Glossary of Terms

Since the subject matter of this blog is technical in nature, this Glossary of Terms is provided for your reference. Each term is intended to be a brief definition to enable you to better understand the term as it is used in a particular blog post. New terms will be added as they appear in each blog post.


Accumulation Phase or Stage

As it pertains to financial planning in general, the period of time over which the value of an investment portfolio that is generally allocated for a specific planning goal, e.g., education, retirement, etc., is increased through a combination of contributions to, and appreciation of, the portfolio.

Accumulation Value

The value of a fixed index annuity before any applicable surrender charges.

Activities of Daily Living (“ADL’s”)

Six activities, two of which you must be unable to perform, in order to meet one of the two benefit triggers to qualify for benefits under a tax qualified long-term care insurance policy. The six activities are bathing, dressing, eating, continence, toileting, and transferring.

Adjusted Gross Income (“AGI”)

Used in the calculation of an individual’s income tax liability, it is an intermediary step used in the calculation of one’s taxable income that is equal to gross income from taxable sources less deductions from gross income that are allowable even if you don’t itemize deductions.

Alternative Minimum Tax (“AMT”)

A second method of calculating income tax that begins with taxable income and adds back specified tax preference items that are otherwise allowed as tax deductions with the resulting AMT required to be paid if greater than one’s regular tax liability.

Annual Point-to-Point Cap Indexing Method

A fixed index annuity indexing method that calculates the percentage change between prices of a specified stock market index on the contract date in the first year or contract anniversary date in subsequent years and the day before the contract anniversary date and applies a specified cap rate to deterimine the annual interest amount that is credited to a particular fixed index annuity contract each contract year.

Annuitant

An individuals entitled to receive benefits from an annuity. The individuals may be the same as, or different from, the owners of the annuity contract.

Annuitization

The irrevocable structured payout of an annuity with a specified payment beginning at a specified date, paid at specified intervals over a stated period of months or years or for the duration of the annuitant’s and potentially his/her spouse’s and/or other individuals’ lifetime(s) depending upon the payout option selected.

Annuitize

See above.

Annuity

A contract between an insurance company and an individual, or insured, whereby the insurance company, in exchange for receipt of a lump sum payment, or premium, or series of payments, or premiums, that is invested by the insurance company in one or more tax-deferred investment vehicles, agrees to pay the insured a lump sum, distributions of the contract balance, or the option to elect an irrevocable structured payout with a specified payment beginning at a specified date, paid at specified interevals over a stated period of months or years or for the duration of the insured’s and potentially his/her spouse’s and/or other individuals’ lifetime(s) depending upon the payout option selected. There is also a death benefit payable to the insured’s beneficiary(ies) prior to annuitization of the contract of the greater of the account value or a guaranteed minimum amount, such as total purchase payments reduced by withdrawals.

Annuity Beneficiary

An individual, institution, trustee, or estate that receives benefits from an annuity contract upon the death of the annuity owner or annuitant(s).

Basis in IRA

After-tax or non-deductible contributions to an IRA that are reported to IRS on Form 8606 – Nondeductible IRAs that won’t be taxable when either taking distributions from an IRA or converting a traditional IRA to a Roth IRA.

Blended Index

Offered by many fixed index annuities, this is generally a weighting of three different indexing methods that are typically pre-assigned or are sometime weighted based on performance.

Cap Rate

A preset limit on the percentage of indexed growth that is used to calculate interest credited to a fixed index annuity under the annual point-to-point, monthly point-to-point or monthly sum, and monthly average crediting methods.

Capital Gain

For certain assets considered to be capital assets, this is equal to the excess of the net selling price over the adjusted cost basis, which, in the case of real estate, is equal to the purchase price less accumulated depreciation. Personal capital gains for assets held for more than one year qualify for favorable long-term capital gain tax rates.

