Glossary
Key terms and concepts used in retirement planning and our methodology.
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4% Rule
A retirement withdrawal guideline suggesting you can withdraw 4% of your portfolio in the first year of retirement, then adjust for inflation annually, with a high probability of not running out of money over 30 years. Based on the Trinity Study.
A
Asset Allocation
The distribution of investments across different asset classes (stocks, bonds, cash, real estate) to balance risk and return based on your goals, risk tolerance, and time horizon.
B
Bond Tent
A strategy of temporarily increasing bond allocation in the years just before and after retirement, then gradually returning to a higher stock allocation. Designed to reduce sequence of returns risk during the critical early retirement years.
C
CAPE Ratio
Cyclically Adjusted Price-to-Earnings ratio, also known as Shiller PE. Measures stock market valuation by comparing current prices to average inflation-adjusted earnings over the past 10 years. Higher values historically correlate with lower future returns.
D
Drawdown
The peak-to-trough decline in portfolio value during a specific period. Maximum drawdown measures the largest percentage drop from a peak before a new peak is reached. Important for understanding downside risk.
F
FIRE
Financial Independence, Retire Early. A movement focused on extreme savings and investment to achieve financial independence and optional early retirement, often targeting a 50-70% savings rate.
G
Glide Path
A gradual shift in asset allocation over time, typically moving from higher-risk investments (stocks) to lower-risk investments (bonds) as you approach or progress through retirement.
Guardrails Strategy
A flexible withdrawal approach that sets upper and lower bounds around a base withdrawal rate. If portfolio performance pushes withdrawals outside these guardrails, you adjust spending up or down to stay within sustainable limits.
I
Inflation Adjustment
Increasing withdrawal amounts or projections to maintain purchasing power as prices rise. Typically based on CPI (Consumer Price Index) or a fixed assumed inflation rate.
M
Monte Carlo Simulation
A computational technique that runs thousands of possible scenarios using randomized inputs to model uncertainty. In retirement planning, it generates many possible market return sequences to estimate the probability of different outcomes.
R
Rebalancing
Periodically adjusting your portfolio back to your target asset allocation by selling assets that have grown beyond their target weight and buying those that have fallen below. Can be done on a schedule or when allocations drift beyond thresholds.
S
Safe Withdrawal Rate (SWR)
The percentage of your portfolio you can withdraw annually with a high probability of not depleting your savings over a specified period. The historically cited 4% rate assumes a 30-year retirement with a balanced portfolio.
Sequence of Returns Risk
The risk that poor investment returns early in retirement will permanently impair your portfolio, even if average returns over the full period are acceptable. Early losses combined with withdrawals can create an unrecoverable deficit.
Success Rate
In Monte Carlo analysis, the percentage of simulated scenarios where your portfolio lasted through your entire retirement period without being depleted. A 95% success rate means 95 out of 100 simulations ended with money remaining.
T
Tax-Deferred
Accounts like Traditional IRAs and 401(k)s where contributions may be tax-deductible and growth is not taxed until withdrawal. Withdrawals in retirement are taxed as ordinary income.
Tax-Exempt
Accounts like Roth IRAs and Roth 401(k)s where contributions are made with after-tax money but qualified withdrawals (including growth) are completely tax-free in retirement.
Trinity Study
A 1998 academic paper that analyzed historical data to determine sustainable withdrawal rates. Found that a 4% initial withdrawal rate with inflation adjustments had a high success rate over 30-year periods with a balanced stock/bond portfolio.
V
Variable Percentage Withdrawal (VPW)
A dynamic withdrawal strategy that adjusts annual withdrawals based on portfolio value, remaining life expectancy, and asset allocation. Withdrawals increase when markets are up and decrease when down.
Social Security
A U.S. government program providing retirement income based on your earnings history. Benefits can be claimed between ages 62-70, with higher monthly amounts for delayed claiming. An important income floor for most retirees.