Retirement Planning Terms Report



This post is for you, the soon-to-be retiree.  While there’s a lot to understand, digest and apply to our financial lives: budgets, savings, spending, health care, interest rates, the economy, social security, the stock markets, investments, and taxes, it is even more vital to put all of it into context as we plan for retirement.  Most of us haven’t had much financial training, more likely piecemeal information from random sources. I’ve created this document to help you make smart money decisions as you approach retirement.  Ready?  Let’s dive in!


Retirement can be many things to many people, but first and foremost retirement shouldn’t include worrying about money.  Use this report to get educated and make smart decisions about your retirement.


Getting educated doesn’t mean you have to become a expert. So no, this isn’t a comprehensive course to turn you into a retirement professional, but a basis to work from and the first step to increase your retirement comfort and confidence.  At a minimum, you will need enough knowledge so you can decide what sources of information are reliable or, if you hire an advisor, who is right for your needs. Whether you attempt retirement alone or with an advisor, having a basic understanding of planning and investments can help you avoid costly mistakes, expensive assumptions and ongoing confusion.


Plans tell you where you stand, where you hope to go and what needs to happen to get you there.


Financial Plan:  What’s your plan?  Heard that a thousand times eh? What exactly is a financial plan?  Financial plans provide a road map to where you want to go and what you need to do to get there.  It’s a form of projection that includes your current financial goals and assets plus a number of saving, tax and investment assumptions.  A financial plan can put your retirement goals in context and determine whether what you want and need is realistically achievable or what you might modify to give you a higher probability of reaching your goals.  While the word plan might feel like a fixed road map to follow, it isn’t. Plans require management as life changes and your retirement evolves. Advisor or not, you should have a plan.


Retirement Plan:  How is a retirement plan different?  A retirement plan is a specialized financial plan that focuses on the spending of assets rather than the saving of assets. Retirement plans consider spend down strategies, social security strategies, healthcare strategies, Roth conversion strategies, legacy strategies, withdrawal strategies and income strategies. Retirement plans need to be carefully managed given you do not have income to help recover from planning or investment mistakes.


Once you have a plan, there are number of efforts that go into executing and managing your plan.  I’ll focus on terms related to retirement planning and management below given that’s my specialty.


Income Planning:   Income Planning is the process of effectively positioning your assets and income streams (pension, social security,annuities) to provide an income that is sufficient and predictable (and tax efficient!) during your anticipated retirement.  Prudent income planning can help minimize much of the financial risk associated with retirement and is one piece of the total risk management process.


A plan is what you expect to do and have happen.  Plans need to be managed, updated and evolved.


Risk Management:   Risk Management is the process of identifying risk related to your plan and, ideally, mitigate through plan design, handing off the risk to an outside entity or, at least minimizing risk despite a potentially limited ability to offset it completely.  Risks in retirement include market risk(how will specific investment markets perform), longevity risk(what if you live to age 110?) and inflation risk(what if inflation skyrockets and everything gets much more expensive?).  Some risks can be eliminated. Others can only be minimized through management.

Asset Management:  Asset Management is the management and administration of your assets (savings, retirement accounts, investment accounts, real estate, annuities, etc..) to meet your planning goals.  Some goals are near term (income for the next 5 years) and other goals are longer term (income for retirement years 15-20 or even legacy assets left for young grandchildren). Assets for each goal should be managed differently.  This is where asset segmentation and asset allocation come in.

Asset Segmentation:  Asset Segmentation is the practice of applying specific assets in specific accounts to specific goals and timeframes.   A 25 year retirement might have 5 retirement segments, each 5 years long with assets to match each segment’s goals. Once a segments assets are needed, income is then distributed via a tax-efficient drawdown plan across all account assets in the 5 year segment.  Of course, each segment needs to be invested correctly based on time frame and income goals.

Asset Allocation:   Each segment needs to be allocated to meet your long term growth and  then, income goals. Asset Allocation is the splitting up of your dollars across different investments while considering your desired rate-of-return and your tolerance for risk (diversification can help reduce risk).  Once you decide what the allocation should look like, you need to decide what investments belong in each segment. The investments you use will be determined by your selected investment approach.

