Retirement Planning Glossary: Terms You Need to Know

401(k)

An employer-sponsored retirement savings plan that allows employees to contribute pre-tax dollars from their paycheck. Contributions grow tax-deferred, and taxes are paid upon withdrawal in retirement. Many employers match a portion of employee contributions. In 2026, the annual contribution limit is $23,500 ($31,000 for those 50 and older).

403(b)

Similar to a 401(k), but offered by public schools, nonprofits, and certain other tax-exempt organizations. The contribution limits and tax treatment are essentially the same.

Annuity

A contract with an insurance company in which you make a lump sum payment or series of payments in exchange for regular disbursements beginning immediately or at a future date. Annuities can provide guaranteed income for life, making them a powerful tool for managing longevity risk in retirement.

Asset Allocation

The distribution of your investment portfolio across different asset classes — stocks, bonds, real estate, cash — to balance risk and return. Your ideal asset allocation typically shifts over time, becoming more conservative as you approach and enter retirement.

Compound Interest

Earning interest on both your original principal and the interest already accumulated. Over long time horizons, compounding is the most powerful force in wealth building. A dollar saved at 25 is worth far more at 65 than a dollar saved at 45.

Defined Benefit Plan (Pension)

A retirement plan in which the employer promises a specific monthly benefit in retirement, typically based on years of service and salary history. The employer bears the investment risk. Pensions are less common in the private sector today but remain prevalent in government employment.

Defined Contribution Plan

A retirement plan (like a 401(k) or 403(b)) in which the employee contributes a defined amount, and the final benefit depends on how much was contributed and how the investments performed. The employee bears the investment risk.

IRA (Individual Retirement Account)

A personal retirement savings account with tax advantages. Traditional IRAs offer a potential tax deduction on contributions, with taxes paid on withdrawals. Roth IRAs use after-tax contributions, with tax-free qualified withdrawals. Contribution limits in 2026 are $7,000 per year ($8,000 if 50 or older).

Longevity Risk

The risk of outliving your retirement savings. As life expectancies increase, longevity risk has become one of the central challenges in retirement planning. Annuities, Social Security optimization, and conservative withdrawal strategies are common tools for managing it.

Required Minimum Distribution (RMD)

The minimum amount the IRS requires you to withdraw annually from traditional IRAs and employer-sponsored retirement plans beginning at age 73. RMDs are calculated based on your account balance and IRS life expectancy tables. Failure to take your RMD results in a 25% excise tax on the amount not withdrawn.

Roth Conversion

The process of moving funds from a traditional IRA or 401(k) into a Roth IRA. You pay income taxes on the converted amount in the year of conversion, but future growth and qualified withdrawals are tax-free. Roth conversions are a common strategy for managing taxes in retirement, particularly in years when your income is lower than usual.

Sequence of Returns Risk

The risk that poor investment returns early in retirement — when you are drawing down your portfolio — can permanently impair your financial security, even if long-term average returns are acceptable. A major market decline in the first few years of retirement is far more damaging than the same decline later, because you are selling assets at depressed prices to fund living expenses.

Social Security Full Retirement Age (FRA)

The age at which you are entitled to 100% of your calculated Social Security benefit. For anyone born in 1960 or later, the FRA is 67. Claiming before your FRA permanently reduces your benefit; delaying past your FRA increases it by 8% per year up to age 70.

Vesting

The process by which an employee earns the right to employer contributions in a retirement plan over time. Immediate vesting means you own employer contributions right away. Cliff vesting means you own nothing until a specific date, then own 100%. Graded vesting means you earn ownership gradually over several years.