Glossary
Key terms and concepts for retirement planning.
401(k)
An employer-sponsored retirement savings plan that allows employees to contribute pre-tax dollars. Contributions and growth are tax-deferred until withdrawal. Many employers offer matching contributions.
4% Rule
A rule of thumb stating you can withdraw 4% of your portfolio in the first year of retirement, then adjust for inflation each subsequent year, with a high probability of not running out of money over 30 years. Derived by William Bengen in 1994.
Asset Allocation
How your portfolio is divided among different asset classes like stocks, bonds and cash. A common allocation is 60% stocks and 40% bonds. Your allocation affects both risk and expected returns.
Backtesting
Testing a retirement strategy against historical data to see how it would have performed in the past. Uses actual year-by-year returns rather than assumed constant returns.
Bengen, William
Financial advisor who published the original 4% rule research in 1994. His paper "Determining Withdrawal Rates Using Historical Data" analyzed safe withdrawal rates using historical market data.
Bond
A fixed-income investment where you lend money to a government or corporation in exchange for regular interest payments and return of principal at maturity. Generally less volatile than stocks.
CAPE Ratio
Cyclically Adjusted Price-to-Earnings ratio, also called Shiller P/E or P/E10. Calculated by dividing the current price by the average of 10 years of inflation-adjusted earnings. Used to assess market valuation. Historical median is approximately 16.5.
Coast FIRE
A milestone where you have enough saved that compound growth alone will get you to your retirement number. You no longer need to contribute. You can "coast" by covering only current expenses.
Compound Growth
When investment returns generate their own returns over time. A $100,000 portfolio growing at 7% becomes $107,000 after year one, then that $107,000 grows 7% to $114,490 and so on. The mathematical basis of long-term wealth building.
Constant Dollar Withdrawal
A withdrawal strategy where you withdraw a fixed amount (adjusted for inflation) regardless of portfolio performance. Same as the 4% Rule methodology.
CPI
Consumer Price Index. A measure of the average change in prices paid by consumers for a basket of goods and services. The most common measure of inflation in the United States.
Dividend
A portion of a company's profits paid to shareholders, typically quarterly. Dividends historically contribute about 2% per year to total stock market returns.
Dollar Cost Averaging
Investing a fixed amount at regular intervals regardless of price. This strategy reduces the impact of volatility by buying more shares when prices are low and fewer when prices are high.
Expense Ratio
The annual fee charged by a mutual fund or ETF, expressed as a percentage of assets. A 0.03% expense ratio means $3 per year for every $10,000 invested. Lower is better.
Fat FIRE
Financial independence with a higher spending target, typically $100,000 or more per year. Requires a larger portfolio than traditional FIRE.
FI Number
Financial Independence Number. The portfolio value at which your investments can sustain your lifestyle indefinitely. Typically calculated as Annual Expenses ÷ Safe Withdrawal Rate.
FIRE
Financial Independence, Retire Early. A movement focused on high savings rates and investment to achieve financial independence and optional early retirement.
Glide Path
Gradually changing your asset allocation over time, typically becoming more conservative as you age. Example: 90% stocks at 30, 60% stocks at 60.
Historical Returns
The actual returns achieved by an investment over past periods. Used in backtesting. Not a guarantee of future performance.
HSA
Health Savings Account. A triple-tax-advantaged account for medical expenses: contributions are tax-deductible, growth is tax-free and withdrawals for qualified medical expenses are tax-free. After age 65, can be used like a traditional IRA.
Index Fund
A mutual fund or ETF designed to track a market index like the S&P 500. Known for low fees, broad diversification and historically outperforming most actively managed funds.
Inflation
The general increase in prices over time, reducing the purchasing power of money. Long-term U.S. average is about 3% per year. Critical to account for in retirement planning.
Lean FIRE
Financial independence with a frugal spending target, typically under $40,000 per year. Requires a smaller portfolio but less spending flexibility.
Monte Carlo Simulation
A method that runs thousands of scenarios with randomized returns to show a range of possible outcomes. Provides probability distributions rather than single projections.
Nominal Return
Investment return before adjusting for inflation. The number you see on your account statement. To get real return, subtract inflation.
P/E Ratio
Price-to-Earnings ratio. Current stock price divided by earnings per share. A measure of how expensive stocks are relative to their earnings.
Real Return
Investment return after adjusting for inflation. Represents actual increase in purchasing power. Real return ≈ Nominal return − Inflation.
Rebalancing
Periodically buying/selling assets to maintain your target allocation. If stocks rise and your 70/30 becomes 80/20, you sell stocks and buy bonds to return to 70/30.
RMD
Required Minimum Distribution. The amount you must withdraw from tax-advantaged retirement accounts (401k, Traditional IRA) starting at age 73. Calculated based on age and account balance.
Roth IRA
An individual retirement account funded with after-tax dollars. Contributions are not tax-deductible, but qualified withdrawals in retirement are completely tax-free, including all growth.
S&P 500
Standard & Poor's 500. A stock market index tracking 500 of the largest U.S. companies. Often used as a proxy for "the stock market" and the basis for many index funds.
Safe Withdrawal Rate (SWR)
The percentage of your portfolio you can withdraw annually with a high probability of not running out of money. The 4% rule is the most famous SWR guideline.
Sequence of Returns Risk
The risk that poor returns early in retirement (when you're withdrawing) will permanently damage your portfolio, even if average returns are good over time. The order of returns matters, not just the average.
Shiller, Robert
Yale economist who won the 2013 Nobel Prize in Economics. Creator of the CAPE ratio and the historical market dataset used in most retirement calculators.
Stock
An ownership share in a company. Stocks have historically returned about 7% per year after inflation, but with significant year-to-year volatility.
Success Rate
In backtesting or Monte Carlo, the percentage of simulations where the portfolio survived the full retirement period without running out of money.
Traditional IRA
An individual retirement account where contributions may be tax-deductible. Growth is tax-deferred, and withdrawals in retirement are taxed as ordinary income.
Trinity Study
A 1998 paper by three Trinity University professors that tested withdrawal rates against historical data, confirming the 4% rule. Formally titled "Retirement Savings: Choosing a Withdrawal Rate That Is Sustainable."
Variable Percentage Withdrawal (VPW)
A withdrawal strategy where the percentage withdrawn increases with age based on remaining life expectancy. Designed to maximize lifetime spending while minimizing bequest.
Social Security
A U.S. government program providing retirement income based on lifetime earnings. Benefits can begin as early as 62 (reduced) or as late as 70 (increased). Full retirement age is 66-67 depending on birth year.