual retirement account that offers tax deferred growth and an upfront tax deduction if eligible based on earnings.

value fund

Stock mutual or exchange-traded fund that invests in companies the fund manager believes are intrinsically undervalued relative to the rest of the stock market.

variable annuities

Tax-deferred retirement plan that offers a more predictable income stream in exchange for higher fees and reduced liquidity.

vesting period

The time that must elapse before the employer paid benefits in a retirement plan are owned by an employee.