106 terms · plain English

Financial terms glossary

Clear definitions of the retirement, FIRE, tax, and planning terms that actually come up when you map your future. Where a term maps to one of our free calculators, you can jump straight to running it on your own numbers.

A B C D E F G H I L M N O P Q R S T V W #

A

ACA Subsidy (Premium Tax Credit)A government credit that lowers marketplace health insurance premiums based on your income.

Adjusted Gross Income (AGI)Your total income minus specific deductions; a key figure that drives eligibility for many tax benefits.

AmortizationThe schedule by which a loan is paid off over time, shifting gradually from mostly interest to mostly principal.

AnnuityA contract, usually with an insurer, that converts a lump sum into a stream of guaranteed income.

AssetAnything you own that has financial value — cash, investments, property, and more.

Asset AllocationHow your portfolio is divided among stocks, bonds, and other asset classes — the main driver of risk and return.

B

Backdoor Roth IRAA legal workaround that lets high earners fund a Roth IRA despite income limits, by converting a nondeductible traditional contribution.

Barista FIRESemi-retirement where part-time work covers some expenses (and often health insurance), so your portfolio doesn't carry the full load yet.

BondA loan to a government or company that pays interest and returns principal at maturity.

Bucket StrategyDividing retirement savings into short-, medium-, and long-term 'buckets' to manage risk and cash needs.

C

Capital GainThe profit when you sell an asset for more than you paid; taxed at different rates depending on how long you held it.

Cash FlowThe money coming in versus going out over a period — the day-to-day engine of saving and spending.

Catch-Up ContributionAn extra amount people 50 and older can contribute to retirement accounts beyond the standard limit.

Coast FI vs Barista FITwo part-way milestones: Coast FI means no more saving is needed; Barista FI means part-time income still covers some costs.

Coast FIREThe point where your existing investments will grow to fund retirement on their own, without any further contributions.

COBRAA federal option to keep your employer health plan after leaving a job, at full price for up to 18 months.

Compound InterestEarning returns on both your original money and the returns it has already generated — the engine behind long-term wealth.

Consumer Price Index (CPI)The government's main measure of inflation, tracking the average price change of a basket of consumer goods and services.

Contribution LimitThe maximum the IRS lets you put into a tax-advantaged account each year.

Cost BasisWhat you paid for an investment, used to calculate the taxable gain or loss when you sell.

D

Debt-to-Income Ratio (DTI)Your monthly debt payments divided by your gross monthly income — a key measure lenders use.

Delayed Retirement CreditsThe roughly 8% per year your Social Security benefit grows for each year you wait past full retirement age.

DividendA share of a company's profits paid out to shareholders, usually quarterly.

Dollar-Cost AveragingInvesting a fixed amount on a regular schedule regardless of price, smoothing out market timing.

Drawdown StrategyThe plan for which accounts to withdraw from, and in what order, to fund retirement tax-efficiently.

E

Effective Tax RateThe average rate you actually pay across all your income — total tax divided by total income.

Emergency FundCash set aside for unexpected expenses or income loss, typically three to six months of essential spending.

Employer MatchMoney your employer adds to your 401(k) based on your own contributions — effectively free money.

Estate PlanningArranging in advance how your assets will be managed and distributed, minimizing taxes and complications for heirs.

F

Fat FIREFinancial independence at a comfortable or affluent spending level, requiring a larger portfolio.

FI NumberThe amount of invested assets you need so that a sustainable withdrawal covers your annual expenses — your financial-independence target.

FiduciaryA financial professional legally required to act in your best interest, not just recommend 'suitable' products.

FIRE (Financial Independence, Retire Early)A movement built around saving and investing aggressively enough to make work optional decades before traditional retirement age.

Full Retirement Age (FRA)The age at which you qualify for 100% of your Social Security benefit — 67 for those born in 1960 or later.

G

Glide PathA planned shift in asset allocation over time, typically becoming more conservative as retirement approaches.