Diversification:   Diversification can help eliminate risks associated with having too few or very similar types of investments. Diversification can help ensure you own some of the winners in any given year or, in contrast, can help ensure you don’t only own the losers.


Proper segmentation, allocation and diversification can reduce risk.


Investment Approach:   Generally speaking, there are three ways to invest in or one might say, “approach the markets”.  Active, index and factor investing.

Active investing is attempting to pick winning investments while also attempting to avoid the “losers”.  For example: Buy stock in Walmart but not Target (please note this is not a recommendation). Or making investments in the industrial sector but not the technology sector.  Active management requires a portfolio manager to make predictions and hope that their predictions come true. Folks on CNBC love active investing. Active investing generally has higher investment management fees than other types of investing.

Index investing, in contrast, is when you buy everything (stocks or bonds) in a specific segment, asset class or index.  For example: Buy the 500 largest companies in the United States by buying an S&P 500 Index Fund. Index investing is favored by investors that recognize that most people cannot consistently (over a long period of time) pick winners and avoid losers. CNBC watcher generally aren’t that interested in this approach because it’s not very interesting. Indexing is generally associated with low investment management fees.

Factor investing or evidence-based investing is the practice of biasing portfolios toward attributes of higher performing securities that have proven to be persistent over time and pervasive across the global markets. The best of both worlds some say, evidence-based investing combines low fees with hundreds of years of fact-based, academically-driven research. As you would expect, not all factor or evidence-based investments are the same.


Knowledge helps you pay attention to what matters.  Experience helps you ignore what doesn’t.


Other terms and concepts worth understanding….

Stock (and bond) Markets:  Markets are where things are bought and sold.  Markets used to be located at a specific location, like the the New York Stock Exchange.  Now, most markets are virtual (electronic) with buyers and sellers located at remote locations. The price for a stock (or bond) moves to the last price it was bought/sold at.  Supply and demand drives prices up and down. It’s no more complicated than that. The news affects the markets. In any given day if more people are motivated to buy IBM than want to sell it (assuming a similar size of buyers and sellers), the share price of IBM will rise.  Bad news published about IBM? Likely more will want to sell than buy and, well, the price of IBM will fall until enough buyers “step up” and start buying. Buyer and seller supply and demand ultimately drives the markets on any given day, year or decade.

Stock Market Index:  The Dow, S&P 500, Nasdaq, Russell 2000: These are baskets of stocks designed to measure the progress of “the markets”.  The S&P 500 for example, is the largest 500 companies in the United States. Currently, the S&P is around 2900. 2900 what?  Doesn’t really matter. It’s all relative and just a way to measure the size of the 500 largest companies in the US. Incidentally, the S&P 500 is a capitalization-weighted index meaning larger companies have a greater effect on the index.  That’s unfortunate given an equal-weighted S&P 500 has outperformed a capitalization-weighted S&P 500 over time. So much for just buying the index.


Looking for variety?  There are over 12,000 companies you can invest in.  There are over 8,000 mutual funds you can buy


Stock:   As a stockholder in a corporation you own a portion of a company and can participate in the company’s growth (assuming its value grows) and receive distributions of profit (dividends – if it pays out a portion of its profits to shareholders).  You can invest in big companies, small companies, US or international, growth focused companies, companies that produce high dividends, etc. There are many different types of stocks: Growth, Value, Large, Mid and Small Cap, US, International, Emerging market.  There are also different stock sectors: Energy, Financials, Technology, etc… If you own stock in a company and the company goes bankrupt the value of that stock will generally go to zero.

Bond:   If you own a bond, a company or government has borrowed your money and will pay you interest and, later, when the bond matures, will give you back the bonds par value. There are many different types of bonds: US, international, government, corporate, high quality, low quality (low quality bonds generally pay higher interest but are riskier), long term, short term, etc… Interest rates can affect the price of bonds and bond mutual funds significantly.  When interest rates rise, most bonds or “bond like” investments go down in value.

