A participant's accrued benefit is his or her benefit as determined under the terms of the plan expressed in the form of an annual benefit commencing at normal retirement age.
A person professionally trained in the technical aspects of insurance and related fields, particularly in the mathematics of insurance - such as the calculation of premiums, reserves, and other values.
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A volatile, difficult-to-predict investment, this is subject to rapid gain or loss. This type of investment is generally appropriate for long-term holdings (10 or more years) and for investors willing to accept fluctuations in the value of their investments.
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The alternate minimum tax (AMT) was designed by Congress to make sure that certain taxpayers pay a minimum amount of tax. The AMT takes away certain deductions and adds certain "preference items" back into taxable income for the pruposes of figuring AMT. The municipal bond market is affected by the existence of the AMT because interest income derived from some municipal bonds is considered a "preference item" when doing this calculation.
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Payment of a debt in regular, periodic installments of principal and interest as opposed to interest only payments.
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A schedule showing each payment of a loan to be amortized and breaking down the payment into the amount applied to principal and the amount applied to interest.
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An annuity is a type of investment that guarantees payment of specific amounts at specific times, or a single lump sum payment. Annuities are sponsored by insurance companies and other financial institutions and sold by agents, banks, savings and loans, stockbrokers, and financial planners.
Fixed annuities work like certificates of deposit (CDs); you invest a lump sum, and the insurer guarantees a fixed rate of interest for one to five years. Variable annuities let you direct your investment into fund-like portfolios of stocks, bonds, and cash equivalents. Your return, as with a fund, depends on the performance of the portfolios you choose. Most variable annuities come with annual charges.
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Asset allocation is the division of holdings among different types of assets, such as domestic stocks, international stocks, bonds, real estate, and cash. Financial planners refer to asset allocation when discussing portfolios. For example, if you are young and single saving for retirement 40 years from now, a planner might recommend an asset allocation heavy in stocks, which tend to have a higher risk and a higher return. But if you are near retirement (or about to cash in some investments to pay for a child's college education), a financial planner might recommend a less risky asset allocation to preserve income and capital.
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An asset class typically refers to securities that have similar features. For example, stocks and bonds are the two main classes. They may be subdivided into other classes like mortgages, common stock and preferred stock. Asset classes are used in the process of asset allocation to control the risk and return characteristics of a portfolio. The predictions for asset class performance are based on historical performance characteristics, which include the expected future return, the expected future volatility (risk) of the return, and how the returns of assets classes perform relative to each other.
In the long run, with a diversified portfolio, over 90 percent of your returns as an investor are determined by the class of assets you decide to hold. The remaining percentage of your return depends on which specific stock, bond or mutual fund you buy and when you buy it.
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Balanced investments blend one or more of the investment categories. For example, you may have a balanced fund, which blends stocks, bonds and money market instruments. These blended choices will have different levels of risk based on how they are balanced.
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As to life insurance, the person named in the policy to receive the insurance proceeds at the death of the insured.
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Blue chips are high-quality stocks of major companies which generally have long and unbroken records of earnings and dividend payments.
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Bonds are debt instruments issued by a company, or non-profit organization or government to finance a certain aspect of its operation. When you buy bonds, you essentially are lending money to the institution issuing the bond and you are entitled to receive interest on that loan. Depending on the bonds' coupon interest rate, bonds can become more or less attractive to buyers and, as a result, may rise and fall in market value.
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A capital gain is the appreciation in price of an investment.
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A capital loss is the depreciation in price of an investment.
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Certificates of Deposit (CDs) offer a fixed rate of return and are generally FDIC (Federal Deposit Insurance Corporation) insured up to $100,000. CDs can be issued by various depository institutions consisting of commercial and savings banks and federal savings and loans.
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Common stocks represent ownership in corporations. 'Blue chip' stocks are issued by, generally, the largest, most stable corporations. Though smaller company stocks may not be as stable, they frequently offer the potential for higher returns.
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A loss of value in real property brought about by age, physical deterioration, functional or economic obsolescence.
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For mutual funds, the distribution is the amount paid out to investors. "Capital gain distribution" refers to the profits the fund makes selling its investments. "Income distribution" refers to the money the fund earns when its investments grow in value.
