Understanding retirement financial jargon
Financial jargon can make the process of getting one's finances in order and making smart economic decisions a bit of a challenge. To the average person, figuring out terminology can be a stumbling block and a hassle some want to avoid.
However, it's important to know some of the lingo associated with financial planning to ensure money is being saved and spent in a responsible way.
*401(k): In the United States, a retirement plan where money is diverted into an account and then invested. Current income tax is deferred until the money is withdrawn upon maturity.
*Amortization schedule: A comprehensive schedule of payments determining the breakdown of the mortgage amount, interest, principle received, and balance due through each period of the loan until the loan balance reaches zero.
*Annuity: A stream of fixed payments that is generally paid as part of a life insurance policy or retirement fund.
*Appraisal: An estimated value of property used most often in real estate transactions.
*Bankruptcy: A legally declared inability of an individual or organization to pay their creditors.
*Dividend: A portion of a company's profit paid to common and preferred shareholders. The dividend is paid in a fixed amount for each share of stock held, whether in cash or more stock.
*Hedge fund: An aggressive investment fund generally open to a limited number of investors.
*Interest: Fees paid on borrowed assets.
*IRA: Individual Retirement Accounts were initially set up in 1974 to provide a retirement option for individuals who were not covered by an employer-sponsored plan. Eventually it was opened up so anyone under the age of 70 could donate up to a certain amount of income a year.
*Liquidity: The ability to turn assets into cash without losing a lot of value.
*Longevity risk: The risk a pension fund or life insurance company takes on when offering its plans, due to the increasing life expectancy rate.
*Pension: A deferred compensation scenario by where an employer pays an employee a portion of income based upon length of service and employee age. Some pensions can be contributed to by the employee himself, with the employer matching the contribution.
*Portfolio: Collection of stocks, bonds and money market instruments owned by an individual or company.
*Prime Rate: A term applied in many countries to a reference interest rate used by banks.
*Principal: The original amount of debt on which interest is calculated.
*Rollover: This term is used for moving a retirement plan into a different one, generally when leaving a job. Usually there is a set time period in which the rollover must occur so that a penalty isn't issue.