Understanding retirement planning terms is the first step to making confident decisions. Browse the glossary below or search for specific terms.
An employer-sponsored retirement savings plan that allows employees to contribute a portion of their salary before taxes. Contributions grow tax-deferred, meaning you pay taxes when you withdraw funds in retirement.
Tip: Many employers offer matching contributions — try to contribute at least enough to get the full match.
An Individual Retirement Account where contributions may be tax-deductible. Like a 401(k), the money grows tax-deferred and withdrawals in retirement are taxed as ordinary income.
Tip: Contribution limits are lower than 401(k)s. For 2024, the limit is $7,000 ($8,000 if age 50+).
Retirement accounts funded with after-tax dollars. The key advantage is that qualified withdrawals in retirement are completely tax-free, including all investment gains.
Tip: Roth accounts are especially valuable if you expect to be in a higher tax bracket in retirement.
A taxable investment account with no contribution limits or withdrawal restrictions. Capital gains taxes apply when you sell investments for a profit.
Tip: Useful for savings beyond retirement account limits. Long-term capital gains (held >1 year) are taxed at lower rates.
A federal program that provides retirement benefits based on your earnings history. You can start benefits as early as age 62, at full retirement age (67 for most), or delay until age 70 for maximum benefits.
Tip: Each year you delay past 67 increases your benefit by about 8%. Check your estimate at ssa.gov/myaccount.
An annual increase to Social Security benefits designed to keep pace with inflation. The adjustment is based on the Consumer Price Index (CPI). Historical median is about 2.9%.
Tip: COLA adjustments compound over time, making delayed SS even more valuable in later years.
A retirement plan where an employer promises to pay a defined benefit amount in retirement, usually based on salary and years of service. Less common today but still offered by some employers and government agencies.
Tip: If you have a pension, understand whether it includes COLA adjustments or is a fixed amount.
A measure of the average change in prices paid by consumers for goods and services over time. It's the primary measure of inflation used in retirement planning. The historical median is about 2.8%.
Tip: Higher CPI means your retirement income needs to grow faster to maintain purchasing power.
The annual percentage return you expect from your investment portfolio. A common assumption for a diversified stock portfolio is 7% (before inflation). More conservative portfolios might assume 4-5%.
Tip: Be realistic — higher assumed ROI means more optimistic projections. Consider using 5-6% for conservative planning.
A widely-cited guideline suggesting you can withdraw 4% of your portfolio value each year in retirement with a high probability of not running out of money over 30 years. Based on the Trinity Study.
Tip: The 4% rule is a starting point, not a guarantee. Adjust based on market conditions and your specific situation.
A withdrawal strategy where you draw from your portfolio based on your actual spending needs minus other income (SS, pension). This approach directly targets a specific lifestyle cost.
Tip: This approach can lead to faster portfolio depletion if spending needs are high relative to portfolio size.
An account where contributions reduce your current taxable income, and investments grow without being taxed. You pay ordinary income tax when you withdraw funds. Examples: Traditional 401(k), Traditional IRA.
Tip: Required Minimum Distributions (RMDs) start at age 73, forcing you to withdraw and pay taxes.
An account funded with after-tax dollars where qualified withdrawals are completely tax-free. Examples: Roth IRA, Roth 401(k). No RMDs for Roth IRAs.
Tip: Having a mix of tax-deferred and tax-exempt accounts gives you flexibility to manage your tax bracket in retirement.
The actual percentage of your total income that you pay in taxes, after deductions and credits. This is different from your marginal tax bracket. A 10% effective rate is common for moderate retirement income.
Tip: Your effective rate in retirement is often lower than during working years due to lower income and deductions.
Tax on the profit from selling investments in a taxable brokerage account. Long-term gains (assets held >1 year) are taxed at 0%, 15%, or 20% depending on income. Short-term gains are taxed as ordinary income.
Tip: Tax-loss harvesting can offset gains. Consider your total income when planning brokerage withdrawals.
When your investment portfolio runs out of money during retirement. This is the primary risk in retirement planning — outliving your savings.
Tip: If projections show depletion, consider: reducing spending, delaying retirement, increasing savings, or adjusting investment allocation.
The risk that poor market returns early in retirement can permanently damage your portfolio, even if average returns over time are acceptable. This is because you're withdrawing from a declining portfolio.
Tip: Having 2-3 years of expenses in cash or bonds can help weather early market downturns without selling stocks at a loss.
A spending model that assumes retirees naturally spend slightly less each year as they age (about 1% less in real terms). This reflects the common pattern of decreased travel and activity in later retirement years.
Tip: While spending may decrease overall, healthcare costs often increase — plan for both trends.