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Plain-language definitions for the technical terms used in retirement income planning.
Since the subject matter of this blog is technical in nature, this Glossary of Terms is provided for your reference. Each term is intended to be a brief definition to enable you to better understand the term as it is used in a particular blog post.
New terms will be added as they appear in each blog post.
Accumulation Phase or Stage
As it pertains to financial planning in general, the period of time over which the value of an investment portfolio that is generally allocated for a specific planning goal, e.g., education, retirement, etc., is increased through a combination of contributions to, and appreciation of, the portfolio.
Adjusted Gross Income (AGI)
Used in the calculation of an individual's income tax liability, it is an intermediary step used in the calculation of one's taxable income that is equal to gross income from taxable sources less deductions from gross income that are allowable even if you don't itemize deductions.
Alternative Minimum Tax (AMT)
A second method of calculating income tax that begins with taxable income and adds back specified tax preference items that are otherwise allowed as tax deductions with the resulting AMT required to be paid if greater than one's regular tax liability.
Annuitant
One or more individuals entitled to receive benefits from an annuity. The individuals may be the same as, or different from, the owners of the annuity contract.
Annuitization
The irrevocable structured payout of an annuity stated in an annuity contract with a specified payment beginning at a specified date, paid at specified intervals over a stated period of months or years or for the duration of the insured's and potentially his/her spouse's and/or other individuals' lifetime(s) depending upon the payout option selected.
Annuity
A contract between an insurance company and an individual, or insured, whereby the insurance company, in exchange for receipt of a lump sum payment, or premium, or series of payments, or premiums, that is invested by the insurance company in one or more tax-deferred investment vehicles, agrees to pay the insured a lump sum, distributions of the contract balance, or the option to elect an irrevocable structured payout with a specified payment beginning at a specified date, paid at specified intervals over a stated period of months or years or for the duration of the insured's and potentially his/her spouse's and/or other individuals' lifetime(s) depending upon the payout option selected.
Annuity Beneficiary
An individual, institution, trustee, or estate that receives benefits from an annuity contract upon the death of the annuity owner or annuitant(s).
Basis in IRA
After-tax or non-deductible contributions to an IRA that are reported to IRS on Form 8606 - Nondeductible IRAs that won't be taxable when either taking distributions from an IRA or converting a traditional IRA to a Roth IRA.
Capital Gain
For certain assets considered to be capital assets, this is equal to the excess of the net selling price over the adjusted cost basis, which, in the case of real estate, is equal to the purchase price less accumulated depreciation. Personal capital gains for assets held for more than one year qualify for favorable long-term capital gain tax rates.
Cash Flow Projection
A financial statement that is prepared using various assumptions to show how cash is expected to flow in and flow out over a specified period of time to enable you to see if your projected cash receipts will be sufficient to cover your projected cash disbursements and to plan accordingly.
Charitable Remainder Trust (CRT)
An income and estate planning technique whereby capital gain recognition on the potential sale of an asset is deferred by transferring ownership of the asset to a CRT, the remainder beneficiary of which is one or more charitable organizations, prior to the sale with the grantor being entitled to a charitable contribution deduction equal to the fair market value of the remainder interest in the CRT and receipt of a future stream of income resulting from the sale of the asset by the CRT.
Compound Interest
Interest which is calculated on the principal and the accumulated interest of prior periods. Where this occurs, the investment grows exponentially.
Cost of Living Adjustment (COLA)
As it pertains to Social Security, the automatic annual increase in benefits that corresponds with an increase in the cost of living as measured by the Consumer Price Index, or CPI, that is designed to offset a loss in purchasing power. To the extent that CPI remains flat or decreases in a particular year, there is no COLA in the following year.
Deferred Annuity
An annuity for which annuitization commences at least 13 months after date of purchase with either a lump sum or series of periodic payments.
Deferred Income Annuity (DIA)
See Deferred Annuity.
Depreciation Recapture
The amount of depreciation that is included as ordinary income vs. capital gain in the year of sale of a depreciable asset which is generally 100% of accumulated depreciation allowable on personal property and the excess of accelerated depreciation over straight-line depreciation on real property.
