9 Financial Terms You Should Know Before You Retire

9 Financial Retirement Terms You Should Know Before You Retire

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Written by Edmund Moy

Jun 3, 2022

If you’re starting your retirement planning journey, you might be confronted with a lot of finance jargon. Even armed with a degree in economics, I sometimes find it hard to read through material on retirement planning. Cash surrender value, charitable remainder unitrust, codicils, dollar cost averaging, and a whole host of acronyms like AGI, AMT, CSV, COLAs, GSTT, IRD, and ILITs can make my head spin and leave me wanting to procrastinate.

To help you better understand the language of retirement planning, I thought I would take nine terms that are commonly used in this area, but not necessarily commonly understood, and hopefully provide some common-sense explanations. In particular, I’ve chosen terms you’re more likely to come across the closer you get to retirement.

1. Dollar Cost Averaging

When planning for retirement, consistency is important. Instead of playing the market and trying to base your asset amounts on stock trends, dollar cost averaging takes the opposite approach. Dollar cost averaging is the practice of allocating the same amount to each asset or asset class on a consistent basis, regardless of market trends.

Though it may seem counterintuitive, there can be a number of benefits to approaching retirement with a dollar cost averaging strategy. These include:

  • Helping build the habit of retirement savings without requiring as much oversight. You can simply set a fixed amount every month and automate the allocation.
  • Taking advantage of price declines (when managed properly). Unless you’re already working in the stock market on a regular basis, it can be hard to actually respond properly to stock price fluctuations in time. Dollar cost averaging can set you up to take advantage of price dips without the need for constantly watching the markets.
  • Removing some of the emotions from the portfolio management process. There’s a lot at stake when saving for retirement, so steady allocation over time can take advantage of both up and down markets and put your mind at ease.

Dollar cost averaging sees retirement saving as a long-term habit. It’s often beneficial to those who want to be prepared without the need for constantly tracking the markets.

2. Net Asset Value (NAV)

Another common retirement term is “net asset value.” Net asset value (NAV) is a company’s total assets minus its total liabilities. For example, if a company has assets and securities valued at $150 million, but liabilities totaling $20 million, its NAV is $130 million.

A company’s NAV fluctuates constantly, and many institutions, such as mutual fund managers, are required to report their net asset value on a daily basis.

If you’re planning retirement, NAV may be important because it determines the amount of units you actually purchase of a mutual fund. And it’s a good way to look at the historical value of the fund to evaluate how it has performed.

However, many argue NAV is not as important as the market price of a stock, since that’s determined by the market. If a mutual fund, for example, has a higher NAV, you will get more units, but any gains will be dependent on the stock market, not the NAV.

3. Guaranteed Monthly Income

Once you retire, you will want to know how much you will receive from your accounts and when, so you can budget and plan your everyday life. Guaranteed monthly income plans, also known as guaranteed income plans, are retirement plans that predefine how much is paid out to you and how often, as long as you live beyond a certain tenure. Most guaranteed income plans pay annually, half-yearly, quarterly, or monthly.

The primary benefit of this is its guaranteed consistency. Especially if you’re used to budgeting around regular paychecks, a guaranteed income plan may help continue that regularity. A guaranteed income plan is not affected by market volatility, which could make it a safe source of income in retirement, especially if you want a lower-risk strategy. There can also be significant tax benefits to guaranteed income plans, since most of the time the taxes are paid during the investment stage.

Guaranteed income plans can often have a lower overall return than some higher-risk options, so it’s worth considering your risk tolerance and retirement goals when weighing your options.

4. Defined Contribution Plan

A defined contribution plan is a standard retirement plan for a workplace. An employee usually contributes to the plan regularly while the employer matches that contribution. The two most common defined contribution plans are 401(k) and 403(b) plans.

Similar to how dollar cost averaging works, an employee and employer contribute the same amount (often a percentage of the total paycheck) on a regular basis regardless of what the market is doing. If you are working at a place that contributes to a 401(k) or 403(b), then you are already participating in a defined contribution plan. And if your employer is matching your contributions, then you are basically getting additional money above and beyond your paycheck put toward your retirement every month.

As with most retirement plans, you may wish to check with your employer about the fine print—when you are eligible to access funds from the defined contribution plan, whether it’s a pretax or post-tax plan, and if there is a company matching limit.

