Glossary
401(k) Plan
A qualified retirement plan established by employers which allows eligible employees to make salary-deferred (salary-reduction) contributions on a pre- or post-tax basis. Employers may make matching or partially-matching contributions to the plan on behalf of eligible employees; they may also add a profit-sharing feature to the plan. Earnings accrue on a tax-deferred basis.
403(b) Plan
A tax deferred retirement plan very much like the 401(k) [above], for non-profit organizations (school, church, etc.).
Alternative Minimum Tax
A method of calculating income tax that disallows certain deductions, credits, and exclusions. This was intended to ensure that individuals, trusts, and estates that benefit from tax preferences do not escape all federal income tax liability. All taxpayers must calculate their taxes both ways and pay the greater of the two.
Annuity
A form of contract sold by life insurance companies that guarantees a fixed or variable payment to the buyer at some future time, usually retirement. A FIXED Annuity pays out in regular (fixed) installments varying only with the payout method elected. A VARIABLE Annuity pays out an amount that varies with the value of the account.
Asset Allocation
The process of dividing investments among different kinds of assets, such as stocks, bonds, real estate and cash, to optimize the risk/reward tradeoff based on an individual's or institution's specific situation and goals. A key concept in financial planning and money management.
Bond (debt security)
A negotiable, long-term debt instrument that carries certain obligations (including the payment of interest and repayment of principal) on the part of the issuer. Common issuers are the Federal government (Treasuries), state and local governments (Municipals) and businesses (Corporates).
Bond, Discounted
Also called Zero-Coupon bonds, no periodic interest payments. Instead, the bond is sold at some price below (discounted) its face value and returns full face value at maturity. The difference is taxed as ordinary interest. This type of bond is best used in tax deferred accounts such as IRA's.
Budget
An estimate of income and expenses for a specified period.
Capital Gain or Loss
The difference between the sales price and the purchase price of a capital asset. When that difference is positive, the difference is referred to as a capital gain. When the difference is negative, it is a capital loss.
Cash Value
In a life insurance policy, cash value is the build-up in the owner's cash savings. At any point in time, it represents the amount of money (before adjustments) that would be returned to the policy owner upon cancellation of a policy.
CERTIFIED FINANCIAL PLANNER® Practitioner
A credential granted by the Certified Financial Planner Board of Standards, Inc. (Denver, CO) to individuals who complete a comprehensive curriculum in financial planning and ethics. CFP®, CERTIFIED FINANCIAL PLANNER® and federally registered CFP (with flame logo)® are certification marks owned by the Certified Financial Planner Board of Standards. These marks are awarded to individuals who successfully complete the CFP Board's initial and ongoing certificate.
Defined Benefit Plan
A qualified retirement plan under which a retiring employee will receive a guaranteed retirement fund, usually payable in installments. Annual contributions may be made to the plan by the employer at the level needed to fund the benefit. The annual contributions are limited to a specified amount, indexed for inflation.
Defined Contribution Plan
A retirement plan under which the annual contributions made by the employer or employee are generally stated as a fixed percentage of the employee's compensation or company profits. The amount of retirement benefits is not guaranteed; rather, it depends upon the investment performance of the employee's account.
Distribution
A withdrawal of assets from a retirement account that are then paid to the account owner or beneficiary. The account owner (or beneficiary) may be required to pay income tax on distributions received during the year. Early-distribution penalties may also apply if the distribution occurs while the account owner is under the age of 59½.
Diversification
The process of accumulating securities in different investments, types of industries, risk categories, and companies in order to reduce the potential harm of loss from any one investment.
Dividend
Distribution of earnings to shareholders, the amount is decided by the company's board of directors and is usually paid quarterly. Dividends must be declared as income in the year they are received.
Durable Power of Attorney (DPOA)
A legal document conveying authority to an individual to carry out legal affairs on another person's behalf.
Early Withdrawal
The removal of funds from a fixed-term investment before its maturity date, or the removal of funds from a tax-deferred investment account or retirement savings account before a prescribed time, such as the account owner's attainment of a minimum age requirement. An early withdrawal fee is usually imposed, which acts as a deterrent to frequent withdrawals before the end of the early withdrawal period.
Efficient Portfolio
A portfolio that provides the greatest expected return for a given level of risk, or equivalently, the lowest risk for a given expected return. also called optimal portfolio.
Employer-Sponsored Retirement Plan
A tax-favored retirement plan that is sponsored by an employer. Among the more common employer-sponsored retirement plans are 401(k) plans, 403(b) plans, simplified employee pension plans, and profit-sharing plans.
Estate Planning
The overall planning of a person's wealth, including the preparation of a will and the planning of taxes after the individual's death.
Fee-Only Financial Advisor
An advisor who, in all circumstances, is compensated solely by the client, with neither the advisor nor any related party receiving compensation that is contingent on the purchase or sale of a financial product.
Fee-Based Financial Advisor
An advisor who sells commission-based products in addition to providing financial advice for a fee.
Fiduciary
An individual, corporation or association holding assets for another party, often with the legal authority and duty to make decisions regarding financial matters on behalf of the other party. A financial advisor held to a Fiduciary Standard occupies a position of special trust and confidence when working with a client.
Health Care Proxy
A legal document that allows a person to choose someone to make medical decisions on their behalf when they are unable to do so. In some states the person who is authorized may be called a proxy; in others the person may be called an agent.
Individual Retirement Account (IRA)
A retirement investing tool that can be either an "Individual Retirement Account" or an "Individual Retirement Annuity". There are several different types: Traditional IRAs, Roth IRAs, Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) IRAs, and Simplified Employee Pension (SEP) IRAs. Traditional and Roth IRAs are established by individual taxpayers; Roth IRA contributions are not tax-deductible. SEPs and SIMPLEs are retirement plans established by employers, with individual participant's contributions being made to their own SEP- and SIMPLE IRAs.