Financial Independence Income Planning
See Retirement Income Planning.
Financial Independence Planning
The development and management of a plan designed to provide an ongoing, inflation-protected, tax-favored distribution of income that will ideally enable you to live in the style to which you're accustomed, while minimizing the possibility that you will outlive your assets.
Financial Plan
A document that includes a person or family's financial goals, including the timeframe for achieving each goal, analysis of one's current and projected financial situation, and recommendations for achieving each goal.
Financial Planner
A professional who uses the financial planning process to help clients establish financial goals, prepare an initial and ongoing analysis of their current and projected financial situation, and make recommendations for pursuing the achievement of financial goals. While there is currently no single professional license or credential required to hold oneself out as a financial planner, the CERTIFIED FINANCIAL PLANNER or CFP certification is generally considered to be the leading and most recognized designation. The Personal Financial Specialist, or PFS, credential distinguishes CPA's who specialize in financial planning.
Financial Planning
See Personal Financial Planning.
Fixed Annuity
A annuity that offers a guaranteed interest rate for a set period of time. Premiums are invested in fixed income instruments such as corporate and government bonds in the general account of the insurance company, and the insurance company guarantees to pay a fixed payout to the annuitant when annuitized, thereby assuming the investment risk.
Fixed Income Annuity
The payments received through annuitization of a fixed annuity. The payments can be either immediate or deferred, depending upon whether an immediate or deferred annuity is purchased.
401(k) Plan
A type of defined contribution (vs. defined benefit) plan offered by an employer to employees which allow them to contribute a portion of their salary to the plan up to a maximum annual IRS-specified limit generally on a pre-tax basis, with the exception of Roth 401(k) plan contributions, which are made with after-tax dollars. The employer may elect to match a portion of employees' contributions if specified in the plan document. All contributions and plan earnings accumulate on a tax-deferred basis. All amounts not transferred to another 401(k) plan or rolled over into an IRA upon separation of service from the employer or termination of the plan are taxable as ordinary income upon withdrawal unless the withdrawals are from a Roth 401(k) plan account. The plan gets its name from Section 401(k) of the Internal Revenue Code under which it is authorized.
Immediate Annuity
A fixed annuity for which annuitization commences one month after date of purchase with a lump sum or single premium.
Income Annuity
The payments received through annuitization of a fixed or variable annuity. The payments can be either immediate or deferred, depending upon whether an immediate or deferred annuity is purchased.
Income Gap
Difference between projected income needs and projected income sources.
Income Distribution
As it pertains to retirement income planning, the cash that is made available on a regular basis from retirement capital to fund one's retirement planning goals. It may be fully taxable, partially taxable, or nontaxable depending on the source.
Income Portfolio
Streams of income generated by income-producing investments.
Income Portfolio Plan
A strategy that uses streams of income generated by income-producing investments to close the gap between projected income needs and projected income sources.
Income Streams
A regular series of payments generated by one or more investments.
Individual Retirement Account (IRA)
A personal retirement plan that enjoys tax-deferred growth to which annual contributions up to the lesser of earned income or an IRS-specified limit, that is $5,000 or $6,000 if 50 and above as of 2010. There are two basic types of IRAs: Traditional IRA and Roth IRA.
Inflation
The increase in the general level of prices of goods and services in an economy over a period of time that results in erosion in the purchasing power of money. The traditional measure of inflation is the consumer price index, or CPI.
Investment Risk
The degree of uncertainty, or deviation from an expected outcome, regarding the future benefits to be realized from a specific investment.
Joint and Survivor Annuity Payment Option
Annuitization payment option whereby periodic payments are made by a life insurance company to an annuitant and to the annuitant's specified survivor.
Laddered Income Streams
A sequential regular series of payments generated by one or more investments.
Life Annuity Payment Option
Also referred to as a straight life annuity payment option, this is an annuitization payment option whereby periodic payments are made by a life insurance company to an annuitant that terminate upon the annuitant's death.
Life Annuity With Guaranteed Payment Option
Annuitization payment option whereby periodic payments are made by a life insurance company to an annuitant, and potentially to an annuitant's beneficiary(ies), that terminate upon the later of the annuitant's death or a guaranteed number of years.
