Getting Ready to Retire


After-tax: The net amount of money you keep after taxes have been deducted from your earnings.

Basis: The amount you use when determining gain or loss for tax purposes.

Contributions: The amount of your pay that you elect to put into your retirement plan.

Custodial Care: The care an older person needs to be able to perform the general activities of daily living.

Deferred Annuity: Money that you leave with the insurance company to be paid to you as an income stream sometime in the future. Deferred annuities are used as tax-deferred savings accounts in which the money can be placed in either fixed or variable products, depending on the type of annuity.

Distribution: An amount received from a qualified retirement plan.

Diversification: The concept of reducing risk by investing your money in different types of investments.

401(k): A company retirement plan established under Internal Revenue Code Section 401(k) that allows employees to save for retirement on a tax-deferred basis.

Guaranteed Renewable: An insurance policy that guarantees the owner the right to renew a policy. The only way to lose a policy with this provision is for failure to pay premiums, or if the insurance company decides to drop the policy for everybody in the state.

Highly Compensated Employee: For purposes of retirement plan limitations, you are considered highly compensated if your gross annual salary exceeds the compensation threshold as defined by the Internal Revenue Code (subject to annual cost of living adjustment).

Individual Retirement Account (IRA): A tax-advantaged retirement account allowing individuals with earned income to contribute a limited amount annually. The contributions are sometimes tax-deductible, and earnings are not taxable until the account is drawn upon.

Inflation Risk: The risk that your investments will lose purchasing power due to inflation.

Keogh: A qualified employer retirement plan for self-employed persons (sole proprietors and partners).

Lump-sum Distribution: A total distribution of an account balance.

Net Worth: The total of your assets less your debts.

Pre-tax: The money you earn before taxes are deducted.

Principal: Your initial investment before interest is earned.

Principal Residence: The place you call home. Your main home where you spend the majority of your time and the one you consider your primary home.

Qualified Employer Retirement Plan: An employer plan that meets complex requirements of the Internal Revenue Code. Contributions to qualified plans and the resulting earnings are generally tax-deferred.

Reasonable and Customary: This is the usual fee charged for a particular service, rendered in a particular area, by service providers with similar training and experience.

Respite Care: Temporary care for a senior, so the caregiver can have some time for herself.

Roth IRA: A type of Individual Retirement Account (IRA) which will allow you to save money on a tax-free basis, provided you meet the eligibility requirements and the holding period rules.

Savings Incentive Match Plan for Employers (SIMPLE): SIMPLE plans may be adopted by employers with 100 or fewer employees who earned at least $5,000 during the preceding year. SIMPLE plans may be in the form of an IRA or part of a 401(k) plan. If you are part of a SIMPLE plan, the maximum salary reduction contribution that can be made on behalf of an employee is $13,500 for 2020 ($13,000 in 2019). For individuals who will reach age 50 within the applicable year the limit is $16,500 for 2020 ($16,000 in 2019).

Simplified Employee Pension (SEP): A SEP is an employer retirement plan that uses IRAs as the funding vehicle, without the IRA contribution limit.

Tax-deferred: Refers to an investment where interest earned (and sometimes the principal invested) is not taxed until the amounts are withdrawn.

Ten-Year Averaging: An IRS approved method which affords special tax treatment to distributions at retirement from company retirement plans.

Trading Down a House: When a person sells a home for a less expensive and smaller one. The proceeds not invested in the new home can be used to supplement retirement savings.

Thrift Plan: Company savings plans which allow you to make contributions from your salary. Contributions are made with after-tax earnings, but your account grows tax-deferred.

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