Guardrails StrategyA flexible withdrawal method that adjusts spending up or down based on how the portfolio performs.

H

Health Insurance GapThe stretch between losing employer coverage at early retirement and Medicare eligibility at 65, when you buy your own insurance.

Home EquityThe portion of your home's value you actually own — market value minus the mortgage balance.

HSA (Health Savings Account)A triple-tax-advantaged account for medical expenses, available with a high-deductible health plan.

I

I-Bonds and TIPSU.S. Treasury securities designed to protect savings from inflation by adjusting with the inflation rate.

Index FundA fund that holds every security in a market index, offering broad diversification at very low cost.

InflationThe gradual rise in prices over time, which erodes the purchasing power of a dollar.

Inherited IRAAn IRA you receive as a beneficiary, now generally subject to a 10-year withdrawal rule for most non-spouse heirs.

IRA (Individual Retirement Account)A personal, tax-advantaged retirement account you open yourself, in traditional (pre-tax) or Roth (after-tax) form.

IRMAA (Income-Related Monthly Adjustment Amount)A surcharge added to Medicare Part B and Part D premiums for higher-income retirees, based on income from two years prior.

L

Lean FIREReaching financial independence with a deliberately low annual spending level, requiring a smaller portfolio.

LiabilityAny debt or financial obligation you owe — the amounts subtracted from assets to find net worth.

Lifestyle InflationThe tendency for spending to rise alongside income, quietly delaying financial goals.

Liquid Net WorthYour net worth excluding hard-to-sell assets like your primary home — the wealth you could actually spend.

Long-Term Capital GainsProfit on assets held more than a year, taxed at preferential federal rates of 0%, 15%, or 20%.

Long-Term Care InsuranceCoverage for extended personal care — like a nursing home or in-home help — that regular health insurance and Medicare don't cover.

M

Marginal Tax RateThe tax rate applied to your next dollar of income — the rate of your highest tax bracket.

Medicare Part BThe part of Medicare covering doctor visits and outpatient care, paid for with a monthly premium.

Medicare TaxA payroll tax that funds Medicare, withheld from wages and self-employment income, with an extra surtax on high earners.

Medigap (Medicare Supplement)Private insurance that covers gaps in Original Medicare, like deductibles and coinsurance.

Mega Backdoor RothA strategy using after-tax 401(k) contributions to move large sums into Roth accounts, far beyond normal limits.

Modified Adjusted Gross Income (MAGI)AGI with certain deductions added back; the income figure that drives ACA subsidies, IRMAA, and contribution limits.

Monte Carlo SimulationA method that runs your plan through hundreds or thousands of randomized market scenarios to estimate the probability it succeeds.

MortgageA loan to buy real estate, secured by the property, repaid with interest over years or decades.

N

Net Investment Income Tax (NIIT)A 3.8% surtax on investment income for higher-income taxpayers.

Net WorthEverything you own minus everything you owe — the single clearest snapshot of financial health.

Nominal Interest RateA return or rate stated before adjusting for inflation.

O

Opportunity CostThe value of the next-best thing you give up when you choose one use of money or time over another.

P

PensionAn employer-provided retirement benefit that pays guaranteed income, usually for life, based on salary and years of service.

PortfolioThe complete collection of investments you hold across all your accounts.

Q

Qualified Business Income (QBI) DeductionA deduction of up to 20% of qualifying pass-through business income for eligible self-employed people and owners.

Qualified Charitable Distribution (QCD)A direct transfer from an IRA to charity that satisfies your RMD without adding to your taxable income.

Qualified DividendsDividends taxed at the lower long-term capital-gains rates rather than ordinary income rates.

R

Real Rate of ReturnYour investment return after subtracting inflation — the growth in actual purchasing power.

Retirement Spending SmileThe observed pattern that real retirement spending falls through the early-to-mid years, then rises late in life as healthcare costs climb.

RMD (Required Minimum Distribution)The minimum amount you must withdraw annually from most pre-tax retirement accounts starting at a set age.

