The Retirement Savings Glossary

Investing for retirement may seem complicated, but you can build a solid understanding of retirement savings by learning the vocabulary. Knowing this financial planning terminology is a great place to start. 

401(k) 

These are retirement plans typically offered by your employer where you can invest money from your paycheck into a retirement account. The money usually isn’t taxed when it’s invested, so it can grow tax deferred, unless contributing to a Roth 401(k).  

The 401(k) definition and name come from the section of the Internal Revenue Code that explains its rules. A 403(b) is a similar type of retirement account you may be able to invest in if you work for certain tax-exempt organizations. 

Defined Benefit Plan 

Pensions or payments you get regularly from your employer after you retire. Benefits are predetermined based on a specific formula. 

Dollar-Cost Averaging 

Investing the same amount of money at regular intervals. This means that when share prices are lower you are buying more shares, and when share prices are higher you are buying fewer shares. If you contribute money from your paycheck into your investment accounts regularly, dollar-cost averaging happens automatically. 

Employee Contribution Limits 

The maximum total amount you are allowed to contribute into a retirement account in a year. These limits generally increase a bit every year. They may be higher for older adults. 

Employer Match  

The amount your employer contributes to your retirement savings account for you, matching your own contributions. For example, your employer may match your contributions up to 3%. 

Expense Ratio 

The costs that come out of your retirement account, typically annually, cover fees like administration expenses. The expense ratio is a percent of your assets. For example, if you have $10,000 in an account and it has a 0.5% expense ratio, you’ll pay $50 per year. That might not seem like a lot, but expense ratios can make a big difference in your retirement finances over the years.  

Individual Retirement Account (IRA) 

IRAs are similar to 401(k)s, but you contribute to them as an individual, not through an employer. They can be a good option if you own your own business or if your employer doesn’t offer a 401(k). 

Mutual Fund 

A mutual fund is an investment vehicle that is a collection of stocks, bonds or other  securities you can buy rather than choosing individual investments. For example, you could buy a mutual fund that includes stocks in the companies that make up the S&P 500 index.  

Pre-Tax Contributions 

Money that’s taken out of your paycheck before income taxes are applied. They can lower your taxable income for the year. 

Portfolio 

Your portfolio is a snapshot of your financial assets. This may contain your retirement investments or other types of finances such as non-qualified assets. You may have a mix of investments, like stocks, bonds and cash, designed to help you achieve your goals. 

Rollover 

Moving money from one retirement account to another. For example, if you change jobs, you may roll money over from your old employer’s account to your new employer’s. 

Roth IRA 

A retirement account you can put after-tax money in. Because you pay the taxes up front, when you withdraw money in retirement you won’t owe taxes on qualified withdrawals. You can open a Roth IRA on your own — it doesn’t need to be linked with your employer. 

Simplified Employee Pension (SEP) Plan 

This is a type of IRA where only the employer makes contributions. You might contribute to an SEP if you’re self-employed or you own a business that doesn’t have many employees. 

Summary Plan Description (SPD) 

An overview of your retirement plan that outlines all of the important information. 

Target-Date Fund 

A mutual fund that’s designed to meet your goals based on a specific retirement year. The fund often includes a year in the name, such as a 2050 target date fund. As you get closer to your target retirement date, the fund will gradually move your investment toward a more conservative mix. 

Tax Deferred 

Investments where you don’t have to pay taxes on your earnings each year. You will pay taxes when you take the money out. 

Get Guidance From a Pro 

You might understand the common retirement terminology, but you could benefit from talking with a professional about how to reach your goals. Connect with Farm Bureau for advice.