Posted on Thursday, January 23, 2025
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by AMAC, D.J. Wilson
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If you are planning for or nearing retirement, you’ve probably come across some unfamiliar words or phrases that are commonly associated with the process. Here is a mini sampling of terms that are frequently used when discussing the all-important subject of retirement.
Aging in place: Aging in place is a term which relates to services that allow older people to remain in their communities. It generally provides a person with the ability to live independently in their home, rather than moving to a retirement home or assisted living.
Asset allocation: Asset allocation is the process of dividing funds between different asset classes. This investment strategy allows people to balance risk vs. reward by adjusting investment portfolios according to goals, risk tolerance, and other vital factors.
Beneficiary: This is a person or legal entity who receives the benefits or proceeds of an account or policy after the original owner dies. An account owner may choose who receives the benefits of a retirement account, for example. If a policyholder fails to name a beneficiary before they die, the insurance company or court may determine where payments go.
Benefit accrual: This term describes the amounts of benefits accumulated. In retirement, it refers to the gradual accumulation of a retirement benefit over time via a pension or a retirement plan.
COLA (Cost-of-living adjustment): This is an increase made to wages or Social Security benefits to help keep up with increased inflation.
Defined benefit plan: This is a company pension plan in which an employee’s pension payments are calculated by the length of service and salary earned at the time of retirement. Defined benefit plans provide a fixed, pre-established benefit.
401(k): This is a retirement account that an employer offers to its employees who can then contribute a percentage of their salary to the account. Some employers will match a portion of the contributions. Employees can roll these types of accounts to another if they change jobs.
IRA (Individual Retirement Account): This describes an individual account set up with a financial institution, whereby money is generally invested in stocks, bonds, or mutual funds. In this type of account, individuals may set aside personal savings up to a certain amount that is tax deferred. IRAs are popular long-term retirement savings plans that allow individuals to contribute pre-tax or post-tax income.
Pension plan: This is an employer-established retirement fund into which amounts are paid regularly during an individual’s work career. Periodic payments may later be made to support the person in retirement.
Plan administrator: This general term is used to describe a person who is identified in a plan document as being responsible for running the plan. It may be an employer, a committee, or someone hired to run the plan. A retirement plan administrator manages day-to-day operations of a pension plan or retirement fund, acting in the best interests of participants.
Pre-tax retirement account: Also known as tax-deferred accounts, pre-tax retirement accounts allow individuals to contribute funds before federal and municipal taxes are deducted from their income. Pre-tax also means account holders can put off paying taxes on potential earnings that are generated.
Profit sharing: This term describes a system in which people who work for a company receive a direct share of the profits based on quarterly or annual earnings.
Retirement annuity: This is an insurance contract that allows a person to set aside money to pay themselves an income in retirement. These are typically funded years in advance and are intended to serve as a secure income stream during retirement.
Retirement calculator: This is a tool that helps individuals estimate how much money they will need to save to retire in comfort.
Retirement fund: This term refers to a long-term investment account sponsored by an individual and/or employer in which one makes contributions for retirement.
Rollover: In retirement, this term describes the movement of savings from one retirement account to another.
Roth IRA: This is a type of IRA for which contributions are not deductible. However, qualified withdrawals in retirement are entirely tax free.
Simplified Employee Pension Plan (SEP): This is a plan in which an employer contributes on a tax-favored basis to IRAs owned by its employees. If the employer meets certain conditions, it isn’t subject to the reporting and disclosure requirements of most retirement plans.
Social Security: This is a federal benefits program that provides financial assistance to Americans in the form of retirement, disability, and survivor benefits. It’s funded by payroll taxes paid by both employee and their employers. Social Security is run by the SSA (Social Security Administration).
Years of Service: This term describes the time an individual has worked in a job covered by a plan. It is used to determine how benefits are accrued.
For a more complete glossary of retirement phrases, click here.
Disclosure: These definitions are for general knowledge only and are not a substitute for professional advice.
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