5. Defined Benefit Plan

A defined benefit plan, unlike a defined contribution plan, is fully managed by an employer and calculated by several factors, including employee salary and length of employment. Also known as a “pension plan” or qualified-benefit plan, defined benefit plans are guaranteed and precalculated by employers. Unlike a 401(k) or 403(b), a pension is paid out as either a lifetime annuity or a lump-sum payout at a predetermined time.

A few things to know about defined benefit plans:

  • They’re paid into and managed by an employer on top of employee salaries without the need for employee contribution. Certain plans allow employees to contribute, but it’s not a requirement.
  • They’re guaranteed regardless of market volatility. The employer takes on all the risk of the plan. If the defined benefit plan fund drops, the employer is required to compensate for the shortfall with cash.
  • The amount is fixed and known, so there is low risk when it comes to making plans about how you will use the money.

Employers will usually choose either a defined contribution plan or a defined benefit plan. Since each comes with different tax considerations and payout terms, you may wish to talk to your employer if a pension is part of your benefits package.

6. Required Minimum Distributions

Once you reach a certain age, you are required to withdraw a minimum amount from certain retirement accounts. Any such withdrawal is known as a required minimum distribution (RMD). Most employer-sponsored retirement plans (such as 401(k)s), traditional IRAs, SEPs, and SIMPLE IRAs) have a required minimum distribution.

As you approach retirement, it’s important to know which retirement accounts have an RMD and how much you need to withdraw. There are often penalties associated with failing to meet the required minimum distribution. Since these accounts are usually built with pretax contributions, you may also have to factor taxes into the distribution amount.

7. Tax-Advantaged Retirement Accounts

Apart from income, another significant aspect of retirement planning is understanding how retirement accounts are taxed. A common retirement term you may hear in this regard is “tax-advantaged retirement account.” Tax-advantaged retirement accounts are types of accounts set up to help the retiree save on taxes in the long run by making the account either tax-deferred or tax-exempt.

  • Tax-deferred accounts include traditional IRAs and 401(k) plans. These allow you to defer the tax you would normally pay on contributions to the ordinary income rate when you start receiving distributions in retirement. This type of account reduces the initial tax burden while you are still working.
  • Tax-exempt accounts include Roth IRAs and Roth 401(k)s. These accounts tax the contribution amount, allowing you to withdraw from the account after a certain age without having to pay any tax on the distribution.

Both types of tax-advantaged accounts can help reduce your tax burden; which type you prefer just depends on when you want to pay tax on the income.

8. Profit-Sharing Plans

A profit-sharing retirement plan gives employees a share in the profits of a company over time. Usually, a company will determine the percentage of profits it plans on sharing with employees and then divide up that percentage at the end of the year based on salaries.

Profit-sharing plans can be a great way to create a sense of buy-in for employees since the success of the company directly affects their retirement portfolios. Also, if a company is highly profitable year over year, there’s a chance an employee can receive higher contributions than with other types of employee-sponsored retirement accounts.

However, profit-sharing plans carry higher risk. If a company is not profitable, it isn’t required to pay into the retirement plan.

9. Gold IRA/Precious Metals IRA

An IRA is a tax-advantaged managed account you can begin withdrawing from at a certain age. The retirement term “gold [or] precious metals IRA” refers to a self-directed IRA that opens the door for those wishing to hold gold and/or other precious metals as qualified retirement assets. Within a precious metals IRA, you can hold physical gold, silver, platinum, and palladium as bars, bullion, and coins. Precious metals IRAs can also hold precious metals–related securities within the managed portfolio.

The same distribution rules for traditional IRAs generally apply to precious metals IRAs. The precious metals market is driven by demand for a scarce resource, whereas the stock market is based on overall market capitalization. One does not necessarily affect the other. The primary benefit of a precious metals IRA is that your contributions are spread across diversified asset classes. This can help protect the performance of your overall portfolio in times of market turbulence or uncertainty.

How You Can Use Your New Retirement Glossary Knowledge

You have much to consider as you approach retirement. The good news is there are a number of great options to help you save enough to thrive once you retire. I hope that understanding some of these basic terms can help you make more informed decisions about your retirement.

If you think a gold or precious metals IRA is right for your financial situation, you can request a free Gold IRA Information Kit to learn more about U.S. Money Reserve’s precious metals IRA options. 


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