10 Essential Retirement Terms and Why They Matter

Satisfaction with your retirement is determined by the financial planning done beforehand. Successful investors spend years accumulating the funds necessary to cover both the expenses and unforeseen circumstances that come along with a retirement.

Financial planning in your working years allows for the stress-free retirement years you deserve.

Watch these videos below for 10 retirement terms you will encounter while investing.

What are Assets?

Assets are items that have value in the market. Resources controlled by a company from which future economic benefits are expected to be generated. In a business, an asset is something the business owns that has a dollar value. (An asset in general, is anything of value that can be traded.)

An intangible asset is an asset that has a dollar value but may not be worth anything unless the business is successful. Typically this is an asset that was acquired through buying another business. The price paid in excess of that business’s net worth is often called “goodwill” and is treated as an asset for GAAP purposes.

What is Margin of Safety?

Margin of Safety is the discount to the true value of a company.

The difference between the sticker price and margin of safety price. This reduction in the sticker price helps to insulate investors from possible valuation mistakes.

For example, in Rule #1 Investing we use a 50% margin. This means that whatever a business is worth, we want to buy it for half of that price.

Never make purchases at the sticker price. Instead, wait for the market to sell the company at your margin.

What is Sticker Price?

The sticker price is the intrinsic value of a business. The value of a business, despite the selling price on the market. Rule #1 investors seek to buy businesses at 50 percent of their Sticker Price, when they are undervalued. Sticker Price is determined by performing calculations on the Four Growth Rates (see definition).

What is the Stock Market?

Stock is ownership in companies that are public – meaning they have sold off chunks of their company.

Together as a group, this collection of companies is known as the stock market. The key to success in the stock market is buying a good business that will survive for 10-15 more years. And buy it on sale!

It is a myth that the stock market is constantly going up with time. The compounded average return in the stock market over the last 120 years is 5%.

Make sure the business is durable and has a CEO with integrity.

What is the S&P 500?

The S&P 500 is an index compiled of the 500 best stocks currently in the market.

In general, the S&P is a measure of how the stock market is doing. I want you to disregard the S&P 500 when it comes to making money.

Focus on your absolute return – how much money are YOU making every year? Don’t compare yourself to any index.

Index Funds vs. Mutual Funds

An index fund is a type of mutual fund with a portfolio constructed to match or track the components of a market index, such as the S&P 500.

Mutual funds are doing the same thing that index funds are doing, except they charge higher fees. Both diversify your portfolio across hundreds of stocks.

Index funds are just very specific to the index that it’s tracking.

What is Earnings Per Share?

Earnings per share are the net earnings of the company divided by the number of shares in the company.

EPS, also known as profit per share, is used to calculate the value of a business.

Make sure the cash flow of the company is as good as its earnings per share.

What is a 401(k) Plan?

The 401(k) is a retirement account created by taking a portion of your salary pre-tax each month. This is also known as a defined contribution plan.

There is a defined amount of money that you can put in your account each month. Once you retire, you pay taxes to the federal government. Today, however, if the stock market goes down, your retirement fund decreases. I recommend getting a self-directed 401(k) plan from management so you can invest the money where you want to.

What is a 10-K?

A 10-k is a financial report. Every public company has to file a 10-k annually. In it, you’ll find a full explanation of the company. It includes things such as risks, numbers, and anything else about the business. The CEO and CFO have to fill it out properly and sign it, risking jail time if the information is false or inaccurate.

Use 10-k’s to your advantage when investing. Read them and gain knowledge about companies and their competitors.

What is a Roth IRA?

It is a wonder the federal government has not discontinued the Roth IRA yet. It produces a phenomenal retirement fund!

The beauty of it lies in the fact that you put money into a Roth IRA after you pay taxes. Once you put the money in, it never gets taxed again. This also includes all of the money that grows on top of it. I recommend all new investors get one NOW!

Are there any other retirement terms you’d like me to go over? Learn all of the investing terms you need to know from my financial terms glossary.

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About Phil Town – Phil Town is an investment advisor, hedge fund manager, two-time NY Times best-selling author, ex-Grand Canyon river guide and a former Lieutenant in the US Army Special Forces. He and his wife, Melissa, share a passion for horses, polo and eventing. Phil’s goal is to help you learn how to invest and achieve financial independence. You can follow him on google+, facebook, and twitter.