Mutual funds:  Mutual funds are an accumulation or basket of stocks, bonds, or both, managed by an investment firm to a set of guidelines described within the mutual fund’s prospectus. Mutual funds have embedded fees that are used to pay the fund managers, investment firms and, sometimes, salespeople.  Mutual funds can be confusing as one fund may have 5 different share classes available with different fees for each. There are thousands of mutual funds out there, a great number of them poorly run. Some mutual funds charge up front commissions.


No mutual fund has ever gone to zero.  Though many company stocks have.


Electronically traded funds:   (ETF) are very similar to mutual funds except you can trade them during the day whereas mutual funds only trade at the end of the day. ETF’s also have embedded fees.  ETF’s can be very tax efficient if they are used properly. ETF’s can also be somewhat faddish.

Embedded Investment Management Fees:   Fees will vary depending on the type of investment that you purchase.  Both ETF’s and mutual funds may have low (0.30% or lower for example) or high fees (anything over 1.0%) dependent on fund share class and management structure. Generally speaking, higher cost investments promise (hope for?) outperformance of the markets in which they invest. These promises, unfortunately, generally do not live up to expectations as higher fees eat into returns and there remains a high correlation between lower fees and higher returns. Clarity around fees and returns is not a financial industry strong point.  It can be an effort to sift through the noise.


Historically, there’s a positive correlation between low fees and superior outcomes.


Dividend:  A dividend is a distribution of profits to the owners of a company.  If you own shares of the company (stock) you will receive a dividend if one is distributed.  Dividends often receive favorable tax treatment. When a company puts a dividend in place they try not to reduce it under any circumstances.

Risk Tolerance:  Your risk tolerance is your tolerance for potential loss and/or volatility (the ups and downs) within your investments.  Risk can come in many forms but there are two common investment risks for long term investors: Potential loss of capital (ie a stock investment drops in value and doesn’t recover) and volatility, the daily, monthly or yearly ups and downs that an investor may experience in their portfolio.  While aggressive growth portfolios can be volatile, conservative income portfolios are generally much more stable. A major form of risk, behavioural risk, doing the wrong thing at the wrong time, can be avoided if you are prepared for it. Not taking some investment risk may be an issue as well, if you don’t grow your assets, you may run out of money in retirement.  Many forms of risk can be reduced or mitigated all together.

Behavioral Finance:  Behavioral finance  combines behavioral and cognitive psychological theory with conventional economics and finance to provide explanations for why people make personal financial decisions.  Nobody likes to hear they have and will make poor decisions with their money but history has proven it to be true. This may be the number one reason to hire an advisor, simply because they aren’t you.


No one likes to hear that their emotions can interfere with a financially successful retirement…

…so I don’t say it out loud.


Investment Returns:  If you invest $100 and earn 9% “return” during a year, you’ll have $109 at the end of the year.  You may or may not owe taxes on that $9. Low turnover (less changing of investments) can improve your after tax returns.

Compound Returns:  Earn 7% on that $109 the following year and now you have $116.63. So you will have gained not 16% but 16.66% because you made money on the money you made.  Compounding is very powerful, so much so that Albert Einstein thought compounding was the greatest “invention” ever.

Risk-adjusted-returns:  Risk and return are highly correlated.  Investments designed to take less risk, even with lower expected rates of return can help in retirement planning and manage risk as desired. Taking more risk and yielding less-than-market returns isn’t attractive yet is very easy to do.

Total Return: You should judge investments/portfolios by total return: the accumulation of interest, price changes, dividends and distributions realized over a given period of time.

FOMO: The fear of missing out is often “Wall Street’s” number #1 marketing strategy.  “You don’t have this, so you’re probably missing out.” “If you added this, you could do better.”  “If you want a better way, your should probably do this.” The fear of missing out is often a significant motivator for us to take action.  Fear shouldn’t be a motivator.


“I feel this may happen.” “I think that may happen.”

Don’t make projections, make a good plan and stick to it.


