The Bogleheads' Guide to Retirement Planning (55 page)

registered investment advisor (RIA):
An investment professional who is registered—but not endorsed—by the Securities and Exchange Commission (SEC).

reinvest date:
See ex-dividend date.

reinvestment:
Use of investment income to buy additional securities. Many mutual fund companies and investment services offer the automatic reinvestment of dividends and capital gains distributions as an option to investors.

required minimum distribution (RMD):
The minimum amount the IRS mandates that you withdraw from IRA accounts and other tax-deferred retirement funds once you reach age 70½.

required rate of return:
The minimum return needed on an investment portfolio to achieve a financial goal within a stated amount of time.

retirement earnings test:
The Social Security formula for reducing or eliminating the benefit payable if the beneficiary is below full retirement age and is earning more than a certain amount from employment.

reverse mortgage:
A contract with a lending institution that gives a homeowner retirement income by borrowing against the equity in the home, with no repayment needed while the individual is living in the home.

risk tolerance:
An investor’s ability or willingness to endure declines in the prices of investments while waiting for them to increase in value.

rollover:
At retirement or end of service, an employee may roll his or her portion of a pension account into an IRA account without paying current income taxes or penalties.

Roth IRA:
An individual retirement account that is funded with after-tax dollars and grows tax-free until money is withdrawn tax-free after age 59½.

safe withdrawal rate (SWR):
The annual rate at which people can withdraw funds and not be expected to run out of money.

Securities and Exchange Commission (SEC):
The agency of the federal government that regulates mutual funds, registered investment advisers, the stock and bond markets, and broker-dealers.

SEP-IRA:
A retirement plan used by small businesses and sole proprietors to shelter income from taxes.

short-term capital gain:
A profit on the sale of a security or mutual fund share that has been held for one year or less. A short-term capital gain is taxed as ordinary income.

SIMPLE IRA:
A retirement plan used by some small companies but now rarely by sole proprietors.

single-premium immediate annuity (SPIA):
See SPIA.

solo 401(k):
A retirement plan used by sole proprietors. Also available as a Roth solo 401(k).

SPIA (single-premium immediate annuity):
Customarily, a fixed annuity that pays out for the life of the annuitant or annuitants. Also known as an immediate income annuity, income annuity, fixed annuity, and lifetime payout immediate annuity.

spread:
For stocks and bonds, the difference between the bid price and the asked price.

Standard and Poor’s (S&P):
One of five agencies (A. M. Best Company, Fitch Ratings, Moody’s Investors Service, Standard & Poor’s, and Weiss Research) that issue letter-grade ratings of insurers’ financial strength.

standard deviation (
σ
):
A measure of the degree to which a fund’s return varies from its previous returns or from the average of all similar funds. The larger the standard deviation, the greater the likelihood (and risk) that a security’s performance will fluctuate from the average return.

state guaranty association:
A consortium of insurance companies, organized and regulated by state law, that protects policyholders if their insurance company becomes insolvent.

substantially equal periodic payments (SEPP):
An IRS-established program that allows withdrawals from IRAs penalty-free, starting at any age.

survivor rights:
When you die, your spouse continues to receive a portion of your pension. This right can be waived if both parties agree.

target date fund:
See life cycle fund.

taxable account:
An account subject to ordinary income tax each year. Includes personal, joint, trust, and custodial accounts.

taxable equivalent yield:
The return from a higher-paying but taxable investment that would equal the return from a tax-free investment. It depends on the investor’s tax bracket.

tax-advantaged account:
Investment accounts that are either deferred from taxes until assets are withdrawn or free from any taxation upon normal withdrawal.

tax bracket:
IRS tax tables that state the level of tax you must pay on the next dollar earned based on your total taxable income.

tax credit:
A tax benefit that reduces your taxes by a fixed amount.

tax-deferred account:
An account that delays the payment of income taxes on investment gains until the money is withdrawn.

tax-exempt bond:
A bond issued by municipal, county, or state governments, whose interest payments are not subject to federal and, in some cases, state and local income tax.

tax-free account:
All interest, dividends, and capital gains earned in a tax-free account are not subject to income tax now or in the future. An example is a Roth IRA.

tax-loss harvesting:
Selling a security that has declined in value in order to deduct the capital loss from taxable income, but with the intention of remaining invested. The investor could either buy back the same security after 31 days to avoid a wash sale or buy a similar security immediately.

tax swapping:
Creating a tax loss by the simultaneous sale of one fund and purchase of a similar fund; one method of tax-loss harvesting.

term certain (also guaranteed period, period certain):
A specified period of time, such as 10 years, during which an annuity is guaranteed to make payments, if not to the annuitant, then to the annuitant’s beneficiary or estate.

thrift savings plan (TSP):
The defined-contribution plan offered to employees of the U.S. government, both civilian and military.

total return:
A percentage change, over a specified period, in a mutual fund’s net asset value, with the ending net asset value adjusted to account for the reinvestment of all distributions of dividends and capital gains.

traditional IRA:
An individual retirement account (IRA) in which the earnings and pretax contributions are taxable when withdrawn after age 59½. Contributions can be deductible (pretax) or nondeductible (after-tax).

transaction fee (also known as a commission):
A charge assessed by an intermediary, such as a broker-dealer or bank, for assisting in the sale or purchase of a security.

Treasury inflation-protected security (TIPS):
A U.S. government debt obligation whose payments of principal and interest increase over time in proportion to the rate of inflation, based on the consumer price index.