Capital Loss Carryover

The amount of any portion of a net capital loss, i.e., capital losses in excess of capital gains, in any year that exceeds $3,000, and, as such, isn’t deductible in the current year, however, the excess amount may be carried forward to, and deducted in, future years.

Cash Flow Projection:

A financial statement that is prepared using various assumptions to show how cash is expected to flow in and flow out over a specified period of time to enable you to see if your projected cash receipts will be sufficient to cover your projected cash disbursements and to plan accordingly.

Charitable Remainder Trust (“CRT”)

An income and estate planning technique whereby capital gain recognition on the potential sale of an asset is deferred by transferring ownership of the asset to a CRT, the remainder beneficiary of which is one or more charitable organizations, prior to the sale with the grantor being entitled to a charitable contribution deduction equal to the fair market value of the remainder interest in the CRT and receipt of a future stream of income resulting from the sale of the asset by the CRT.

Combined Income

Used in the calculation of taxable Social Security benefits, this term refers the the total of (1) 50% of Social Security benefits plus, (2) adjusted gross income increased by tax-exempt income.

Compound Interest

Interest which is calculated on the principal and the accumulated interest of prior periods. Where this occurs, the investment grows exponentially.

Contract Date

As applied to fixed index annuities, this is the date on which the contract is effective.

Contract Year

As applied to fixed index annuities, this is the period used for calculation of interest crediting, In the first year, this period begins on the contract date and ends on the day before the contract anniversary date. In subsequent years, the ending date is the same, however, the contract year begins on the contract anniversary date.

Cost-of-Living Adjustment (“COLA”)

As it pertains to Social Security, the automatic annual increase in benefits that corresponds with an increase in the cost of living as measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W, that is designed to offset a loss in purchasing power. To the extent that CPI remains flat or decreases in a particular year, there is no COLA in the following year.

Deferred Annuity

An annuity that doesn’t mature or begin making payments until some future date.

Deferred Income Annuity (“DIA”)

An annuity from which annuitization begins at least 12 months after the date of purchase in exchange for a lump sum or series of periodic payments. The annuitization can be for a term certain or lifetime, depending upon the terms of the annuity contract.

Defined Benefit Plan

An employer-sponsored plan that provides for an actuarially determined lifetime, or potentially joint lifetime if married, retirement benefit, subject to IRS guidelines, beginning at a specified age based on age, salary, and number of years of participation in the plan.

Defined Contribution Plan

An employer-sponsored plan into which a certain amount or percentage of employer funds and/or employee salary is contributed, subject to IRS guidelines, with each participant having a separate account.

Delayed Retirement Credits:

Percentage increase in Social Security retirement benefits to which one is entitled for delaying the start date of commencement of benefits beyond full retirement age until as long as age 70 at which point the credits end. The annual percentage increase varies from 4.5% to 8% depending upon year of birth. Individuals born in 1930 or earlier are entitled to a 4.5% increase while those born in 1943 or later can receive an 8.0% annual increase in their benefit amount.

Depreciation Recapture

The amount of depreciation that is included as ordinary income vs. capital gain in the year of sale of a depreciable asset which is generally 100% of accumulated depreciation allowable on personal property and the excess of accelerated depreciation over straight-line depreciation on real property.

Distribution of Income

See Income Distribution.

Dow Jones Industrial Average (DJIA)

The oldest and most popular stock market index in the United States. It’s a price weighted index that includes just 30 companies, and, as such, isn’t considered to be as good a measure of the overall stock maret as the S&P 500.

Euro Stoxx 50

A market capitalization weighted stock index of 50 of the largest European companies that have fully transitioned to the euro currency. Weightings are adjusted each quarter and the index is reconstituted on an annual basis in September.

Exclusion Ratio

The amount of an annuity payment that isn’t subject to taxation since it’s considered to be a return of principal. It is equal to the investment in the annuity contract divided by the expected return.

Financial Independence Income Planning

See Retirement Income Planning.

