Financial Glossary

A guideline suggesting retirees can withdraw 4% of their portfolio in year one, then adjust annually for inflation, with historically high (95%+) success rates over a 30-year retirement. Originated from the 1998 Trinity Study. Many modern planners use 3–3.5% for longer retirements or uncertain markets.

An employer-sponsored retirement savings plan with tax-deferred contributions (Traditional) or after-tax contributions (Roth 401k). Annual contribution limits are higher than IRAs. Many employers offer matching contributions. Funds are invested in available fund options in the plan. After leaving an employer, you can roll a 401(k) into an IRA for more investment flexibility.

A tax-advantaged savings plan for education expenses. Contributions grow tax-free; withdrawals for qualified education expenses (K-12 tuition, college, vocational school) are also tax-free. Many states offer a state income tax deduction for contributions. Since 2024, unused 529 funds can be rolled into a Roth IRA (with limits). FuturePath models 529 balances and withdrawals as part of your overall financial picture.

The distribution of investments across different asset classes — typically stocks (equities), bonds (fixed income), and cash equivalents. A classic rule of thumb is "110 minus your age" in stocks, but FIRE planners often hold a higher equity allocation for growth.

Liquid, taxable investments used to fund expenses between early retirement and age 59½, when tax-advantaged accounts can be accessed without penalty. Having a sufficient bridge account is critical for early retirees who can't touch their retirement accounts for years. FuturePath models liquid assets and their drawdown rate.

Tax on profit from selling an investment. Short-term capital gains (held < 1 year) are taxed as ordinary income. Long-term capital gains (held ≥ 1 year) receive preferential rates: 0%, 15%, or 20% depending on your income. FuturePath models both types based on your equity cost basis.

Earning returns on both your original investment AND previously accumulated returns. The cornerstone of long-term wealth building. A portfolio growing at 7% annually doubles roughly every 10 years (the Rule of 72). Starting early maximizes compounding time.

The original purchase price of an asset, used to calculate capital gains or losses when it's sold. In FuturePath, you can enter your equity cost basis separately from the current value to accurately model taxes on sales.

Payroll taxes funding Social Security (6.2% on wages up to the annual limit) and Medicare (1.45% with no cap, plus 0.9% additional Medicare tax above high incomes). Self-employed individuals pay both the employee and employer portions (15.3% combined for Social Security and Medicare). FICA taxes stop once you stop working.

A movement and financial strategy focused on saving and investing aggressively to achieve financial independence — having sufficient assets to cover living expenses from investment returns indefinitely — often well before age 65. Variants include Fat FIRE (high spending target), Lean FIRE (minimal spending), Barista FIRE (part-time work), and Coast FIRE (stop contributing; let existing investments grow).

A dynamic spending approach developed by financial planner Jonathan Guyton. You set an upper guardrail (e.g., if portfolio grows enough that your withdrawal rate drops significantly, you can spend more) and a lower guardrail (if portfolio drops enough that your rate rises too high, you cut spending). This reduces sequence of returns risk while maximizing spending in good markets.

A tax-advantaged account available with a High Deductible Health Plan (HDHP). Triple tax benefit: contributions are pre-tax (or tax-deductible), growth is tax-free, and withdrawals for qualified medical expenses are tax-free. After age 65, withdrawals for any purpose are allowed (taxed as ordinary income). An HSA is arguably the most tax-efficient account available, making it valuable for early retirees to fund healthcare costs.

The rate at which the general level of prices for goods and services rises over time, eroding purchasing power. The Federal Reserve targets 2% annual inflation. FuturePath lets you set a custom inflation assumption to adjust your projected expenses and portfolio withdrawals over time. Ignoring inflation is one of the most common retirement planning mistakes.

A technique that runs your retirement plan through thousands of randomly generated market scenarios to produce a success probability — the share of scenarios where your portfolio survives to your planning horizon. FuturePath offers two modes: Parametric (log-normal distribution calibrated to your expected return and volatility) and Historical Bootstrap (consecutive blocks sampled from 154 years of S&P 500 history, 1871–2024, preserving real crash sequences). Both are recentered to your expected growth rate.

Total assets minus total liabilities. For retirement planning, the relevant measure is typically liquid net worth — assets you can access and invest — excluding illiquid assets like your primary home's equity. Track net worth over time to measure progress toward FIRE.

Periodically adjusting your portfolio back to your target asset allocation by selling overperforming assets and buying underperforming ones. Maintains your intended risk level. Annual or threshold-based rebalancing (e.g., when any asset class drifts more than 5% from target) is common.

The IRS requires you to withdraw a minimum amount each year from Traditional IRAs and 401(k)s starting at age 73 (SECURE Act 2.0). The amount is your account balance divided by a life expectancy factor from IRS Publication 590-B. Missing an RMD triggers a 25% penalty on the missed amount. Roth IRAs are exempt from RMDs during your lifetime. FuturePath automatically calculates RMDs year-by-year.

A strategy of gradually converting Traditional IRA/401(k) funds to Roth IRA over multiple years — ideally in low-income years (like early retirement) when you're in a low tax bracket. Each converted dollar must wait 5 years before it can be withdrawn penalty-free. Executing this correctly creates a stream of tax-free income. FuturePath models the year-by-year tax impact and lets you set an annual conversion target.

An individual retirement account funded with after-tax dollars. Qualified withdrawals (after age 59½, account open 5+ years) are completely tax-free, including all growth. No RMDs during your lifetime. Contributions (not earnings) can be withdrawn tax- and penalty-free at any time. Income limits apply for direct contributions. A Roth IRA is especially valuable if you expect higher taxes in retirement.

The annual percentage of portfolio value you can withdraw in retirement with high historical probability of not running out of money. The classic SWR is 4% (30-year retirement). For longer retirements (40-50 years, typical for early retirees), many experts recommend 3-3.5%. The "right" SWR depends on your asset allocation, spending flexibility, other income sources, and risk tolerance.

A transitional phase between high-income full-time work and full financial independence. In semi-retirement, you might work part-time, do consulting, or take a lower-paying passion job. Income partially covers expenses, reducing portfolio drawdowns and extending retirement sustainability. FuturePath is specifically designed to model this phased approach, helping you find the optimal timing for each transition.

The risk that the timing of market returns significantly impacts your retirement outcome. A major crash early in retirement forces you to sell shares at low prices to cover expenses, permanently reducing your portfolio's ability to recover — even if long-term average returns are fine. This is the core challenge of retirement planning and the main reason withdrawal rates matter more than average returns.

A US federal program providing retirement, disability, and survivor benefits funded by FICA payroll taxes. You can claim retirement benefits between age 62 (reduced) and 70 (maximum). Benefits are based on your 35 highest-earning years. Up to 85% of benefits may be taxable depending on your total income. Spousal benefits allow a non-working or lower-earning spouse to claim based on the partner's record.

Selling investments at a loss to offset capital gains taxes on other investments. The loss can offset up to $3,000 of ordinary income per year, with any excess carried forward. The "wash sale rule" prevents immediately buying back a substantially identical security within 30 days. A powerful tool for taxable brokerage accounts.

An individual retirement account where contributions may be tax-deductible (depending on income and whether you have a workplace plan). Growth is tax-deferred. Withdrawals in retirement are taxed as ordinary income. Required Minimum Distributions start at age 73. Ideal if you expect to be in a lower tax bracket in retirement.