Income Tax Bracket: If you are in the 24% tax bracket, you will pay $.24 for each incremental $1.00 you earn in that year until you reach a certain income limit. Once you are above that income limit you will enter the next tax bracket, now paying 32% of each incremental dollar in taxes to the federal government and so on…

Taxes on capital gains:  Realized gains are gains that you owe taxes on in a given year. Unrealized gains are gains you don’t have to pay taxes on – yet. Long term capital gains are taxed at a lower rate than short term gains, generally.  Some investments may force you to pay taxes in each year, others can help you defer taxes into the future. Some investment may force you to pay taxes on gains you didn’t receive even if you bought the investment yesterday!

Roth vs Traditional Tax Treatment:  This applies to IRAs and 401(k)s.  With Roth tax treatment, there is no tax deduction when you contribute to a Roth “account” but you will not pay any taxes on your contribution or what it grows to in the future.  Traditional tax treatment (pre-tax contributions) is when you (generally) get a tax deduction for contributing to an account but eventually pay ordinary income taxes on the contribution and all of the gains that you have earned.


401(k)’s can be confusing as they may contain multiple types of tax treatments…in one account.


Withdrawal Rate:   Withdrawal rate is the percentage of assets you pull from investments as you take income in retirement.  Excess withdrawal rates, especially during market fluctuations, will lead you to run out of money earlier in retirement than one might expect. Be wary of using rule-of- thumb withdrawal rates to calculate projected retirement income.

Order-of-returns:   A widely overlooked variable is the order you receive your returns while you take income in retirement.  One might call this the “half-million” dollar mistake. For example consider two retirees long term portfolios, each with a 7% average rate of return over their retirement years.  Let’s assume an inflating $80,000 yearly withdrawal rate from assets when in retirement and a $1,100,000 initial portfolio value.

 Consider Bill, who has a lower rate of return in his early retirement years:
 +5%, -4%, +8%, -6%, +14%, +16%, +7%, +16%, +7%, etc…
 Vs.  Debra who has a higher rate of return in her early retirement years:
 +16%, +7%, +16%, +14%, -6%, +8%, -4%, +5%, +7%, etc…

Bill would run out of money after 23 years, 5 years earlier than Debra who would run out of money after 28 years all while averaging the same long term average rate of returns!  Worse, Bill’s total income will be about $600,000 less than Debra’s over her retirement. The order in which you receive your returns matters greatly given poor returns early on will cause additional principal to be spent early in retirement.  Further, recognize that the order in which you receive returns can be more important than your average rate of return is! Asset segmentation can mitigate the effect that order-of-returns can have on a retirement.

Annuities:   Annuities are sold by brokers and have high embedded expenses.  They include an insurance wrapper (to provide guarantees) and high embedded commissions that are paid to the broker or salesperson.   Often you are locked into annuities with significant fees (surrender charges) to get out. Annuities are complicated, hence the need for robust commission structure to incentivise brokers to spend the necessary time to attempt to explain them.  Sadly, guarantees are often promised but rarely used and most annuity owners, due to the complexity of annuities, can’t explain why they bought them. Certain low-fee fixed annuities can be use to defer taxes or build reliable income streams.


Annuities are often best for the person who sold them.


Growth Portfolios:   Not to be confused with growth stocks, growth portfolios are designed to grow your assets to meet a future goal or need.  Income from a growth portfolio is not expected but may be generated from dividends.

Income Portfolios:  Income portfolios are designed to create reliable income immediately from the time of investment.  Retirees, generally, should not have all of their money in income only investments given the risk that lower rates of returns may result in the retiree running out of money during a long retirement.

Growth & Income:  Growth and Income investing, sometimes called Total Return investing is a combination of growth investments and income investments.


Once retired it’s unlikely that you can fully recover from planning and investment mistakes.


Whew!  That’s it for the financial terms.  I venture to guess that you’ve just learned more about financial planning and investments than, guessing, 95% of the population.  I’ll venture another guess what some of you will say next: “Thanks John but how do I apply what I’ve just learned.” Great question with a short answer.  Either you spend the time to become a retirement expert or you hire one.

