Glossary
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This benchmark index, also called the S&P 500®, tracks the performance of 500 widely held US large-capitalization companies in various sectors and industries. The companies included in the index and the number that represent each sector vary from time to time, at the discretion of the S&P index committee.
Changes in the stock price of companies with the largest market caps among the 500 that this capitalization-weighted index tracks have more influence on the movement of the index as a whole than changes in the stock price of smaller-cap companies. Capitalization, also called market value, is calculated by multiplying the number of floating shares times the current share price. -
S&P Global Ratings is an investment services company that rates bonds, stocks, commercial paper, and insurance companies. It also compiles influential stock market indexes and publishes a broad range of reports, guides, and handbooks on financial topics. The S&P 500® Index is one of the key measures of stock market performance and is also the benchmark for a large number of stock index funds. S&P® is a trademark of Standard & Poor's Financial Services LLC.
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A salary reduction plan is a type of employer-sponsored retirement savings plan. Typical examples are 401(k)s, 403(b)s, 457s, and SIMPLE IRAs. A salary reduction plan allows you, as an employee, to contribute some of your current income to a retirement account in your name and to accumulate tax-deferred earnings on those contributions.
In most plans, you contribute pretax income, which reduces your current income tax, and you pay tax at withdrawal at your regular rate. With Roth salary reduction plans, you contribute after-tax income but qualify for tax-free withdrawals if you are older than 59½ and your account has been open at least five years.
Your employer may match some or all of your contribution according to a formula that applies on an equal basis to all participating employees. All salary reduction plans have an annual contribution cap that's set by Congress, and allow annual catch-up contributions for participants 50 and older. -
A saver’s credit is an amount you can deduct from the federal income tax you owe when you file your income tax return for the previous year. To qualify for the credit, you must be at least 18, not currently a student, and are not being claimed as a dependent on anyone else’s return.
The amount of the credit, which depends on your Adjusted Gross Income (AGI) and filing status, is a percentage of contributions you make to an IRA, contributions you chose to make to an employer’s retirement savings plan, contributions to an ABLE account (for individuals with disabilities) for which you’re the designated beneficiary, and certain other plans. The maximum credit is $1,000 if you’re a single filer and $2,000 if you’re married and filing a joint return.
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Traditionally, a security was a physical document, such as stock or bond certificate, that represented your investment in that stock or bond. But with the advent of electronic recordkeeping, paper certificates have increasingly been replaced by electronic documentation. In current general usage, the term security refers to the stock, bond, or other investment product itself rather than to evidence of ownership.
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An insurance company's separate account is established to hold the premiums you use to purchase funds included in variable annuity contracts the company offers. The separate account is distinct from the company's general account, which holds the company's assets as well as premiums for fixed annuities and Interest Accumulation Account.
Assets in a company's separate account are not vulnerable to the claims of creditors, as assets in the general account are. But they can be affected by the ups and downs of the marketplace. Any gain or loss in value results from the investment performance of the investments in the separate account funds you select. -
Each variable annuity contract offers a number of separate account funds. Each of those funds owns a collection of individual investments chosen by a professional manager who is striving to achieve a particular objective, such as long-term growth or regular income.
You allocate your variable annuity premiums among different separate account funds offered in your contract to create a diversified portfolio of funds, sometimes called investment portfolios or subaccounts.
If you're comparing different contracts to decide which to purchase, among the factors to consider are the variety of funds each contract offers, the past performance of those funds, the experience of the professional manager, and the fees.
In evaluating the past performance and other details of the funds a contract offers, or the funds you are using in the contract you selected, you can use the prospectus the annuity company provides for each separate account fund. You may be able to find independent research on the funds from firms such as Morningstar, Inc., Standard & Poor's, and Lipper. -
A SIMPLE, short for Savings Incentive Match Plans for Employees, is an employer sponsored retirement savings plan that may be offered by companies with fewer than 100 employees. Employers must contribute to eligible employees' accounts each year in one of two ways. They can make a contribution equal to 2% of salary for every employee, or match dollar-for-dollar each employee's contribution to the plan, up to 3% of that employee's annual salary.
A SIMPLE may be set up by establishing an IRA in each employee's name or as a 401(k). Congress sets an annual dollar limit on the tax-deferred amount an employee may contribute, based on the type of SIMPLE it is. Contribution ceilings for SIMPLE-IRAs are lower than for other employer sponsored plans.
You may withdraw assets from a SIMPLE without penalty if you are 59½ or older and retired. And you must begin taking minimum required distributions by April 1 of the year following the year you turn 72 unless you're still working. Taxes are due on distributions at your regular tax rate. You may roll your assets over into another employer plan or an IRA if you leave your job for any reason or retire.
