Annuity – a financial product, usually offered by an insurance company, that offers a series of payments over an individual’s lifetime. Immediate annuities begin payments to the annuity owner shortly after purchase. A deferred annuity has a savings phase, in which the money you put into the annuity earns interest, and an income phase, in which your account becomes an annuitized series of lifetime payments.
Bond – a financial product offered by a corporation or government entity. Bonds are debt obligations for the issuer. Bonds have either a variable or fixed rate of return over their lifetime. They are generally safer investments than stocks, though on average they have lower rates of return. Bonds offered by the U.S. Treasury have minimal investment risk, although they may be exposed to inflation risk and interest risk.
Cash balance plan – a plan that is defined by law as a defined benefit plan, but has some of the features of a defined contribution plan, particularly the use of individual accounts, although the accounts are virtual and used merely for accounting purposes.
COLA (Cost of Living Adjustment) – used by defined benefit plan sponsors to counteract the effects of inflation, COLAs increase benefit payments by a certain percentage, although the increase does not necessarily meet or exceed the CPI.
CPI (Consumer Price Index) – a measure of inflation that is calculated from the change in price of a basket of goods from one period to the next.
Defined benefit plan – a retirement plan in which a member’s benefits are based on a preset calculation – it is typically the product of service length, annual salary (in the case of NC retirement systems, the average of the four years of highest salary) and a multiplier. Traditional defined benefit plans, also called pensions, pay a series of benefits over the retiree’s lifetime.
Defined contribution plan – under these plans, the member holds an individual account and has some degree of flexibility over how the assets are invested. Upon retirement, the member typically receives his or her account in a lump sum, though the funds can be re-invested or used to purchase an annuity. Defined contribution plans, such as 401(k) and 457(b) plans, are named and defined by the IRS code which governs them.
Equities – shares of stock in a company.
Home equity – the market value of your home minus any outstanding debt for that home. Home equity increases as homeowners pay off their mortgage and the home appreciates in value.
Inflation – the rise in aggregate consumer prices that leads to a decline in the purchasing power of the $ from one period to the next.
Inflation risk – the risk that inflation will increase during an individual’s retirement years, reducing the purchasing power of retirement income.
Investment risk – the risk that an individual investment loses value (non-systematic risk) or that the entire market experiences a downturn (systematic risk). Diversifying a portfolio of investments is a way to address non-systematic risk.
IRA (Individual Retirement Account) – a retirement savings vehicle that is governed by the IRS code and offers certain tax advantages. Detailed information can be found in this IRS publication.
Longevity insurance – usually purchased around retirement age; a type of deferred annuity in which the income phase is deferred to around age 85.
Longevity risk – the risk that a retiree will outlive his or her assets.
Medicare – a Federal health insurance program that those ages 65 or older (and other excepted individuals) are eligible for. It consists of the following parts:
· Part A: insurance for hospital services
· Part B: insurance for doctor’s visits and outpatient procedures
· Part C: Medicare Advantage Plans (includes part A & B) that are run by private carriers and typically include prescription drug coverage and other supplemental insurance
· Part D: Prescription drug coverage
Medigap – supplemental insurance purchased from a private insurance provider that covers medical costs not covered by Medicare.
Rate of return – the percentage of money earned on an investment over a period of time. For example, if an investor buys $100 worth of a stock at the beginning of a period and earns $10 (the return) on that stock by the end of the period, then the rate of return is 10% (10/100). The rate of return can be positive (gain) or negative (loss). The real rate of return is the rate of return minus the inflation rate.
Replacement rate – the ratio of post-retirement income to pre-retirement income. An adequate replacement rate will be one in which the retiree has enough post-retirement income to meet his or her needs.
Reverse mortgage – home equity that is converted into a lump sum payment or series of payments to the homeowner. Reverse mortgages are typically available only to those over age 62. A reverse mortgage is a loan and must be paid back once the homeowner is deceased or no longer uses the residence.
Stock – a financial product which guarantees a share of ownership in a company. Stocks have rates of return that are dependent upon the company’s performance. Shares of stock in a company are also called equities.
TIPS (Treasury Inflation-Protected Securities) – financial products issued by the United States Treasury that adjust the principal of the security with changes in the CPI.
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