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A portion of a company's earnings paid to investors on a per-share basis. Also, the share of divisible surplus remaining after payment of claims that is payable to the owner of an individual participating policy.
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Purchasing the same dollar amount of an investment at fixed intervals. More shares are bought when prices are down and fewer when prices are up. Dollar-cost averaging does not assure a profit or protect against loss in declining markets. Because such a strategy involves periodic investment, you should consider your financial ability and willingness to continue purchases through market downturns.
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The ownership interest -- that portion of a property's value over and above the liens against it.
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Federal Deposit Insurance Corporation. U.S. government agency that insures deposits, up to a maximum limit, in member banks.
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A mutual fund that seeks both capital appreciation and current income by investing in dividend-paying and growth stocks for capital appreciation and bonds for current income. A growth and income fund combines long-term capital gains with steady income. Invest in growth and income funds if you find growth funds too risky or if you depend on income produced by your assets.
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A growth fund is a mutual fund that invests in growth stocks. Investors who want high capital appreciation tend to invest in growth stocks, which are more conservative than income funds. Growth stocks are usually purchased as a long-term holding, with the expectation that they will appreciate in price per share (and perhaps pay dividends) in the future.
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Stocks of younger or smaller companies, have relatively high risk and represent relatively aggressive investments. Usually, they have grown significantly in the past 3 to 5 years and are expected to continue growing for the next few years. Dividends, if any, are small and erratic, mostly because growing companies prefer to reinvest earnings in development efforts rather than set aside a percentage for shareholders. Growth stocks are usually purchased as a long-term holding, with the expectation that they will pay dividends (as well as appreciate in price per share) in the future, thus providing income at a later time.
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An income mutual fund invests in securities that provide its investors with current income. Typically, these funds invest in different types of bonds or possibly utility stocks that provide high dividends. You are taxed for the income fund's distributions in the year that you receive them (unless you hold the income fund in a tax-deferred account such as an IRA or Keogh).
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Stocks of stable companies, having relatively low to moderate risk and representing relatively conservative investments. If you want to invest for both growth and current income, buy income stocks because of their potential for regular dividend payments. Income stocks tend to be in stable service industries, such as telecommunications and utilities, and can offer both higher-than-average dividend payments and the possibility of capital appreciation.
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Individual Retirement Account (IRA) or Annuity
Retirement arrangement under which defined persons may make annual contributions of up to $2,000 into a tax-deferred account or annuity from which taxable withdrawals can be made by the owner without additional premature distribution penalty after age 59 1/2.
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Inflation simply means that the cost of goods and services rises over time. One popular measure of inflation is the Consumer Price Index (CPI). This measurement of inflation is stated as a yearly percentage and, according to the Department of Labor, has averaged approximately 5.4% from 1965 through 1994.
For example, a loaf of bread costing $1.00 today would cost $1.05 a year from now. In 20 years, that same loaf of bread would cost about $2.86, assuming that inflation continues to average 5.4%. In other words, the same amount will not go as far in the future as it does today.
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The cost for borrowing a sum of money, usually calculated at a percentage rate over a period of time. For example, if you borrow $1,000 for a year at an annual interest rate of 10 percent, you would pay $100 in interest for a year's use of the money:
$1,000 x .10 = $100.
You earn interest on bonds. In that case, the borrower is paying you interest to use the money you invested in their corporate or government bond.
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The goals that an investor sets for his or her portfolio.
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The amount by which your investment gains or loses (capital appreciation/depreciation and dividend or coupon income) over a given period of time. Usually expressed as a percentage of the original amount invested. A five-percent return means you earned five dollars for every $100 you invested in the stated time period. Investment return can be measured over a variety of timeframes (i.e., one-year, five-years, 10-years, etc.)
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This is income from investments rather than from work. It includes interest, dividends, capital gains distributions, capital gains (and losses) on sales, etc.
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This type of rollover occurs when you are moving assets from an IRA held at one custodian to another custodian. You can take actual receipt of the IRA assets and have 60 days to complete the rollover to the new custodian. A direct rollover can be arranged whereby all assets are transferred directly between the custodians. Generally, the types of distributions that are not eligible for an IRA rollover include: required minimum distributions starting at age 70 1/2; substantially equal periodic payments based on the applicable single or joint life expectancy; substantially equal periodic payments over a specified period of 10 or more years; and distributions taken from qualified plans representing voluntary after-tax contributions.