Financial Independence Planning

The development and management of a plan designed to provide an ongoing, inflation-protected, tax-favored distribution of income that will ideally enable you to live in the style to which you’re accustomed, while minimizing the possibility that you will outlive your assets.

Financial Plan

A document that includes a person or family’s financial goals, including the timeframe for achieving each goal, analysis of one’s current and projected financial situation, and recommendations for achieving each goal.

Financial Planner

A professional who uses the financial planning process to help clients establish financial goals, prepare an initial and ongoing analysis of their current and projected financial situation, and make recommendations for pursuing the achievement of financial goals. While there is currently no single professional license or credential required to hold oneself out as a financial planner, the CERTIFIED FINANCIAL PLANNER or CFP® certification is generally considered to be the leading and most recognized designation. The Personal Financial Specialist, or PFS, credential distinguishes CPA’s who specialize in financial planning.

Financial Planning

See Personal Financial Planning.

Fixed Account

One of the choices available for allocating accumulation value dollars in a fixed index annuity. Unlike indexing methods which are generally tied to the performance of a stock market index, the fixed account credits a predetermined fixed interest rate with a minimum guaranteed rate.

Fixed Annuity

An annuity that offers a guaranteed interest rate for a set period of time. Premiums are invested in fixed income instruments such as corporate and government bonds in the general account of the insurance company. The insurance company guarantees to pay a fixed payout to the annuitant when annuitized, thereby assuming the investment risk.

Fixed Income Annuity

A fixed annuity that provides either lifetime payments or payments over a contractually-defined term. The start date of the payments may be either immediate or deferred, depending upon whether an immediate or deferred annuity is purchased.

Fixed Index Annuity (“FIA”)

A fixed annuity that offers a minimum guaranteed interest rate and potential for higher earnings than traditional fixed annuities based on the performance of one or more stock market indexes.

Flexible Premium Deferred Annuity (“FPDA”)

Annuity that allows for more than one investment in the annuity, with flexibility as to amount and frequency of amounts.

401(k) Plan

A type of defined contribution (vs. defined benefit) plan offered by an employer to employees which allow them to contribute a portion of their salary to the plan up to a maximum annual IRS-specified limit generally on a pre-tax basis, with the exception of Roth 401(k) plan contributions, which are made with after-tax dollars. The employer may elect to match a portion of employees’ contributions if specified in the plan document. All contributions and plan earnings accumulate on a tax-deferred basis. All amounts not transferred to another 401(k) plan or rolled over into an IRA upon separation of service from the employer or termination of the plan are taxable as ordinary income upon withdrawal unless the withdrawals are from a Roth 401(k) plan account. The plan gets its name from Section 401(k) of the Internal Revenue Code under which it is authorized.

Full Retirement Age (“FRA”)

Otherwise known as normal retirement age, this is the age at which one is entitled to receive 100% of his/her Social Security retirement benefit. It varies from age 65 to age 67 and is dependent upon the year of birth. The FRA for individuals born in 1937 or earlier is 65 while the FRA for those born in 1960 and later is 67.

Future Purchase Option (“FPO”)

Often available as part of a long-term care insurance policy, a future purchase option gives you the right to purchase additional coverage without evidence of insurability at specified intervals in the future at an additional cost based on your attained age.

Guaranteed Minimum Value

The minimum amount that a life insurance company will pay to the owner(s) or beneficiary(ies) of a life insurance or annuity contract upon withdrawal or in the event of death.

Guaranteed Minimum Withdrawal Benefit (“GMWB”)

See Income Rider.

Health Savings Account (“HSA”)

A tax-favored account used in conjunction with a high-deductible health insurance plan that allows you to make tax-deductible contributions to the account that may be used to pay for eligible medical expenses.

Immediate Annuity

A fixed income annuity for which annuitization begins one month after date of purchase with a single premium.

Immediate Income Annuity

See Immediate Annuity.

