The ABCs of Planning For Your Retirement

For most federal employees, retirement is a very long vacation where their TSP, Social Security, Pension and other “invested assets”, have to last for many years. Running short of money is hard to recover from since rarely are there do-overs in retirement. As federal employees try to prepare themselves for their eventual retirement, it’s easy to get lost in the dizzying array of financial terms, products and services. It is nearly useless and somewhat financially detrimental, to listen to broad based, one-size-fits-all commentary from the media or friends without doing your own homework or speaking with a financial professional.

For example, you might be doing yourself a disservice by stating that you are only concerned with your retirement income or that you want to altogether avoid any TSP Fund that is connected to the stock market, simply because the market is faring poorly right now.
When you are financially planning for retirement, living with and abiding by absolutes might harm you in the long run. It is important to keep an open mind so your retirement plan is appropriate for you, not your co-worker, friend or neighbor.

The following financial terms are basic words and phrases that will enable you to better understand the nightly business reports as they relate to your TSP accounts. It is in your best interest to be familiar with them since the more you know and understand the more productive your conversations will be when it comes time to planning your retirement with a qualified professional. As you read through this list, try to imagine how they might relate to your own specific circumstances and retirement planning. Then write down any questions you would like answered. I will tell you where to get the answers to those questions later in this article.

Annualized Return – The average amount of money that’s earned by a specific investment each year over a given time period. An annualized total return provides only a snapshot of an investment’s performance and does not provide investors with any indication of its internal volatility or underlying quality of holdings. It’s possible for an investment to have a three year annualized return of 5% by earning 15% one year and 0% the second and 0% the third year.

Annuity – A contract between an individual and a financial company designed to grow the principal and/or pay out a consistent stream of income, usually in retirement. It’s generally used as a conservative principal protection tool.
Asset Allocation – The way an investor divides their money among certain types of investments – stocks, bonds, real estate, annuities, and cash, by dollars or percent.

Bear/Bear Market – Someone who believes a particular investment or the overall market will decline. A “bear” is the opposite of a “bull.” Bear Market – When most stock prices are falling over a period of time and wide spread pessimism sets in. If the stock market falls and investors anticipate further declines, they begin selling their shares, causing the market to continue to sustain losses.

Blue Chip Stock (or Company) – A company with a history of consistently strong earnings, maintains a solid balance sheet, and regularly increases their dividends Usually, they are a large and well-known company. The term “blue chip” is historical and comes from poker, where blue poker chips once carried the highest value.

Bonds – Also called fixed income securities, a bond is nothing more than a promissory note in which an investor loans money (by purchasing these notes) to a company or State or Federal Government for a specified period of time at a fixed interest rate. Bonds are issued by companies, Municipalities, States, U.S. and foreign governments to finance a variety of projects (fix roads, build bridges). One example of a fixed-income security (bond) would be a 2 %New York State bond that matures in 10 years, where a $1,000 investment would result in $ 20 annual payments until maturity in 2025 when the investor would receive their $1,000 back. Generally, bonds offer relatively low rates of return.

Bull/Bull Market – An investor who believes a particular investment or the market as a whole will rise. A “bull” is the opposite of a “bear.” Bull Market – When most stock prices are rising over several months and widespread optimism sets in. Investors are excited about potential gains and buy shares of stocks which cause the market to rise in value.

Capital Gain – Earnings on your investments that are usually taxable, though capital gains earnings are taxed deferred in qualified retirement accounts.

Compounding – The ability of an investment to generate earnings, that when reinvested, generate additional earnings. Compounding refers to generating a return on your original return. $ 100 invested at 2 % equals $ 102 after one year. At the end of year two, you would have earned 2 % on $ 102 and have $ 104.04. Year three ends with $ 106.12.

Dividends – A portion of a company’s profits that is paid out to shareholders on a quarterly or annual basis. The Board of Directors of the company makes the decision to declare dividends. It is not mandatory to declare dividends but companies often do so to entice investors to buy their shares. (See yield)

Dollar Cost Averaging – A long-term investing strategy where investors buy fixed dollar amounts of a particular investment on a regular schedule, regardless of the share price. More shares are purchased when prices are low and fewer shares are bought when prices are high.
Dow Jones Industrial Average (DJIA) – Is the most popular and widely used measure of the U.S. Stock Market. It consists of 30 Blue Chip companies. The Dow is used by investors as an indicator of the health and direction of the overall stock market. Some Dow components include: Apple, Boeing, Disney, GE, Home Depot, McDonalds, Verizon and Wal-Mart. There are 22 more.

Equities – The common term used by investors to describe stocks or growth investments.

Income Investing – A strategy where the goal is to purchase investments that generate income on an ongoing basis. Growth of principal is usually not a priority here.
Index – A group of investments, often stocks, of a particular category that is used as a benchmark to reflect the overall performance of that designated category. For example, the S&P 500 is an index of the 500 largest public U.S. companies. It is considered by many to be a more accurate reflection of the stock market than the Dow Jones which contains only 30 companies.

Market Capitalization (or “market cap”) – A quick calculation that multiplies a stock’s current price per share by the number of shares outstanding. It’s often used to categorize the size of companies that allow investors to buy shares. For example, IBM has a market cap of $ 145 billion. Theoretically, you could buy the entire company for that amount.

Market Risk – The risk associated with the overall financial market usually referencing volatility (up and down market) although company solvency can also be an issue.
Principal – Your original investment amount, separate from any earnings.

Risk Tolerance (or Risk Aversion) – The degree or variability of uncertainty of achieving a specific result that an individual is willing to withstand. Often associated with market risk.

S&P 500 – Standard & Poor’s 500 is one of most commonly used benchmarks for the overall performance of the U.S. stock market. Designed to be the leading indicator of U.S. equities, it reflects the risk and return characteristics of the 500 largest stocks of U.S. companies, all wrapped up in a single indicator index. It’s often used as a comparison barometer for investment returns.

Stock (also known as equities) – If you own a stock, you own part of the company. A stock is evidenced by a paper certificate though they are rarely issued today.

Ticker Symbol – An abbreviation used to identify shares of a publicly traded company usually in the form of a few letters. For example, Apple has the ticker symbol APPL, Verizon is VZ and Google is GOOG. The ticker tape machine was invented by Thomas Edison and was used from the 1870’s until the 1970’s. It produced a long printed ribbon tape, most of which was tossed out the window during parades in New York City.

Volatility – Refers to the price movement of a specific investment. If an investment tends to rise and fall in value either frequently or by a large percentage, it is often considered volatile. It’s also considered part of the measure of risk. Note, volatility does not automatically mean an investment is going down—it could be volatile as the price skyrockets on positive company news. Another example of volatility is in reference to your home. It might have dropped in value during the past several years, but that is not a reason to sell it. An investment that’s volatile does not automatically make it a poor choice.

Yield – When a company pays a cash dividend, the yield is the percentage of that dividend over the stock price. In other words, if a stock is trading for $10 and pays an annual dividend of $0.30, the yield is 3%, because for every $100 you invest, you would receive 3% back annually (which would equate to $ 3.00). Most banks today offer savings accounts with a yield of approximately .25%, a quarter of one percent. For every $ 100 held in the account, you would earn twenty five cents though your $ 100 is FDIC insured.