This is where financial advisors come in.

Financial Advisor:  This may be the most poorly defined professional term in history.  With nearly 300,000 “financial advisors” in the US, there are a lot of people that call themselves financial advisors.  They can differ greatly. Their formal titles can differ: Investment Advisor, Portfolio Manager, Financial Consultant, Financial Planner, Investment Manager, etc… What type of clients they work with can differ: CFO’s of Fortune 1000 companies, high income Millennials, ultra-high net worth families, or mass-affluent retirees.  They can also differ in if and how they manage portfolios, if they sell products or charge yearly fees, what type of investments they use, if they have legal responsibility to you (fiduciary) or are they just a salesperson, their past training and experience, if they do financial planning, what they even consider “financial planning” to be, what type of firm they work for, whether they will provide tax advice, etc…


Financial advisor may be the most poorly defined professional term in history.


Just looking at fees alone, there are many different ways advisors can be compensated:  Brokers receive commissions for products they sell – these might be investment (stocks, bonds, mutual funds) or insurance (annuities, life insurance) products. Financial Planners often create plans for a fixed fee, say $1,500 to $4,000 or much, much more, depending on plan complexity and necessary deliverables.  Investment Advisors or Portfolio will select and manage your investments for a yearly fee (either a % of assets under management or a flat fee).  

Any of the aforementioned may call themselves “Financial Advisors”.  Unfortunately, there is no standard expectation you should have from a financial advisor. This is why most people don’t know what to expect when they meet with a financial advisor.  It simply hasn’t been defined well by our profession. 



Some common and, I believe, prudent reasons to hire a financial advisor:



You simply don’t have the time nor desire to manage your retirement finances



You’d prefer to hire an expert rather than try to become one yourself



You don’t think it makes sense to “go it alone” and want to avoid any big mistakes



Like an accountant or car mechanic, people use financials advisors most often because they simply aren’t experts at things they don’t do often: preparing your taxes, replacing the roof on your home, fixing your car… or retiring.  Like anything in life, you’ll have to decide if you want to spend the time and energy to become the expert… or as an alternative, hire one. Different paths but your choice. While becoming the expert will require a significant amount of your time, patience, and energy, choosing an advisor will requires some effort as well given not all work in a similar way nor do they have the same expertise.


The government tried to force all advisors to become fiduciaries.  Since they failed it’s up to you to check.


Fiduciary::  I’m a fiduciary.  Being a fiduciary means everything I do must be in your best interests.  But just because someone is a fiduciary doesn’t mean they are good at what they do.  Most “advisors” are not fiduciaries. Commissioned financial product sales people are not fiduciaries.  It is a big deal. If after creating a retirement plan for you, I determine you can live the rest of your life comfortably with your money sitting in CD’s and short term bonds, I will tell you that.  You can always elect to do differently but your options will be clear.


If you’re going to hire an advisor, hire one that specializes in clients like you!   


Specialization::You wouldn’t hire a general practitioner to replace your knee or operate on your heart, why hire a generalist advisor when you are looking for a retirement advisor. Niche advisors specialize in one type of client and have specific insight and experience.  If you’re preparing for retirement, find an advisor that specializes in exactly that. How can you tell? Their website, literature and entire process should reflect this, not just what they tell you in person.

Congratulations!  You’ve just taken the first step in getting educated about your retirement.  Amazingly, you’ve just learned more about planning and investments than many retirees accumulate in a lifetime of “headline reading” or conversations with their advisors.  You don’t have to be an expert but you do need a basic working knowledge of many of the terms and concepts you have just reviewed. Ultimately, you’ll need to create and administer your retirement plan or you’ll need to work with someone to help you do the same.

Please Note:  Speak to your tax, legal or financial advisor for specific advice about your particular plans and situation.

John Bubello Retirement Financial Advisor

John R. Bubello CFP®

I specialize in Retirement Planning & Investment Management.

My clients worry less, maximize their money, avoid mistakes and retire with clarity and confidence.

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