Index
A calculation that uses a selection of stocks or bonds to gauge a certain market. The Dow Jones Industrial Average, for example, is an index of 30 large industrial companies on the New York Stock Exchange.
Inflation Risk
Uncertainty over the future real (after-inflation) value of your investment.
Irrevocable Trust
A trust that may not be modified or terminated by the trustor after its creation.
Level Premium (Life Insurance)
Life insurance for which the premium remains the same from year to year. The premium is normally more than the actual cost of protection during the earlier years of the policy and less than the actual cost in the later years. The building of a reserve is a natural result of level premiums. The payments in the early years, together with the interest that is to be earned, serves to balance out the underpayment of the later years.
Living Trust
A trust created by a person during his or her lifetime.
Living Will
A document instructing physicians, relatives, or others to refrain from the use of extraordinary measures, as life-support equipment, to prolong one's life in the event of a terminal illness.
Lump-Sum Distribution
The disbursement of the entire value of a profit-sharing plan, pension plan, annuity, or similar lump-sum account to the account owner or beneficiary. Lump-sum distributions may be rolled over into another tax-deferred account.
Marginal Tax Bracket
The tax bracket that applies to the last dollar of taxable income. Currently, there are six marginal tax brackets: 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, and 35 percent.
Modern Portfolio Theory (MPT)
Overall investment strategy that seeks to construct an optimal portfolio by considering the relationship between risk and return, especially as measured by alpha, beta, and R-squared. This theory recommends that the risk of a particular stock should not be looked at on a stand-alone basis, but rather in relation to how that particular stock's price varies in relation to the variation in price of the market portfolio. The theory goes on to state that given an investor's preferred level of risk, a particular portfolio can be constructed that maximizes expected return for that level of risk.
Municipal Bond
A debt security issued by municipalities. The income from municipal bonds is usually exempt from federal income taxes. It may also be exempt from state income taxes in the state in which the bond is issued.
Mutual Fund
A pooled investment vehicle whose securities are managed for a fee (annual management fee) by a professional investment advisor. Mutual Funds exist that invest in most investment alternatives available (Stocks, Bonds, etc.).
NAPFA
The National Association of Personal Financial Advisors is the nation’s leading organization of Fee-Only comprehensive financial planning professionals.
No-Load Mutual Funds
Some Mutual Funds charge additional fees (commissions) to: buy, sell, hold for short periods, etc. A true No-Load Fund charges no additional fees, other than the annual management fee (which all funds charge).
Pension Plan
A retirement plan (often tax exempt) into which an employer makes contributions for his or her employees. Many pension plans are being replaced by the 401(k).
Probate
The court-supervised process in which a decedent's estate is settled and distributed.
Qualified Retirement Plan
Also known as a Qualified Plan, a plan which meets specific requirements set forth in the Internal Revenue Code and, as a result, is eligible to receive certain tax benefits.
Revocable Trust
A trust in which provisions can be altered or canceled by the grantor. During the life of the trust, income earned is distributed to the grantor, and only after death does property transfer to the beneficiaries. This is the opposite of an Irrevocable Trust, which cannot be modified or terminated without the permission of the beneficiary.
Risk
Possibility that an investment's actual return will be different than expected; includes the possibility of losing some or all of the original investment. Measured by variability of historical returns or dispersion of historical returns around their average return.
Rollover
A method by which an individual can transfer the assets from one retirement program to another without the recognition of income for tax purposes. The requirements for a rollover depend on the type of program from which the distribution is made and the type of program receiving the distribution.
Roth IRA
Individual retirement plan. Contributions are not deductible and qualified distributions are tax free.
Simplified Employee Pension Plan (SEP)
A type of plan under which the employer contributes to an employee's IRA. Contributions may be made up to a certain limit and are immediately vested.
SIMPLE
A retirement plan sponsored by companies with fewer than 100 employees which is attractive for employers because it avoids some of the administrative fees and paperwork of plans such as 401(k)s.
Tax-Exempt Bonds
Under certain conditions, the interest from bonds issued by states, cities, and certain other government agencies is exempt from federal income taxes. In many states, the interest from tax-exempt bonds will also be exempt from state and local income taxes.
Term Life Insurance
A type of life insurance where the insured pays only for the cost of a predetermined amount of coverage and no cash value is built-up. As the insured gets older, the cost of premiums increases.
Variable Universal Life Insurance
A type of life insurance that combines a death benefit with a savings element that accumulates tax deferred. Under a variable universal life insurance policy, the cash value in the policy can be placed in a variety of subaccounts with different investment objectives. The policyholder can transfer funds among the subaccounts as he or she wishes. Fees are charged after a certain number of transfers.
Variable Annuity
A life insurance company investment product that combines a savings plan with a small life insurance component to provide certain tax benefits. The savings portion can be invested in a choice of pooled vehicles, including stock funds.
Whole Life Insurance
A type of life insurance that offers a death benefit and also accumulates cash value, tax deferred at fixed interest rates. Whole life insurance policies generally have a fixed annual premium that does not rise over the duration of the policy. Whole life insurance is also referred to as "ordinary" or "straight" life insurance.
Will
A legal document that declares a person's wishes concerning the disposition of property, the guardianship of his or her children, and the administration of the estate after his or her death.
Yield
In general, the yield is the amount of current income provided by an investment. For stocks, the yield is calculated by dividing the total of the annual dividends by the current price. For bonds, the yield is calculated by dividing the annual interest by the current price. The yield is distinguished from the return, which includes price appreciation or depreciation.
Zero-Coupon Bond
This type of bond makes no periodic interest payments but instead is sold at a steep discount from its face value. Bondholders receive the face value of their bonds when they mature.
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