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Your net worth is the total of all of your assets (stocks, bonds, bank accounts, home equity, real estate, personal property, business receivables, notes receivable, etc.) minus the total of your liabilities (outstanding loans owed, credit card balances, taxes payable, bills payable, etc.) Unfortunately, many of these assets will not be readily accessible if cash is needed in a hurry; therefore, we will use only your liquid net worth in determining your financial health. Liquid net worth only includes assets that can readily be turned into cash without a major loss in value; therefore, do not include real estate or business equity, personal property and automobiles, expected inheritances, or funds already earmarked for other purposes.
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A single payment of all your retirement money from an account, usually given when you leave a company or when you retire. Prior to retirement, lump-sum distributions are usually rolled over into another retirement plan or into an IRA. There may be tax consequences when you take a lump-sum distribution. You should consult a financial professional to discuss the taxes that may apply to any action you take with a lump-sum distribution.
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The likely price a ready, willing, and able buyer is willing to pay for a property and the likely price a ready, willing and able seller will accept for the property in question.
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Maximum Exclusion Allowance (MEA)
One of 3 inter-related annual limits imposed by the IRS on the amount that can be contributed to a Tax-Deferred Annuity program on a pre-tax basis. The allowance is calculated based on salary, years of service, and prior contributions to retirement plans.
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Maximum Permissible Contribution
The maximum annual amount that can be contributed to a Tax-Deferred Annuity program on a pre-tax basis. The actual amount is determined in accordance with formulas prescribed by the IRS, which are based on factors such as salary, age, years of service, and contributions to all retirement plans. There is a general limit along with three alternative limits, and special catch-up limits, which should all be reviewed annually
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A fund operated by an investment company that raises money from shareholders and invests in a group of stocks, bonds or other investments. It is professionally managed for the benefit of the shareholders. Each share in the fund represents part ownership of many different stocks, bonds and so on.
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The daily price for a share of a mutual fund. This dollar value is computed by taking the fund's assets (holdings) minus its liabilities (expenses) divided by the # of shares outstanding (those shares issued by the corporation that are held by the public).
Example:
A mutual fund has total assets of $50 million and $5 million in total liabilities, with 3.0 million shares outstanding. The NAV per share is $15.00. The NAV is calculated as follows: [($50 million - $5 million) / 3.0 million shares = $15.00].
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This term refers to the face value of a bond (typically $1,000) before fluctuations in the market cause it to be sold for more or less than its par value.
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A pension plan is a retirement plan offered by some employers that pays a set amount each year during retirement.
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A portfolio is a collection of investment holdings or shadow holdings (stocks and/or mutual funds you don't own but want to track).
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Saving in your company's retirement plan means you are taking advantage of two powerful tax benefits. The first major tax benefit is that your contributions are conveniently deducted from your paycheck before you are taxed; since your reportable income is reduced, you end up paying less in current federal income taxes. Second, your savings accumulate tax-deferred until you withdraw them. For example, Kelly earns $2,000 per month and contributes $200 a month to her employer's plan (ten percent). She would pay income tax on only $1,800 ($2,000-$200), instead of the entire $2,000 that she earned. (Kelly's entire $2,000 monthly earnings will be taxed for Social Security tax purposes, so her future Social Security benefit will not be reduced.) At an assumed federal income tax rate of 35%, that's a $70 monthly tax savings, or $840 per year. Your tax savings will vary according to your tax bracket and contribution rate.
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Dollar amount invested.
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This is an employer-sponsored tax-deferred retirement plan that allows employees to share in company profits. The employer makes contributions in profitable years to individual employee accounts. The account grows tax-deferred until the employee retires or leaves the company.
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A detailed brochure explaining the investment objectives, type of investments, management style, fees and risks and other essential data associated with a mutual fund, other stocks, variable insurance products.
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A person who, according to a company's underwriting standards, is entitled to insurance protection without an extra premium charge or special restrictions.
