Finance Ch. 7 Vocab

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3% Rule

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33 Terms
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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.

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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.

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3
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401(k)

Employer sponsored tax-advantaged retirement savings plan.

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403(b)

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

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asset reallocation

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

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bond fund

Mutual or exchange-traded fund that invests in bonds.

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compounding

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

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defined benefit pension plan

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

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defined contribution plan

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

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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.

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equity income fund

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

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ESG fund

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

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foreign stock fund

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

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global stock fund

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

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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.

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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).

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individual retirement account (IRA)

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

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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.

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Medicare

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

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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.

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Modified Adjusted Gross Income (MAGI)

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

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Roth IRA

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

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Savings Incentive Match Plan for Employees (SIMPLE)

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

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sector funds

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

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Simplified Employee Pension (SEP)

Small business retirement plan offered to employees based on IRAs.

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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.

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Social Security

Government sponsored program that provides supplementary income.

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tax advantaged

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

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taxable income

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

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Traditional IRA

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

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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.

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variable annuities

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

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vesting period

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

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