Treasury security:
A negotiable debt obligation issued by the U.S. government for a specific amount and maturity. Treasury securities include bills (one year or less), notes (1 to 10 years), and bonds (more than 10 years).

trust:
Special term used to describe a wide range of vehicles used to own property. They are used when a person wants to put restrictions or controls on property during and after death. Trusts do not save you money on income taxes but can reduce estate taxes.

turnover rate:
The amount of trading activity in a portfolio or mutual fund expressed as a percentage.

unit investment trust (UIT):
An SEC-registered investment company that purchases a fixed, unmanaged portfolio of income-producing securities and then sells shares in the trust to investors, usually in units of at least $1,000. Usually sold by an intermediary such as a broker.

unrealized capital gain/loss:
An increase (or decrease) in the value of a security that is not real because the security has not been sold. Once a security is sold by the portfolio manager, the capital gains/losses are realized by the fund, and any payment to the shareholder is taxable during the tax year in which the security was sold.

variable annuity (VA):
An annuity whose payment is not a dollar value set in advance by contract but is linked to the performance of an underlying investment, often a stock portfolio.

volatility:
The degree of fluctuation in the value of a security, mutual fund, or index, often expressed as a mathematical measure such as a standard deviation or beta. The greater the volatility, the wider the fluctuation between high and low prices.

wash sale rule:
The IRS regulation that prohibits a taxpayer from claiming a loss on the sale of an investment if that investment, or a substantially identical investment, is purchased within 30 days before or after the sale.

Weiss Research:
One of five agencies (A. M. Best Company, Fitch Ratings, Moody’s Investors Service, Standard & Poor’s, and Weiss Research) that issue letter-grade ratings of insurers’ financial strength.

will:
Basic estate planning document that controls the distribution of assets when you die and names an executor of your estate.

windfall elimination provision:
The Social Security provision for reducing a person’s benefit as a retired worker if that individual also earned a government pension from work that was not covered by Social Security.

yield to maturity:
The rate of return an investor would receive if the securities held by a portfolio were held to their maturity dates.

Taylor Larimore
(Miami, FL), CCL, has been dubbed by
Money
magazine as “the Dean of the Vanguard Diehards,” and John (Jack) Bogle himself calls Taylor “The King of the Bogleheads.” Now 85 and retired, he is a Boglehead to the core. He regularly spends hours per day answering questions for free on the
bogleheads.org
forum and, in doing so, regularly preaches the investment religion of Saint Jack. In his mind, his wealth is a direct result of following the time-tested investment wisdom of Bogle, the founder and retired chairman of the Vanguard Group. A graduate of the University of Miami’s School of Business Administration, Taylor served as a World War II paratrooper in the 101st Airborne Division during the Battle of the Bulge, earning five combat decorations. An avid sailing enthusiast, Taylor was named the American Sailing Association’s Instructor of the Year. Throughout his career, Taylor worked as a life insurance underwriter, revenue officer for the Internal Revenue Service, chief of the financial division for the Small Business Administration in South Florida, and a director of the Dade County Housing Authority. In 1986 Taylor became inspired when reading about the life and teachings of Jack Bogle. Combining his financial experience with Mr. Bogle’s research and advice, Taylor and his wife, Pat, saw their portfolio improve dramatically. Taylor now spends his time sailing and helping others discover the Boglehead way on the Bogleheads forum.

 

Mel Lindauer,
CFS, WMS (Daytona Beach Shores, FL) was dubbed “The Prince of the Bogleheads” by Jack Bogle. He’s one of the leaders of the
bogleheads.org
forums, and has contributed nearly 23,000 posts, helping investors learn the Boglehead way to invest. A former Marine, he started investing in the late 1960s and has firsthand experience with both bull and bear markets. Together with Taylor, he initiated and continues to organize the grassroots Diehards’ annual meetings. He’s been quoted in a number of newspapers and magazines and has appeared on CNN-fn. Retired since 1997, he was founder and former CEO of a successful graphic arts company in the Philadelphia area for 30 years. Since retirement, he has earned credentials as a Certified Fund Specialist from the Institute of Business and Finance and as a Wealth Management Specialist from Kaplan College. He also holds commercial pilot and flight instructor licenses, and was commissioned a Kentucky Colonel by the Governor of his former home state of Kentucky.

 

Richard Ferri,
CFA (Troy, MI) is a key member of the growing Bogleheads braintrust and the founder and CEO of the investment firm Portfolio Solutions, LLC. Rick, as he likes to be called, worked at two major Wall Street firms for 10 years before starting Portfolio Solutions in 1999. His company manages close to $1 billion in separate accounts for individual investors utilizing low-cost ETFs and index funds in prudent asset allocation strategies. Rick earned a bachelor of science degree in business administration from the University of Rhode Island and a master of science degree in finance from Walsh College. He also holds the designation of Chartered Financial Analyst (CFA) from the CFA Institute in Charlottesville, Virginia. Rick is the author of five books on low-fee investing, including
The ETF Book: All You Need to Know about Exchange-Traded Funds, All About Index Funds
, and
All About Asset Allocation
. Rick was a fighter pilot in the United States Marine Corps prior to joining the investment industry in 1988, and is retired from the Marine Corps Reserves.

 

Laura F. Dogu
is a longtime poster on the Bogleheads forum who participated as an investment panelist during the last two Diehard meetings. With more than 4,000 posts, she was named “The Queen of the Bogleheads” in recognition of her efforts researching topics for the many Diehards who need assistance. Focusing on helping new investors develop a low-cost, tax-efficient, broadly diversified portfolio, she wrote the main investment planning post for new members and also developed the structure used by new posters requesting a portfolio review. In addition to her other career as a Boglehead, Laura F. Dogu is a career Foreign Service Officer with the Department of State, which she joined in 1991. Prior to joining the Department of State she worked for IBM for five years. Dogu earned a bachelor of business administration, a bachelor of arts, and a masters of business administration from Southern Methodist University. She also earned a Masters of Science in National Resource Strategy from the Industrial College of the Armed Forces, National Defense University.