Longevity Risk
The risk associated with the possibility of outliving one's assets.
Modified Adjusted Gross Income (Modified AGI)
Adjusted Gross Income that is increased for specified otherwise allowable deductions for adjusted gross income and exclusions and is reduced by otherwise taxable Roth IRA conversions and rollovers in order to calculate deductibility of traditional IRA contributions, eligibility for a Roth IRA contribution, and eligibility for a Roth IRA Conversion before 2010.
Net Operating Loss (NOL)
Occurs when your deductions exceed your income in a particular year with a loss from operating a business being the most common reason for a NOL. NOL's are required to be carried back two years before the year in which the NOL occurred unless the carry back period is waived and carried forward for up to 20 years after the year of the loss.
Net Worth Statement
A financial statement that lists an individual's or family's assets and liabilities and their values as of a specific date. The excess of total assets over total liabilities is a residual amount otherwise known as net worth.
Nonqualified Annuity
An annuity purchased individually, rather than through a tax-advantaged retirement plan or IRA, and, as such, doesn't meet ERISA or IRS requirements for favorable tax treatment, including tax-deductible purchases, and therefore isn't subject to purchase limits and required minimum distribution rules beginning at age 70-1/2.
Passive Loss
Loss from a passive activity, including losses from rental real estate which are limited to $25,000 per year subject to a further limitation for high income taxpayers. Unallowed passive losses can be carried forward to future years with the ability to use them subject to passive loss limitations in each year as well as sale or disposition of the property in which case 100% of the passive loss carry forward can be used in the year of sale or disposition.
Pension
A fixed sum of money paid monthly or on some other regular basis beginning at a specified age to a former employee and potentially to his/her spouse upon death at the same or a reduced amount.
Period Certain Annuity Payment Option
Also referred to as a term certain annuity payment option, this is an annuitization payment option whereby periodic payments are made by a life insurance company to an annuitant, and potentially to an annuitant's beneficiary(ies), in the event that the annuitant dies before the end of the term, for a specified number of months or years.
Personal Financial Planning
Management of all aspects of an individual or family's financial affairs with the objective of pursuit of the achievement of the individual or family's financial goals. It generally includes an initial and ongoing analysis of one's current financial condition as well as one or more of the following financial planning disciplines performed either independently or with the assistance of a professional adviser: cash flow, income tax, risk management (insurance), investment, retirement, and estate.
Premature Distribution Penalty
10% penalty that is assessed on the taxable amount of any distribution from an IRA or qualified retirement plan prior to age 59-1/2 that is in addition to income tax liability on the distribution unless subject to an exception.
Qualified Annuity
An annuity purchased through a tax-advantaged retirement plan or IRA, and as such, meets ERISA or IRS requirements for favorable tax treatment, including tax-deductible purchases, however, it's also subject to purchase limits and required minimum distribution rules beginning at age 70-1/2.
Required Minimum Distribution (RMD)
The minimum amount calculated in accordance with an IRS life expectancy table factor that a retirement plan account owner must withdraw each year from a plan without being subject to a penalty beginning at age 70-1/2 or in the year of retirement if later if the plan is a qualified, i.e., employer sponsored, retirement plan and the individual isn't a 5% or greater owner of the business sponsoring the plan.
Retirement Asset Planning
The process of planning for the accumulation of sufficient assets to be used for retirement and spending down of those assets during ones retirement years with the ultimate goal of not depleting all assets during ones' lifetime.
Retirement Capital
Assets that are physically segregated or otherwise dedicated for funding retirement. The assets are either immediately available, e.g., a checking account, or can be sold, e.g., brokerage account securities or a rental property. The assets themselves, or proceeds from the sale of those assets, can either be directly used to pay for retirement expenses or can be invested in one or more income-producing investments, such as an annuity, to provide income to fund retirement.
Retirement Income Planner
An individual who is professionally trained, licensed, and experienced in developing strategies for creating and optimizing retirement income to meet one's needs throughout retirement.
