Retirement Words You Need to Know

Before you make retirement decisions, make sure you understand the lingo

by Ellen Hoffman

Do you speak Retirement? Every field, whether it's sports or information technology, has its own lexicon. The language of Retirement has been around for years, mostly spoken by academics or people in financial services. But now that millions of boomers are starting to confront decisions about their future, the jargon of retirement and financial planning seems to be surfacing all around us, in everything from the Social Security statement we receive annually to TV commercials hawking financial products.

Understanding these terms can be crucial to your future. In the worst case, making a financial decision based on misunderstanding some of the jargon could detract from both your retirement income and the lifestyle you've dreamed about.

A competent financial adviser will explain retirement planning terms to a client. But if you don't have a financial adviser, or if your eyes glaze over after encountering three or four of these unfamiliar, technical-sounding terms, take the time to look them up. (You can find explanations, as well as definitions, of most of them by surfing the Internet.) Or find another adviser who will make sure you understand not just the dictionary meaning, but also the implications of some of these important retirement terms.

Different Scenarios

Here are some examples. Currently, my favorite retirement-related word is "decumulation." Don't let this one stump you. Simply the opposite of "accumulation," it has been in economic textbooks for a while but is making the leap into common parlance as pre-retirees search for ways to spend down—that is, decumulate—the savings they've amassed in retirement accounts during their working years. Most people will need to use these savings for living expenses, and they'll have to come up with a decumulation rate that assures the money will last for as many years as they'll need it.

The shift in focus from saving money to spending has also raised the profile of the jaunty term "Monte Carlo simulation." In the context of retirement, this refers to a computer model that allows you to create hundreds or even thousands of financial scenarios, based on various estimates of your potential income and expenditures. When your adviser runs the simulation, he or she can tell you, for example, that under one set of assumptions, there's a 10% chance your retirement nestegg will last 10 years. And under another set, there's a 99% chance it will last 30 years.

A Monte Carlo simulation, or any other tool for planning to live off your retirement savings, may incorporate another increasingly visible retirement process—"annuitizing." To annuitize means to create a regular income stream for a fixed period or for the rest of your life. You can do this by actually purchasing an annuity, which is an insurance contract, or by arranging to withdraw a certain amount of your assets—say, 4% of your IRA—each year, to pay your retirement living expenses. (See my previous BusinessWeek articles for more complete explanations of annuities: ("Variable Annuities: Don't Believe the Hype" and "Insuring Your Income." about immediate annuities.)