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Glossary
Every concept the calculators use, with formulas and worked examples.
59 terms
Time value of money
- AmortizationPaying off a loan with level payments that cover interest first and gradually more principal over time.
- AnnuityA series of equal payments made at regular intervals, such as monthly contributions or yearly withdrawals.
- Compound interestInterest earned on both the original amount and on interest already earned.
- Discounted cash flow (DCF)Valuing a series of future cash flows by converting each one to today's dollars and adding them up.
- Future valueWhat money today, or a series of deposits, grows to by a future date at a given rate of return.
- Internal rate of return (IRR)The discount rate at which an investment's net present value equals zero; its effective annual return.
- Net present value (NPV)The present value of all future cash flows minus the upfront cost; positive means the investment beats your discount rate.
- Present valueWhat a future amount of money is worth today, after discounting it at a chosen rate of return.
- Time value of moneyThe idea that a dollar today is worth more than a dollar in the future because today's dollar can earn a return.
Inflation
- Consumer Price Index (CPI)A US government index tracking the average change in prices urban consumers pay for a basket of goods and services.
- InflationThe general rise in prices over time, which reduces what each dollar can buy.
- Real vs. nominalNominal amounts are actual dollar figures; real amounts are adjusted for inflation to reflect buying power.
Taxes
- Bracket fillingDeliberately adding income, often from Roth conversions or IRA withdrawals, until you reach the top of a chosen tax bracket.
- Capital gainsThe profit from selling an asset for more than its cost basis; taxed at lower rates if held more than one year.
- Capital lossA loss from selling an asset for less than its cost basis; it offsets gains and up to $3,000 of ordinary income a year.
- Cost basisWhat you paid for an investment, including adjustments, used to figure your taxable gain or loss when you sell.
- Marginal vs. effective tax rateYour marginal rate is the tax on your next dollar of income; your effective rate is total tax divided by income.
- Net investment income tax (NIIT)A 3.8% federal surtax on investment income for people whose modified AGI exceeds $200,000 (single) or $250,000 (married filing jointly).
- Payroll tax (FICA)Social Security and Medicare taxes withheld from wages and self-employment income.
- Standard deductionA fixed amount subtracted from income before tax, available to anyone who does not itemize deductions.
- Tax bracketsIncome ranges taxed at increasing rates; each rate applies only to the income within its range.
- Tax-gain harvestingDeliberately selling appreciated investments in a low-income year to realize gains at the 0% long-term rate and reset cost basis higher.
- Taxation of Social Security benefitsUp to 85% of Social Security benefits can be federally taxable, depending on your other income.
Retirement accounts
- 72(t) SEPPSubstantially equal periodic payments - a schedule of withdrawals from an IRA or 401(k) that avoids the 10% early penalty at any age.
- Contribution limitsIRS caps on how much you can put into 401(k)s, IRAs, HSAs and similar accounts each year.
- Early withdrawal penaltyA 10% additional federal tax on retirement account withdrawals taken before age 59½, unless an exception applies.
- Employer matchMoney your employer adds to your workplace retirement plan based on how much you contribute.
- Health savings account (HSA)A tax-advantaged account for medical expenses, available with an HSA-eligible health plan, that can also act as a retirement account.
- Required minimum distribution (RMD)The minimum amount you must withdraw each year from traditional retirement accounts once you reach RMD age.
- Roth conversion ladderConverting traditional retirement money to Roth each year so that, five tax years later, each conversion can be withdrawn without penalty before 59½.
- Rule of 55An exception that lets you take penalty-free withdrawals from a workplace plan if you leave that employer in or after the year you turn 55.
- Traditional vs. RothTraditional accounts give a tax break now and tax withdrawals later; Roth accounts are funded with taxed money and grow tax-free.
FIRE and retirement income
- Buy, borrow, dieA strategy of holding appreciated assets for life, borrowing against them for spending instead of selling, and leaving them to heirs with a stepped-up basis.
- DrawdownSpending down your portfolio in retirement, including the order you pull from taxable, traditional and Roth accounts; also a peak-to-trough market decline.
- FI numberThe portfolio size at which your investments can cover your spending indefinitely, often estimated as 25 times annual expenses.
- FIRE variantsCommon flavors of financial independence - Lean, Fat, Barista and Coast FIRE - defined by spending level and whether you still work.
- GuardrailsA withdrawal strategy that cuts spending after bad markets and raises it after good ones, within preset limits.
- Safe withdrawal rate (SWR)The percentage of your starting portfolio you can withdraw in year one, then adjust for inflation, with a low chance of running out.
- Step-up in basisThe reset of an inherited asset's cost basis to its market value at the owner's death, erasing the built-in capital gain.
- The 4% ruleA rule of thumb that withdrawing 4% of your starting portfolio, then adjusting for inflation, historically lasted at least 30 years.
Borrowing and leverage
- Cushion (distance to margin call)How far your portfolio can fall, in percent, before a margin or maintenance call is triggered.
- Leverage ratioTotal assets divided by your own equity; it shows how much a market move is magnified in your net worth.
- Loan-to-value (LTV)Your loan balance divided by the value of the collateral securing it, shown as a percentage.
- Maintenance requirementThe minimum equity, as a percentage of the account's value, that you must keep in a margin account or pledged account.
- Margin callA demand from your broker or lender to add cash or collateral, or reduce the loan, after your equity falls below the maintenance requirement.
- Margin loanA loan from your brokerage secured by the securities in your margin account, usable to buy more securities or for other purposes.
- Securities-based line of credit (SBLOC)A revolving credit line, usually from a bank or broker, secured by a pledged investment portfolio and not allowed to be used to buy securities.
Simulation and risk
- Asset allocationHow your portfolio is divided among asset classes such as stocks, bonds and cash.
- CorrelationA measure from −1 to +1 of how closely two investments' returns move together.
- Dividend and interest yieldThe share of an investment's value paid out each year as cash: dividends from stocks, or interest from bonds, savings and money market funds.
- Expense ratioThe annual fee a mutual fund or ETF charges, expressed as a percentage of the money you have invested.
- Monte Carlo simulationRunning a plan thousands of times with randomly generated returns (and sometimes inflation) to see the range of possible outcomes.
- PercentileThe value below which a given percentage of outcomes fall; the 10th percentile is worse than 90% of outcomes.
- Random seedThe starting number for the random-number generator that draws a simulation's paths.
- RebalancingPeriodically buying and selling to bring your portfolio back to its target allocation.
- Sequence-of-returns riskThe risk that poor returns early in retirement, while you are withdrawing, permanently damage your portfolio even if later returns are good.
- Simulation pathOne possible future in a Monte Carlo run: a full sequence of monthly returns, and optionally inflation, from today to the end of your plan.
- Success rateThe percentage of simulated scenarios in which your plan never runs out of money over the planning horizon.
- VolatilityHow much an investment's returns swing around their average, usually measured by the standard deviation of annual returns.