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401(k) plans are tax-deferred retirement arrangements available to employees of private sector and some tax-exempt organizations (i.e. non-government hospitals). Employees can contribute a portion of income tax-free into this type of plan. Contributions reduce employees' current taxable income, and the assets in the plan grow on a tax-deferred basis. Withdrawals are subject to income tax in the year they are made. In general, because these plans are designed as supplementary income for retirement, funds should not be withdrawn from 401(k) plans prior to age 59 1/2. If funds are withdrawn prior to age 59 1/2 a penalty tax of 10% results in addition to the normal federal, state, and local tax that may be applicable.
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Section 403(b) Plan
403(b) plans are tax-deferred retirement arrangements available to employees of tax-exempt organizations and public schools who are not able to participate in section 401(k) plans. Employees can contribute a portion of income tax-free into this type of plan. Contributions reduce employees' current taxable income, and the assets in the plan grow on a tax-deferred basis. Withdrawals are subject to income tax in the year they are made. In general, because these plans are designed as supplementary income for retirement, funds should not be withdrawn from 401(k) plans prior to age 59 1/2. If funds are withdrawn prior to age 59 1/2 a penalty tax of 10% results in addition to the normal federal, state, and local tax that may be applicable.
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Section 457 Plan
457 plans are tax-deferred retirement arrangements available to employees of state and local governments. Employees can contribute a portion of income on a tax-deferred basis. Withdrawals are subject to income tax in the year they are made. 457 plans are not subject to the same 10% penalty tax for early distributions as 401(k) plans or 403(b) plans.
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If you are employed, you probably contribute to the Social Security system. At retirement you can begin to collect benefits from the Social Security Administration. Your benefits increase if you delay your retirement. Age 59-1/2: You can usually start withdrawing from retirement savings without penalties. If you set your retirement age younger than 59-1/2, you may pay a ten-percent penalty. Age 62: Normally, your first chance to get a Social Security retirement check. But starting this early reduces your benefit by 25 to 30 percent, for life. Age 65: Medicare begins. It's risky to leave a job earlier unless your employer will continue your health insurance. Age 66 to 67: According to 1995 Social Security regulations, the retirement age when baby boomers can claim their full Social Security benefit. "Baby boomers" is the label for the generation of people born between 1947 and 1964. Age 70-1/2: According to 1995 I.R.S. regulations, the age at which you must begin withdrawing money from your tax-deferred investments.
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Stocks represent part ownership in a company. When you own stock in a company, you are a shareholder and may be entitled to receive dividends if the company is profitable. The value of a stock rises or falls according to how attractive it is to buyers and based on the general conditions of the broad stock market. Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments.
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Tax preference granted to qualified retirement plans in which taxes are not imposed
when funds are contributed or accrued, but when cash is distributed to plan participants.
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When you save in a regular savings account, interest you earn is taxable annually as ordinary income. Year after year, this taxation can take a huge bite out of your potential earnings. In a qualified retirement savings plan or IRA, your earnings grow tax-deferred until you withdraw the money. Keep in mind there may be a ten percent federal penalty tax for withdrawal prior to age 59 1/2. Tax-deferred compounding means your account balance grows much faster because all of your earnings are reinvested without being reduced by current taxes.
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A written instrument, executed in the form required by law, by which a person makes a disposition of property to take effect upon death.
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Amount of interest paid on a bond or money market instrument stated as a percentage of the face value of the instrument.
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Zero-coupon bonds are fixed-income securities that are sold at a deep discount. They pay principal and interest upon maturity, not periodically like coupon bonds. The difference between the amount you pay for the bonds and the amount you receive at maturity equals the return on your investment. If the zero-coupon bonds are municipal obligations, or municipal zero-coupon bonds, they generally are tax-exempt from federal and state taxes for residents of the issuing state. The market value of zero-coupon bonds fluctuate more to changes in market conditions than regular coupon bonds and therefore may not be suitable for all investors. Interest on some municipal bonds may subject certain taxpayers to the alternative minimum tax (AMT).
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The amount per year that every person is allowed to give another person without incurring a federal gift tax liability. There is no limit on the number of these gifts you can make to different people in a year. To qualify for this exclusion, a gift must be of a "present interest" and the donor must not have control over the asset. This can present problems when making gifts to trusts.
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