Glossary
The words, in plain English.
Sequence-of-returns risk
Sequence-of-returns risk is the danger that poor investment returns early in retirement, combined with ongoing withdrawals, permanently damage a portfolio. The same set of returns arriving in a different order can mean running out of money or finishing with plenty. It matters most in the first five to ten years.
Volatility drag
Volatility drag is the gap between a portfolio's average annual return and what it actually compounds to. Because a loss requires a larger percentage gain to recover from, bumpier returns compound to less than smoother ones with the same average. The wider the swings, the bigger the gap.
Time segmentation
Time segmentation is a retirement income approach that divides savings into consecutive time periods — often five-year segments — and invests each one according to when it will be spent. Near-term segments are held in stable assets, later segments in growth assets, because they have decades before they are needed.
The 4% rule
The 4% rule is a guideline suggesting a retiree can withdraw 4% of their portfolio in the first year of retirement, then adjust that amount for inflation annually, with a low chance of running out over 30 years. It came from historical research, not from any individual's plan.
Safe withdrawal rate
A safe withdrawal rate is the percentage of a portfolio a retiree can take each year with a high probability of the money lasting. It is a probability estimate produced by a model, not a guarantee, and it is highly sensitive to the assumptions behind it.
Tax-loss harvesting
Tax-loss harvesting means selling an investment in a taxable account that has fallen below its purchase price to realize a loss, then immediately buying something similar to stay invested. The realized loss offsets capital gains and, up to an annual limit, ordinary income.
Concentrated stock position
A concentrated stock position is a single holding large enough that its performance materially affects your whole financial picture — commonly more than 10% to 20% of investable assets. It usually accumulates through equity grants, purchase plans, or an acquisition rather than through a deliberate decision.
Required minimum distribution (RMD)
A required minimum distribution is the amount you must withdraw each year from most tax-deferred retirement accounts once you reach the age set by law. The amount is calculated from your balance and life expectancy, and failing to take it triggers a penalty.
Roth conversion
A Roth conversion moves money from a tax-deferred account into a Roth account, and you pay income tax on the converted amount in the year you do it. In exchange the money grows tax-free, is withdrawn tax-free, and is not subject to required minimum distributions for you.
Social Security claiming age
Your Social Security claiming age is when you start benefits, and it permanently changes the monthly amount. Claiming at 62 reduces it, waiting past full retirement age increases it by roughly 8% a year up to 70. For someone with a full retirement age of 67, the range runs from about 70% to 124% of the full benefit.
Asset location
Asset location is deciding which type of account holds each investment, so the same portfolio produces a better after-tax result. Assets that generate ordinary income usually belong in tax-deferred accounts; assets with favorable long-term treatment often belong in taxable ones. It is different from asset allocation.
Bond ladder
A bond ladder is a set of bonds bought with staggered maturity dates, so a portion matures each year. Held to maturity, each bond returns its face value on a known date regardless of what interest rates did in between — which makes it useful for funding income you need on a schedule.
Covered call
A covered call is selling someone the right to buy stock you already own at a set price by a set date, in exchange for a premium today. It generates income and cushions small declines, but caps your upside — if the stock rises past the strike, your shares are sold at that price.
IRMAA
IRMAA is the Income-Related Monthly Adjustment Amount — a surcharge added to Medicare Part B and Part D premiums when income exceeds set thresholds. It is based on your tax return from two years earlier, and it works as a cliff: one dollar over a threshold moves you into the higher tier.
Qualified charitable distribution (QCD)
A qualified charitable distribution sends money directly from an IRA to a charity after you reach the eligible age. The amount counts toward your required minimum distribution but never appears in your taxable income — which is better than taking the money and deducting the gift.
Roth conversion ladder
A Roth conversion ladder is a series of partial conversions across several years, each sized to fill a tax bracket without crossing into the next. Spreading the conversion out keeps the tax rate low, where converting everything at once would push a large amount through the highest brackets.
Pension lump sum vs. annuity
At retirement many pensions offer a choice: a single lump sum, or a monthly payment for life. They are genuinely different products. The annuity transfers longevity risk to the plan; the lump sum keeps flexibility and inheritance but leaves you managing the income yourself.
Longevity risk
Longevity risk is the possibility of outliving your money. It is the risk that makes every other retirement risk matter: a market decline is survivable over ten years and potentially ruinous over thirty. Planning to average life expectancy leaves roughly half of people short.
Inflation risk in retirement
Inflation risk is the erosion of what your income can buy. At 2.5% a year, money loses nearly half of its purchasing power over 25 years — so an income that is comfortable at 65 may not be at 90. Fixed payments with no cost-of-living adjustment carry this risk entirely.
Fee-based vs. commission
A fee-based advisor is paid a percentage of the assets they manage, so their revenue rises and falls with your balance. A commission-based advisor is paid by the product provider when you buy something. The difference determines whose interest the advice is aligned with by default.
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