Immediate Life Income Annuity

See Immediate Annuity, Income Annuity, and Life Annuity Payment Option.

Income Account Value

A calculated amount that’s used to determine the lifetime income payout from a fixed index annuity income rider.

Income Annuity

The payments received through annuitization of a fixed or variable annuity. The payments can be either immediate or deferred, depending upon whether an immediate or deferred annuity is purchased.

Income Gap

Difference between projected income needs and projected income sources.

Income Distribution

As it pertains to retirement income planning, the cash that is made available on a regular basis from retirement capital to fund one’s retirement planning goals. It may be fully taxable, partially taxable, or nontaxable depending on the source.

Income Portfolio

Streams of income generated by income-producing investments.

Income Portfolio Plan

A strategy that uses streams of income generated by income-producing investments to close the gap between projected income needs and projected income sources.

Income Rider

When attached to a fixed index annuity, this gives the annuitant(s) the ability to activate a lifetime income withdrawal beginning at a time specified in the rider, with the amount of the income calculated in accordance with a formula specified in the rider.

Income Stream

A regular series of payments that, once it begins, will continue for the rest of your life, or a fixed term, as applicable.

Indexed Annuity

See Fixed Index Annuity.

Indexing Method

Together with a particular stock market index, is responsible for determining the amount of interest that is credited to the value of a fixed index annuity on the contract anniversary date each year.

Indexing Strategy

As applied to fixed index annuities, this includes the selection of one or more (1) stock market indexes, and (2) indexing methods.

Individual Retirement Account (IRA)

A personal retirement plan that enjoys tax-deferred growth to which annual contributions up to the lesser of earned income or an IRS-specified limit, that is $5,000 or $6,000 if 50 and above as of 2010. There are two basic types of IRAs: Traditional IRA and Roth IRA.

Inflation

The increase in the general level of prices of goods and services in an economy over a period of time that results in erosion in the purchasing power of money. The traditional measure of inflation is the consumer price index, or CPI.

Instrumental Activities of Daily Living (“IADL’s”)

Cognitive functions pertaining to comprehension, judgment, memory, and reasoning. Activities include shopping for personal items, managing money, using the telephone, preparing meals, managing medication, and doing housework.

Inverse Performance Trigger Indexing Method

A fixed index annuity indexing method that credits a predefined interest rate during each contract year during which the value of the specified stock market index at the end of the contract year is less than or equal to its value at the beginning of the contract year.

Investment Risk

The degree of uncertainty, or deviation from an expected outcome, regarding the future benefits to be realized from a specific investment.

Itemized Deductions

Specified expenses paid used in the calculation of individual income tax liability that reduces adjusted gross income to the extent that total allowable itemized deductions exceed the specified standard deduction to arrive at taxable income. Some common examples of itemized deductions include medical expenses, state income taxes paid, real estate taxes paid, mortgage interest paid, charitable contributions, and un-reimbursed employee business expenses.

Joint and Survivor Annuity Payment Option

Annuitization payment option whereby periodic payments are made by a life insurance company to an annuitant and to the annuitant’s specified survivor.

Laddered Income Streams

A sequential regular series of payments generated by one or more investments.

Last-In First-Out (“LIFO”) Tax Treatment

This applies to withdrawals from annuities purchased after August 13, 1982. The first money that comes out is taxable as ordinary income. Once all of the earnings have been received, all future payments are considered to be a return of investment, and, as such, are nontaxable.

Life Annuity Payment Option

Also referred to as a straight life annuity payment option, this is an annuitization payment option whereby periodic payments are made by a life insurance company to an annuitant that terminate upon the annuitant’s death.

Life Annuity With Guaranteed Payment Option

Annuitization payment option whereby periodic payments are made by a life insurance company to an annuitant, and potentially to an annuitant’s beneficiary(ies), that terminate upon the later of the annuitant’s death or a guaranteed number of years.