RolloverMoving retirement funds from one account to another — like an old 401(k) to an IRA — without triggering tax.

Roth ConversionMoving money from a pre-tax retirement account into a Roth account, paying tax now so future growth and withdrawals are tax-free.

Roth IRAAn after-tax retirement account where qualified withdrawals — including all growth — are completely tax-free.

RSU (Restricted Stock Unit)Company shares granted as compensation that vest over time and are taxed as income when they vest.

Rule of 72A shortcut to estimate how many years it takes an investment to double: divide 72 by the annual return.

S

Safe Withdrawal RateThe percentage of your portfolio you can withdraw in the first year of retirement, adjusted for inflation thereafter, with low risk of running out.

Savings RateThe share of your income you save or invest rather than spend — the strongest predictor of how fast you reach financial independence.

Self-Employment TaxThe Social Security and Medicare tax self-employed people pay on net earnings, covering both the employee and employer halves.

Sequence of Returns RiskThe danger that poor investment returns early in retirement permanently damage a portfolio, even if average returns are fine.

Short-Term Capital GainsProfit on assets held one year or less, taxed at your higher ordinary income rates.

Social SecurityThe U.S. federal program that pays inflation-adjusted retirement income based on your lifetime earnings and the age you claim.

Solo 401(k)A 401(k) for self-employed people with no employees, allowing both employee and employer contributions.

Spousal Benefit (Social Security)A Social Security benefit a spouse can claim based on the other spouse's earnings record, up to half their full benefit.

Standard DeductionA fixed amount you can subtract from income instead of itemizing, reducing your taxable income.

Step-Up in BasisThe reset of an inherited asset's cost basis to its value at the owner's death, often erasing capital-gains tax on prior growth.

Survivor Benefit (Social Security)The Social Security benefit a widow or widower can receive based on a deceased spouse's record.

T

Tax BracketsThe income ranges, each taxed at a progressively higher rate, that make up the U.S. graduated income tax.

Tax Credit vs DeductionA deduction lowers taxable income; a credit lowers your tax bill directly — credits are usually worth more.

Tax WithholdingIncome tax your employer or plan sends to the IRS on your behalf throughout the year.

Tax-Advantaged AccountsAccounts that reduce or defer taxes — like 401(k)s, IRAs, HSAs, and 529s — to encourage long-term saving.

Tax-DeferredGrowth you're not taxed on until you withdraw — the defining feature of traditional 401(k)s and IRAs.

Tax-Free (Roth)Money that's never taxed again on withdrawal, including all its growth — the hallmark of Roth accounts.

Tax-Loss HarvestingSelling investments at a loss to offset capital gains (and a limited amount of ordinary income), lowering your tax bill.

Taxable Brokerage AccountA standard investment account with no contribution limits or withdrawal penalties, but no special tax shelter.

Term Life InsuranceLife insurance that covers a set period and pays out only if you die during it — simple and low-cost.

Traditional IRAA retirement account where contributions may be tax-deductible now and withdrawals are taxed later.

Trinity StudyThe 1998 research that tested historical withdrawal rates and gave rise to the 4% rule.

TrustA legal arrangement where a trustee holds and manages assets for beneficiaries, often to avoid probate or control distribution.

V

VestingThe process by which you gain full ownership of employer contributions or equity over time.

W

Wash-Sale RuleAn IRS rule that disallows a tax loss if you buy the same or a substantially identical security within 30 days of selling it.

WillA legal document directing how your assets are distributed and who cares for minor children after your death.

Withdrawal RateThe percentage of your portfolio you withdraw in a given year to fund living expenses.

#

The 4% RuleA retirement guideline that withdrawing 4% of your starting portfolio (then adjusting for inflation) historically lasted at least 30 years.

401(k)An employer-sponsored retirement plan that lets you contribute pre-tax (or Roth) dollars, often with an employer match.

529 PlanA tax-advantaged savings account for education expenses, where growth and qualified withdrawals are tax-free.

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