Two key differences between SIMPLEs and other employer plans are that your account must be open at least two years before you can withdraw or move the money, and the federal tax penalty for early withdrawal is 25% of the amount you take, rather than 10%. -
A SEP is a qualified retirement plan set up as an individual retirement annuity (IRA) in an employee's name. You can establish an SEP for yourself if you own a small business, or you may participate as an employee if you work for a company that sponsors such a plan. The federal government sets the requirements for participation, the maximum annual contribution limits, and the rules governing withdrawals.
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A single-sum distribution, also known as a lump-sum distribution, is a one-time payout of the balance of your defined benefit or defined contribution plan account. By electing the single-sum distribution, you give up your right to periodic income payments from the plan.
There are arguments for and against this approach. On the negative side, you face a significant tax bill, which will reduce the amount you have to reinvest or save. In addition, it becomes your responsibility to ensure that you’ll have adequate retirement income. On the positive side, if the plan sponsor is on uncertain financial ground, it often makes sense to access the full value of your account. In addition, in some cases, you may not be able to leave your account with a former employer, though a direct rollover to an IRA could be an alternative.
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Shares of relatively small publicly traded corporations with a total market capitalization of less than $3 billion are typically considered small-capitalization, or small-cap, stocks. Market capitalization is calculated by multiplying the market price per share by the number of outstanding shares.
Small-cap stocks, which are tracked by the Russell 2000 Index, tend to be issued by young, potentially fast-growing companies. Over the long term - though not in every period - small-cap stocks as a group have produced stronger returns than any other investment category. Mutual funds that invest in this type of stock are known as small-cap funds. -
A specialist or specialist unit is a member of a securities exchange responsible for maintaining a fair and orderly market in a specific security or securities on the exchange floor. Specialists execute market orders given to them by other members of the exchange known as floor brokers or sent to their post through an electronic routing system.
Typically, a specialist acts both as agent and principal. As agent, the specialist handles limit orders for floor brokers in exchange for a portion of their commission. Those orders are maintained in an electronic record known as the limit order book, or specialist's book, until the stock is trading at the acceptable price. As principal, the specialist buys for his or her own account to help maintain a stable market in a security.
For example, if the spread, or difference, between the bid and ask (the highest price offered by a buyer and the lowest price asked by a seller) gets too wide, and trading in the security hits a lull, the specialist might buy, sell, or sell short shares to narrow the spread and stimulate trading. But because of restrictions the exchange puts on trading, a specialist is not permitted to buy a security when there is an unexecuted order for the same security and the same price in the limit order book. -
A spending plan can help you manage your money more effectively, live within your income limits, reduce your reliance on consumer credit, and save for the things you want.
You create a spending plan, or budget, by dividing up your income so that it covers your regular expenses - both essential and nonessential. It's a good idea to include some income for your emergency fund-typically about three months of income-and ideally some for your investment account.
As a starting point, some people use what they spent the previous year to figure out their spending plan for the next year.
You may want to check the Bureau of Labor Statistics website (www.bls.gov) for the average nationwide expenditures for housing, food, and other costs. But you may have to modify that information to reflect local costs and your own situation. -
A split-funded annuity lets you begin receiving income from a portion of your principal immediately, while the rest of the money goes into a deferred annuity.
The advantage of split-funding is that you have the benefit of some income right away for immediate needs or wants, while the balance compounds tax deferred, allowing you to build your retirement assets.
One goal of a split-funded annuity is providing a larger future income when you begin to draw on the deferred portion than you would receive if you annuitized the entire principal now. -
In the most general sense, a spread is the difference between two similar measures. In the stock market, for example, the spread is the difference between the highest price offered and the lowest price asked.
With fixed-income securities, such as bonds, the spread is the difference between the yields on securities having the same investment grade but different maturity dates. For example, if the yield on a long-term Treasury bond is 6%, and the yield on a Treasury bill is 4%, the spread is 2%.
The spread may also be the difference in yields on securities that have the same maturity date but are of different investment quality. For example, there is a 3% spread between a high-yield bond paying 9% and a Treasury bond paying 6% that both come due on the same date.
The term also refers to the price difference between two different derivatives of the same class. For example, there should be a spread between the price of the October wheat futures contract and the January wheat futures contract. Part of that spread is known as the cost of carry. However, the spread widens and narrows, caused by changes in the market - in this case the wheat market. -
Stable value funds invest to provide capital preservation by maintaining a value of $1 per share. The funds achieve this objective by investing in a combination of short- and intermediate-term bonds, or bond funds plus insurance company contracts.
The insurance company contracts, sometimes described as wrappers, help to protect the fund assets against the potential risk of the return on the portfolio of bond investments turning negative. That can occur if interest rates rise, depressing the price of the bonds.
