Definition An annuity is a financial product designed to provide a steady stream of income, typically used for retirement planning. When you purchase an annuity, you make a lump-sum payment or a series of payments to an insurance company, which then promises to make periodic payments back to you at a later date. This can be a great way to secure your financial future and ensure you have a reliable income during your retirement years.
Definition A Cash Balance Plan is a type of employer-sponsored retirement plan that combines elements of both defined benefit and defined contribution plans. Unlike traditional defined benefit plans, where the retirement benefit is determined by a formula based on salary and years of service, Cash Balance Plans define benefits in terms of individual account balances. Each employee has a hypothetical account that grows annually based on a specified interest crediting rate and contributions determined by the employer.
Definition A Defined Benefit Pension Plan is a type of employer-sponsored retirement plan that guarantees a specific retirement benefit to employees based on a predetermined formula. This formula generally considers factors such as the employee’s salary history, years of service and age at retirement. Unlike defined contribution plans (e.g., 401(k)), where the final benefit depends on investment performance, a defined benefit plan provides a fixed, predictable income in retirement, which is usually paid out as a monthly annuity.
Definition Financial independence is the state of having enough income to cover one’s living expenses without needing to actively work for a living. It represents a goal for many individuals seeking to gain control over their lives and finances. This independence can be achieved through a combination of savings, investments and passive income streams, allowing individuals to live life on their own terms. Components of Financial Independence Achieving financial independence typically involves several key components:
Definition Index fund investing is a strategy where investors purchase mutual funds or exchange-traded funds (ETFs) designed to replicate the performance of a specific market index. This approach allows investors to gain exposure to a broad array of securities without needing to select individual stocks. Index funds are known for their low fees, tax efficiency and historically reliable returns. Key Components of Index Funds Market Index: A benchmark that tracks the performance of a specific segment of the market, such as the S&P 500 or the Dow Jones Industrial Average.
Definition An Individual Retirement Account (IRA) is a tax-advantaged investment tool designed to help individuals save for retirement. IRAs can be established at a financial institution, allowing investors to hold a range of assets, including stocks, bonds, ETFs and mutual funds. Importance of IRAs IRAs offer significant tax benefits that can accumulate over time, helping to maximize retirement savings. They are critical for financial planning, especially for those without access to employer-sponsored retirement plans.
Definition A Keogh Plan, also known as an HR-10 plan, is a tax-deferred retirement savings plan designed for self-employed individuals and unincorporated businesses, such as sole proprietorships and partnerships. The Keogh Plan allows for significant contributions, enabling business owners and their employees to save for retirement while enjoying tax advantages. Importance of Keogh Plan The Keogh Plan is particularly important for self-employed individuals and small business owners who want to maximize their retirement savings while benefiting from tax deductions.
Definition A Money Purchase Pension Plan (MPPP) is a type of employer-sponsored retirement plan that requires fixed contributions to be made by the employer, usually expressed as a percentage of an employee’s salary. Unlike other pension plans that may have benefits tied to the employer’s financial performance, MPPPs offer a more predictable savings approach for retirement, as the contributions are predetermined. Components of a Money Purchase Pension Plan Employer Contributions: Employers are required to make annual contributions to the plan, which is usually a fixed percentage of each participating employee’s salary.
Definition A pension fund is a type of investment pool that collects and manages funds contributed by employers and employees to provide retirement income. Essentially, it serves as a safety net, ensuring that individuals have a reliable source of income once they retire. The money is invested in various assets to grow over time, providing a sustainable income stream for beneficiaries. Components of a Pension Fund Understanding the components of a pension fund can help decipher how they operate:
Definition A Rollover IRA is an individual retirement account designed to receive and hold funds rolled over from an employer-sponsored retirement plan, such as a 401(k), 403(b) or 457 plan. This allows individuals to consolidate their retirement savings into a single account while preserving the tax-deferred status of the funds. Rollover IRAs offer a wide range of investment options and greater control over retirement assets. Importance of Rollover IRA Rollover IRAs are important for individuals who are changing jobs, retiring or simply looking to consolidate their retirement accounts.