Retirement Income Planning
The process of planning for a predictable income stream from one's assets that, when combined with other sources of income, is designed to meet an individual's or family's financial needs throughout retirement.
Retirement Planning
The process of establishing, and periodically revising, retirement goals and developing financial strategies during one's working years with the objective of obtaining and maintaining financial security throughout one's retirement years.
Retirement Income Planning Professional
See Retirement Income Planner.
Roth IRA
A personal retirement plan that enjoys tax-deferred growth to which annual nondeductible contributions up to the lesser of earned income or an IRS-specified limit, that is $5,000 or $6,000 if 50 and above as of 2010, if your income falls below IRS-specified limits that differs depending upon whether you're single or married. Unlike a traditional IRA, contributions may be made to a Roth IRA after age 70-1/2. Distributions are generally nontaxable provided that funds remain in a Roth IRA until the later of (a) five years from the date of the first Roth IRA contribution or (b) age 59-1/2. In addition, there are no required minimum distributions during a Roth IRA owner's lifetime.
Roth IRA Conversion
A technique for transferring part or all of a traditional IRA to a Roth IRA that, prior to 2010, was permissible only for taxpayers with modified adjusted gross income of less than $100,000. The amount converted must be included in one's gross income in the year of conversion, unless the conversion is done in 2010, in which case an election may be made to include 50% of the conversion amount in 2011 and 50% in 2012.
Safe Withdrawal Rate
A percentage that can be applied to the value of one's portfolio on the day before retirement to calculate the annual amount, increased by an annual inflation factor, that can theoretically be withdrawn from the portfolio without depleting the portfolio for the remaining duration of one's life, with 4% often cited as a safe withdrawal rate for a diversified portfolio.
Sequence of Returns
A series of investment portfolio returns, usually expressed annually, that has a direct impact on the longevity of an investment portfolio during the withdrawal stage.
Simple Interest
Interest that is calculated solely as a percentage of the principal. Where this occurs, the investment grows linearly.
Single Premium Immediate Annuity (SPIA)
See Immediate Annuity.
Social Security
The comprehensive federal government program providing current and former workers covered by the program and their dependents with retirement income, disability income, and Medicare benefits that is financed by assessment of employers and employees.
Spend-Down Phase
As it pertains to Retirement Asset Planning, the period during which an individual or family is withdrawing Retirement Capital for funding retirement needs.
Statement of Financial Condition
Synonymous with Net Worth Statement. It is generally a more formal term associated with personal financial statements prepared by CPAs.
Straight Life Annuity Payment Option
See Life Annuity Payment Option.
Term Certain Annuity Payment Option
See Period Certain Annuity Payment Option.
Traditional IRA
A personal retirement plan that enjoys tax-deferred growth to which annual contributions of up to the lesser of earned income or an IRS-specified limit, that is $5,000 or $6,000 if 50 and above as of 2010, until age 70-1/2. Contributions may be partially or fully deductible depending upon participation in an employer-sponsored retirement plan and adjusted gross income. In general, a traditional IRA owner must begin taking taxable minimum distributions no later than April 1st of the year following the year in which the owner turns 70-1/2 using the value of one's IRA accounts as of December 31st of the previous year and an IRS life expectancy factor.
Variable Annuity
An annuity that offers a variable rate of return depending on the performance of the investment options selected. Unlike a fixed annuity which is invested in fixed income instruments in the general account of the insurance company, a variable annuity is invested in non-fixed income instruments, typically mutual funds, in a separate account. A variable annuity is a security since the value and payouts to the annuitant when annuitized will vary depending on the performance of the investment options with the investor assuming the market risk.
Withdrawal Drag
The depletion of an investment portfolio resulting from reduced earnings attributable to withdrawals from the portfolio. It is equal to the difference between portfolio earnings with no withdrawals minus portfolio earnings with withdrawals.
Withdrawal Phase or Stage
As it pertains to financial planning in general, the period of time over which distributions are taken from an investment portfolio that is generally allocated for a specific planning goal, e.g., education, retirement, etc.
Questions about a term in your plan? Call Becker Retirement at (888) 791-8448 or email support@beckerretirement.com.