Even if the bond investments themselves have a negative return, the wrapper is meant to insure that the fund value does not drop below $1 and the crediting rate on fund assets will not be less than zero.
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State guaranty funds, which are offered in every state, protect contract owners against the insolvency of an insurance company that has issued insurance contracts including annuity contracts. However, each state's laws set different limits on benefits and coverage.
The guaranty funds are backed by an association of insurance companies, not the state or federal government. But all insurance companies in the state must belong and contribute to the fund in order to be licensed to sell their products. But if you buy your contract from a highly rated company, its financial strength and reputation stand behind your contract.
Rating services such as S&P Global, Ratings Moody's, AM Best, and Fitch rank insurance companies on their overall financial condition, which underlies their ability to meet their obligations. You can request these reports from the insurance company. They are also available in public libraries, on the Internet, and from your financial adviser. -
When you inherit assets, such as securities or property, they are stepped up in basis. That means the assets are valued at the amount they are worth when your benefactor dies, or as of the date on which his or her estate is valued, and not on the date the assets were purchased. That new valuation becomes your cost basis.
For example, if your father bought 200 shares of stock for $40 a share in 1965, and you inherited them when they were selling for $95 a share, they would have been valued at $95 a share. If you had sold them for $95 a share, your cost basis would have been $95, not the $40 your father paid for them originally. You would not have had a capital gain and would have owed no tax on the amount you received in the sale.
In contrast, if your father had given you the same stocks as a gift where there is no step up, your basis would have been $40 a share. So if you sold at $95 a share, you would have had a taxable capital gain of $55 a share (minus commissions). -
Stock is an equity investment that represents part ownership in a corporation and entitles you to part of that corporation's earnings and assets. Common stock gives shareholders voting rights but no guarantee of dividend payments. Preferred stock provides no voting rights but usually guarantees a dividend payment.
In the past, shareholders received a paper stock certificate - called a security - verifying the number of shares they owned. Today, share ownership is usually recorded electronically, and the shares are held in street name by your brokerage firm. -
The separate account funds to which you allocate your variable annuity premiums are sometimes called subaccounts. Each subaccount is managed by an investment specialist, or team of specialists, who make buy and sell decisions based on the subaccount's objective and their analysts' research.
If you're comparing different contracts to decide which to purchase, among the factors to consider are the variety of subaccounts each contract offers, the past performance of those subaccounts, the experience of the professional manager, and the fees.
In evaluating the past performance and other details of the subaccounts a contract offers, or those you select in the contract you choose, you can use the prospectus the annuity company provides for each subaccount. You may also be able to find independent research from firms such as Morningstar, Inc., Standard & Poor's, and Lipper. However, past performance is not indicative of future results. -
Each asset class - stocks, bonds, and cash equivalents, for example - is made up of a number of different groups of investments called subclasses. Each member of a subclass shares distinctive qualities with other members of the subclass.
For example, some of the subclasses of the asset class bonds are US Treasury bonds, mortgage-backed agency bonds, corporate bonds, and high-yield bonds. Similarly, some of the subclasses of stock are large-, medium-, and small-company stock, blue chip stock, growth stock, value stock, and income stock.
Because different subclasses of an asset class perform differently, carry different risks, and may go up and down in value at different times, you may be able to increase your return and offset certain risks by diversifying your portfolio by holding individual securities within a variety of subclasses within each asset class. -
You are said to surrender a contract when you end a policy, such as an annuity or a life insurance contract, before its maturity date. The same term applies if you withdraw money from a mutual fund within a certain time period after purchase.
In some cases, you get the surrender value back, which is the accumulated value minus fees and expenses. In other cases, a surrender fee applies as a penalty. In a mutual fund, it’s designed to prevent in-and-out trading in a fund, which might require the fund manager to liquidate holdings in order to redeem your shares. In the case of an annuity contract, the fee may be used to cover the sales charge paid to the investment professional who sold you the product.
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When you are ready to draw on your retirement savings, you may have a number of options, including systematic withdrawals, also known as specified payment options, for receiving income. Systematic withdrawals are regular, periodic payments from an annuity contract, managed account, mutual fund, qualified retirement plan, or IRA.
You establish the withdrawal arrangement with the account administrator. This includes the payment period - monthly, quarterly, or annually - and the size of the withdrawals, either as a fixed dollar amount or a percentage of your account value.
You can make changes or cancel the plan at any time. This makes systematic withdrawals a more flexible method of accessing your retirement funds than annuitization, where payments and schedules generally can't be altered once they're set. However, systematic withdrawals don't guarantee lifetime income, as annuitization does.
After you reach 72, you can use systematic withdrawals as a way to ensure you take out the minimum required distribution (MRD) from qualified retirement accounts and IRAs to avoid the risk of incurring IRS penalties.
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