Lifetime Retirement Payments (“LRP”)

Lifetime income payable by a life insurance company to one or more annuitants from either annuitization of, or income withdrawals from, an annuity contract.

Longevity Insurance

See Deferred income Annuity (“DIA”).

Longevity Risk

The risk associated with the possibility of outliving one’s assets.

Marginal Tax Bracket (Marginal Income Tax Rate)

The tax rate at which additional taxable income will be taxed.

Maximum Annual Lifetime Income Withdrawal Percentages

A table found in the income rider section of a fixed index annuity contract that is a listing of percentages for various age brackets for single and joint life annuitants that can be applied to the income account value at a specified age to calculate maximum lifetime annual income withdrawal amounts beginning at various ages.

Medicare

The United States government’s health care program that is funded by the Social Security Administration and reimburses hospitals and physicians for services provided to individuals 65 years and older and some people with disabilities under age 65.

Medicare Part A

The section of Medicare that helps cover inpatient care in hospitals. There is no premium for Part A if you or your spouse had 40 quarters of Medicare-covered employment.

Medicare Part B

The section of Medicare that covers medically-necessary services, including physicians and outpatient care. There is a monthly premium for Part B, the amount of which is determined by the amount of one’s income.

Modified Adjusted Gross Income (Modified “AGI” or “MAGI”) (IRS Definition)

Adjusted Gross Income that is increased for specified otherwise allowable deductions for adjusted gross income and exclusions and is reduced by otherwise taxable Roth IRA conversions and rollovers in order to calculate deductibility of traditional IRA contributions, eligibility for a Roth IRA contribution, potential exposure to the Medicare investment income tax, and eligibility for a Roth IRA Conversion before 2010.

Modified Adjusted Gross Income (Modified “AGI” or “MAGI”) (Social Security Administration Definition)

Adjusted gross income that is increased by tax-exempt interest income. It is used to determine the amount of one’s Medicare Part B monthly premium.

Modified Endowment Contract (“MEC”)

A life insurance contract entered into or materially changed after June 21, 1988 in which the cumulative premiums paid during the first seven years of the contract exceed the amount needed to provide a paid-up policy, and, as such, are considered excessive. Loans and withdrawals from “MEC” contracts are taxable and possibly subject to penalties.

Monthly Average Indexing Method

A fixed index annuity indexing method that calculates the percentage change between prices of a specified stock market index on each of the monthly anniversary dates, adds them together, divides the total by twelve, and applies a specified cap rate to determine the the annual interest amount that is credited to a particular fixed index annuity contract each contract year.

Monthly Point-to-Point Cap Indexing Method

A fixed index annuity indexing method that calculates the percentage change between prices of a specified stock market index on each of the monthly anniversary dates, applies a specified cap rate to determine the monthly capped percentage changes, and adds the monthly capped percentages changes to determine the annual interest amount that is credited to a particular fixed index annuity contract each contract year.

Monthly Sum Crediting Indexing Method

See Monthly Point-to-Point Cap Indexing Method.

Nasdaq 100

A stock market index composed of the 100 largest, most actively traded U.S. companies listed on the Nasdaq stock exchange.

Net Investment Income Tax

Surtax applied at a rate of 3.8% to certain net investment income of individuals, estates and trusts that have income above statutory threshold amounts.

Net Operating Loss (“NOL”)

Occurs when your deductions exceed your income in a particular year with a loss from operating a business being the most common reason for a NOL. NOL’s are required to be carried back two years before the year in which the NOL occurred unless the carry back period is waived and carried forward for up to 20 years after the year of the loss.

Net Worth Statement

A financial statement that lists an individual’s or family’s assets and liabilities and their values as of a specific date. The excess of total assets over total liabilities is a residual amount otherwise known as net worth.

Non-qualified Annuity

An annuity purchased individually, rather than through a tax-advantaged retirement plan or IRA, and, as such, doesn’t meet ERISA or IRS requirements for favorable tax treatment, including tax-deductible purchases, and therefore isn’t subject to purchase limits and required minimum distribution rules beginning at age 70-1/2.

