Glossary of Terms

A 401(k) plan is a retirement account that a company sets up on behalf of its employees. Both the participant and the employer can contribute to the account.

There are two types of 401(k)s, traditional and Roth. Income invested in traditional 401(k)s isn’t taxed while it’s invested, but is taxed when it’s withdrawn. Income invested in a Roth 401(k) is taxed before it’s invested, but no tax is paid when it is withdrawn.

501(C)(3) is an IRS code for tax-exempt nonprofit organizations and charities. Donations made to such organizations may be deducted from your taxes.

Legal documents containing your wishes for medical care if you are no longer capable of making decisions yourself.

A financial instrument that pays the holder a guaranteed stream of payments. The annuity is funded by either a lump sum (one-time) or a series of deposits. Once funded, the sum is invested by the insurance company who sold the annuity (the accumulations phase). After a certain trigger (for example, the holder’s retirement or reaching a certain age) payments begin to be issued to the holder (annuitization phase). Annuity payments may be fixed or variable in both amount and in length (some pay out for a designated span of years, others until the holder’s death).

A period in which stock prices decline significantly from recent highs and remain below previous high marks for weeks or months. Generally, a decline of at least 20% in stock prices is considered the threshold marking the start of a bear market.

A financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates.

An accountant’s estimate of the value of the assets of the company, minus its liabilities. This differs from a company’s market value, which is the prevailing market rate that investors will pay to own the company.

A period during which stock prices rise significantly from recent lows for weeks, months or years.

A legal document verified by a medical professional and issued by the government stating when a person died.

A financial instrument whose value is tied to the value of another financial instrument, for example, a contract which gives the purchaser the right to buy a certain commodity at a certain price on a date in the future.

A strategy for managing investment risk by investing in a mixture of different investments. Since different asset classes face different risks, even if one type of asset declines in value, others may not.

A cash payment to investors who own stock in the company.

A legal document authorizing a third party to handle your legal and financial needs if you are incapacitated.

The amount of money that would be returned to shareholders if a company’s assets were sold off and all its debt repaid.

ESG stands for Environmental, Social and Governance, an alternative set of criteria used to evaluate a company’s impact on society. In addition to traditional metrics such a profitability, risk, and sector weighting, the managers of ESG funds may also weigh a company’s contribution to global warming, the labor conditions of its workers, or whether its board is exercising adequate oversight over a company’s executives.

An estate executor is responsible for administering your estate after your death, and has a fiduciary obligation to act in the best interests of your beneficiaries. Other titles for this role include estate administrator, personal representative or trustee (for trusts).

A type of security which allows investors to indirectly invest in an underlying basket of financial instruments (these may include stocks, bonds, commodities or other types of instruments). Shares in an ETF are publicly traded on an exchange, and the price of an ETF’s shares will fluctuate throughout the trading day (traditional mutual funds trade only once a day). For example, one popular ETF tracks the companies in the S&P 500, so buying a share of the ETF gets an investor exposure to all 500 companies in the index.

A person or organization who manages assets for a third party, and is legally bound to act in the best interests of that third party, putting the third party’s interest before their own.

Legally or ethically obligated to act in the best interests of another person.

The creator of a trust who owns the assets to be transferred.

A stock whose issuing company is expected to grow at a significantly higher rate than the market.

A document authorizing a patient’s health records to be disclosed to authorized third parties.

A legal document that allows an heir to waive their right to an inherited asset or property. Would-be beneficiaries would use an inheritance tax waiver to avoid the tax burdens that come with inherited assets or avoid maintaining an overly burdensome property, for example.

The length of time that an investor expects to hold an asset.

A type of account in which funds can be saved and invested without being subject to tax until the account holder reaches retirement age.

Liabilities are calculated by adding up your existing debts (mortgage, car loans, student loans, credit cards, etc.).

The ease with which an asset can be bought or sold. Assets for which there are many buyers and sellers at any given time are highly liquid (for example, a stock which trades on a public exchange). Assets which trade rarely are illiquid (for example, a Picasso painting or a high-end home).

Intended to prevent people from giving away money and resources in order to qualify for Medicaid. For example, if you apply for Medicaid on October 31, 2021, the look-back period goes back to October 31, 2016 in most states. Applicants may face penalties of delayed Medicaid benefits if they gave away assets or sold them below market value during the look-back period—assets that could have otherwise been used to help pay for their long-term care.

An annuity purchased with after-tax income rather than in a retirement account. Earnings are taxed as income upon withdrawal; the principal is not taxed.

A state-appointed official who attests or certifies legal documents, particularly witnessing signatures, as a fraud deterrent.

A required minimum distribution is the amount of money that must be withdrawn each year from tax-deferred retirement accounts once the beneficiary reaches retirement age (72, according to IRS rules).

The probability that an investment will decline in value in the short term, along with the magnitude of that decline. Stocks are often considered riskier than bonds because they have a higher probability of losing money, and they tend to lose more than bonds when they do decline.

The amount of loss an investor is willing to absorb in their investment portfolio.

The process of transferring funds from one retirement account to another, typically without incurring a tax.

An alternative to the lengthier probate process, typically used when the decedent passes away without significant assets to distribute.

An estate-planning tool that allows beneficiaries with a disability or additional needs to retain assets while still receiving government benefits like Medicare or Supplemental Security Income, even if the inherited amount puts them over those programs’ income limits.

A financial instrument giving the holder a proportion of the ownership and earnings of a company.

The person who assumes management of a living trust following the death of the original grantor.

A person’s ability to create or change a legally valid will and mental capacity to understand the nature and extent of what they own.

A trust contained in a last will and testament that becomes effective upon death. Aka a will trust or a trust under will.

The deceased person who created the will in effect at the time of death.

A document demonstrating legal ownership of property or assets.

A legal document that functions as an instruction manual to how you want your money managed and spent in your later years as well as how your assets should be distributed after your death. Assets placed in a trust are generally safe from creditors and can be sold by the trustee in short order, avoiding the lengthy and costly probate process.

A stock that is statistically cheap as a multiple of its earnings or book value, as compared to the overall stock market.

A measure of how large the changes in an asset’s price are. The more volatile an asset, the more likely that its price will experience sharp rises and steep drops over time. The more volatile an asset is, the riskier it is to invest in.

A physical signature on a paper document (as opposed to a digitally signed version).

Yield is a measure of the income on an investment in relation to the price. There are several ways to measure yield. The current yield of a security is the income over the past year (either dividends or coupon payments) divided by the current price.