Here is a short glossary of some of the most commonly used terms and financial instruments used in retirement planning:
ANNUITY A contract that guarantees fixed or variable payments over time. Some investors buy annuities to provide them with a stream of income in the future.
CERTIFICATE OF DEPOSIT (CD) A bank instrument that enables a depositer to earn interest on his or her money during a fixed a period of time. The rate varies depending on the amount invested and the duration of the CD.
CIVIL SERVICE RETIREMENT SYSTEM A pension plan for federal workers hired before 1984. Most workers hired since then go into the Federal Employees' Retirement System (FERS).
DEFINED BENEFIT PLANS Pension plans that guarantee a specific retirement benefit.
DEFINED CONTRIBUTION PLANS Pension plans that require specific rates of contribution but do not guarantee a specific retirement benefit.
ESTATE PLANNING Planning for the orderly handling, disposition and administration of assets that are left behind after an individual's death. Includes drawing up a will, setting up trusts and figuring out ways to minimize estate taxes.
INDIVIDUAL RETIREMENT ACCOUNT (IRA) A personal retirement account set up by an employed person with a contribution of up to $2,000 a year (or $4,000 for a couple). Contributions may be tax-deductible, and earnings are not taxed until the funds are withdrawn at age 59½ or later.
SIMPLE IRA Savings Investment Match Plan for Employees for companies with up to 100 employees. Allows workers to put aside up to $6,000 per year; their employers can choose to match contributions dollar for dollar up to 3 percent of the worker's pay or make an across-the-board contribution of 2 percent to each eligible worker. Those opting for the 3 percent match can cut it to 1 percent for two out of any five years.
ROTH IRA New in 1998, these IRAs are funded with nondeductible contributions and are not taxed upon withdrawal. Only singles with adjusted gross income of less than $95,000 may make a full contribution (partial contributions may be made up to income of $110,000). Likewise, only couples with income less than $150,000 may make a full contribution, with partial contributions allowed yp to $160,000.
INFLATION INDEXED Benefits that rise over time to offset increases in the cost of living, usually as measured by the Labor Department's consumer price index.
KEOGH PLAN A tax-deferred pension account for self-employed workers or employees of unincorporated businesses.
PENSION FUND A fund set up and invested by an employer or a labor union to provide retirement income for workers. The funds accumulate income and capital gains tax-free which are used to pay benefits.
POWER OF ATTORNEY Authorization of one person to make legal decisions and take other actions, such as signing legal documents, on behalf of another person.
REFINANCING Revising a payment schedule, usually to reduce monthly payments, for example by reducing the interest rate on a mortgage.
SIMPLIFIED EMPLOYEE PENSION PLAN (SEP) A pension plan in which both the employee and the employer contribute to an Individual Retirement Account.
TAX DEFERRED An investment which accumulates earnings that are not subject to taxes until the investor takes possession of the earnings often at a point at which the investor is in a lower tax bracket than before, such as retirement.
THRIFT SAVINGS PLAN A savings and investment plan for federal workers.
VESTING Reaching the point, through length of service, at which an employee acquires the right to receive employer-contributed benefits such as pensions.
401(k) A tax-deferred savings and investment plan in which employees may choose to contribute up to about $10,000 in 1999. Employers often match a percentage of an employee's contributions. Employees control how the assets are allocated among different types of investments. All taxes plus a 10 percent penalty are usually imposed on withdrawals made before age 59½.
Sources: Barron's Dictionary of Finance and Investment Terms; J.K. Lasser's Your Income Tax; The Washington Post
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