Passive Activity Loss

Loss from a passive activity, including losses from rental real esate which are limited to $25,000 per year subject to a further limitation for high income taxpayers. Unallowed passive losses can be carried forward to future years with the ability to use them subject to passive loss limitations in each year as well as sale or disposition of the property in which case 100% of the passive loss carry forward can be used in the year of sale or disposition.

Pension

A fixed sum of money paid monthly or on some other regular basis beginning at a specified age to a former employee for his/her lifetime, and upon death, potentially to his/her spouse for his/her lifetime at the same or a reduced amount.

Period Certain Annuity Payment Option

Also referred to as a term certain annuity payment option, this is an annuitization payment option whereby periodic payments are made by a life insurance company to an annuitant, and potentially to an annuitant’s beneficiary(ies), in the event that the annuitant dies before the end of the term, for a specified number of months or years.

Personal Exemption

A fixed dollar amount that that is subtracted from Adjusted Gross Income to arrive at Taxable Income for a taxpayer, spouse, and each dependent who cannot be claimed as a dependent by another taxpayer.

Personal Financial Planning

Management of all aspects of an individual or family’s financial affairs with the objective of pursuit of the achievement of the individual or family’s financial goals. It generally includes an initial and ongoing analysis of one’s current financial condition as well as one or more of the following financial planning disciplines performed either independently or with the assistance of a professional adviser: cash flow, income tax, risk management (insurance), investment, retirement, and estate.

Premature Distribution Penalty

10% penalty that is assessed on the taxable amount of any distribution from an IRA or qualified retirement plan prior to age 59-1/2 that is in addition to income tax liability on the distribution unless subject to an exception.

Premium

Life insurance term for an investment made in an annuity.

Premium Bonus

A fixed percentage of the investment in a fixed index annuity that’s added by some life insurance companies to the fixed index annuity’s accumulation value of specified products.

Premium Bonus Recapture Charge

A provision that is sometimes included in a fixed index annuity that includes a premium bonus provision whereby a percentage of the premium bonus is deducted from withdrawals during a specified period, generally the first 10 years of the contract.

Qualified Annuity

An annuity purchased through a tax-advantaged retirement plan or IRA, and as such, meets ERISA or IRS requirements for favorable tax treatment, including tax-deductible purchases, however, it’s also subject to purchase limits and required minimum distribution rules beginning at age 70-1/2.

Qualified Longevity Annuity Contract (“QLAC”)

A deferred fixed income annuity designed for use in retirement plans such as 401(k) plans and traditional IRAs that’s limited to an investment of the lesser of $125,000 or 25% of the value of a retirement plan and requires that lifetime distributions begin at a specified date no later than age 85.

Qualified Social Security RecipientTM

Includes (1) current Social Security retirement benefit recipients, and (2) future recipients who are vested in their benefits. Current recipients are currently receiving a defined monthly payment. Future recipients are vested in, and as such have a non-forfetiable right to receive, a defined monthly benefit after 40 quarters, or 10 years of work and associated payment of Social Security taxes.

Re-characterization

Process authorized by the IRS to allow you to reverse a Roth IRA conversion by doing a trustee-to-trustee transfer of the Roth IRA account assets plus earnings thereon to the traditional IRA account from which the Roth IRA conversion originated by the due date (including extensions) for your tax return for the year during which the conversion occurred.

Required Minimum Distribution (“RMD”)

the minimum amount calculated in accordance with an IRS life expectancy table factor that a retirement plan account owner must withdraw each year from a plan without being subject to a penalty beginning at age 70-1/2 or in the year of retirement if later if the plan is a qualified, i.e., employer sponsored, retirement plan and the individual isn’t a 5% or greater owner of the business sponsoring the plan.

Retirement Asset Planning

The process of planning for the accumulation of sufficient assets to be used for retirement and “spending down” of those assets during one’s retirement years.

Retirement Capital

Assets that are physically segregated or otherwise dedicated for funding retirement. The assets are either immediately available, e.g., a checking account, or can be sold, e.g., brokerage account securities or a rental property. The assets themselves, or proceeds from the sale of those assets, can either be directly used to pay for retirement expenses or can be invested in one or more income-producing investments, such as an annuity, to provide income to fund retirement.

Retirement Income Plan

See Retirement Income Planning.

Retirement Income Planner

An individual who is professionally trained, licensed, and experienced in developing and managing strategies for creating and optimizing retirement income to meet one’s financial needs for the duration of retirement.

Retirement Income Planning

The process of planning for a predictable income stream from one’s assets, that when combined with other sources of income, is designed to meet an individual’s or family’s financial needs for the duration of retirement.

Retirement Income Planning Professional

See Retirement Income Planner.

Retirement Income Portfolio

A mixture, or collection, of financial assets that is designed to generate sufficient after-tax income to cover the difference between projected annual retirement expenses and projected non-asset sources of retirement income, including, but not limited to, Social Security and pension income.

Retirement Paycheck

See Pension.

Retirement Planning

The process of establishing, and periodically revising, retirement goals and developing financial strategies during one’s working years with the objective of obtaining and maintaining financial security throughout one’s retirement years.

Return of Premium

Lump sum benefit available as an optional feature with a deferred income annuity whereby the premium is payable to the contract’s beneficiaries in the event of death of the contract owners prior to commencement of the income payout.

Roll Up Rate

The interest rate that’s used to calculate the income account value of a fixed index annuity.

Roth IRA

A personal retirement plan that enjoys tax-deferred growth to which annual nondeductible contributions up to the lesser of earned income or an IRS-specified limit, that is $5,500 or $6,500 if 50 and above as of 2015, if your income falls below IRS-specified limits that differs depending upon whether you’re single or married. Unlike a traditional IRA, contributions may be made to a Roth IRA after age 70-1/2. Distributions are generally nontaxable provided that funds remain in a Roth IRA until the later of (a) five years from the date of the first Roth IRA contribution or (b) age 59-1/2. In addition, there are no required minimum distributions during a Roth IRA owner’s lifetime.

Roth IRA Conversion

A technique for transferring part or all of a traditional IRA to a Roth IRA that, prior to 2010, was permissible only for taxpayers with modified adjusted gross income of less than $100,000. The amount converted must be included in one’s gross income in the year of conversion, unless the conversion is done in 2010, in which case an election may be made to include 50% of the conversion amount in 2011 and 50% in 2012.

Safe Withdrawal Rate

A percentage that can be applied to the value of one’s portfolio on the day before retirement to calculate the annual amount, increased by an annual inflation factor, that can theoretically be withdrawn from the portfolio without depleting the portfolio for the remaining duration of one’s life, with 4% often cited as a safe withdrawal rate for a diversified portfolio.

SEP-IRA

A retirement plan for a business owned by a self-employed individual into which an employer may make a deductible contribution up to 25% of an employee’s compensation and up to 20% of the self-employed individual’s net self-employment income up to maximum specified annual limits into an IRA account.

Sequence of Returns

A series of investment portfolio returns, usually expressed annually, that has a direct impact on the longevity of an investment portfolio during the withdrawal stage.

Series of Substantially Equal Periodic Payments (“SOSEPP”)

See 72(t) IRA.

72(t) IRA

A type of IRA account, distributions from which IRS has authorized as an exemption from the 10%

Premature Distribution Penalty

in connection with the distribution of a series of substantially equal periodic payments for the greater of five years or until age 59-1/2.

Simple Interest

Interest that is calculated solely as a percentage of the principal. Where this occurs, the investment grows linearly.

Single Premium Deferred Annuity (“SPDA”)

An annuity that limits investments to a single lump-sum investment.

Single Premium Immediate Annuity (“SPIA”)

See Immediate Annuity.

Social Security

The comprehensive federal government program providing current and former workers covered by the program and their dependents with retirement income, disability income, and Medicare benefits that is financed by assessment of employers and employees.

Social Security Deemed Filing Provision

Prior to full retirement age, an application for a worker benefit is deemed to be an application for a spousal benefit and vice versa.

Social Security Earnings Test

A threshold that’s applied to the earnings of individuals receiving Social Security retirement benefits prior to their full retirement age that results in a reduction of benefits to the extent that the threshold is exceeded in a particular year.

Social Security Spousal Benefit

As a spouse, even if you have never worked under Social Security, you are eligible to receive a Social Security benefit equal to as much as 50% of your spouse’s benefit if you wait until your full retirement age instead of receiving a benefit based on your earnings record.

Spend-Down Phase

As it pertains to Retirement Asset Planning, the period during which an individual or family is withdrawing Retirement Capital for funding retirement needs.

Standard and Poor’s (S&P) 500

A stock market index of 500 large cap stocks weighted by market value that’s designed to be a leading indicator of the overall U.S. stock market performance.

Standard Deduction

A fixed dollar amount based on filing status that is subtracted from Adjusted Gross Income to arrive at Taxable Income when a taxpayer’s total itemized deductions are less than the fixed dollar amount.

Statement of Financial Condition

Synonymous with Net Worth Statement. It is generally a more formal term associated with personal financial statements prepared by CPAs.

Stock Market Index

Measures the performance of a specific group of stocks. An example of a stock index is the S&P 500.

Straight Life Annuity Payment Option

See Life Annuity Payment Option.

Surrender Period

As applied to fixed index annuities, this is the stated term of the annuity over which a predefined declining surrender charge may be assessed, and deducted from the contract’s accumulation value, on annual withdrawals in excess of a penalty-free withdrawal amount that’s generally equal to predefined percentage of total premiums, typically 10%.

Taxable Income

The income that is used to calculate the amount of one’s income tax liability. It is calculated by subtracting itemized deductions or the standard deduction and personal exemptions from adjusted gross income.

Term Certain Annuity Payment Option

See Period Certain Annuity Payment Option.

Traditional IRA

A personal retirement plan that enjoys tax-deferred growth to which annual contributions of up to the lesser of earned income or an IRS-specified limit, that is $5,500 or $6,500 if 50 and above as of 2015, until age 70-1/2. Contributions may be partially or fully deductible depending upon participation in an employer-sponsored retirement plan and adjusted gross income. In general, a traditional IRA owner must begin taking taxable minimum distributions no later than April 1st of the year following the year in which the owner turns 70-1/2 using the value of one’s IRA accounts as of December 31st of the previous year and an IRS life expectancy factor.

Trigger Indexing Method

A fixed index annuity indexing method that credits a predefined interest rate in each contract year to the extent that the value of the specified stock market index at the end of the contract year is greater than or equal to its value at the beginning of the contract year.

Variable Annuity

An annuity that offers a variable rate of return depending on the performance of the investment options selected. Unlike a fixed annuity which is invested in fixed income instruments in the general account of the insurance company, a variable annuity is invested in non-fixed income instruments, typically mutual funds, in a separate account. A variable annuity is a security since the value and payouts to the annuitant when annuitized will vary depending on the performance of the investment options with the investor assuming the market risk.

Withdrawal Drag

The depletion of an investment portfolio resulting from reduced earnings attributable to withdrawals from the portfolio. It is equal to the difference between portfolio earnings with no withdrawals minus portfolio earnings with withdrawals.

Withdrawal Phase or Stage

As it pertains to financial planning in general, the period of time over which distributions are taken from an investment portfolio that is generally allocated for a specific planning goal, e.g., education, retirement, etc.

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