Retirement Planning Glossary
Key terms and concepts behind Monte Carlo simulations, spending strategies, and portfolio risk modeling.
A
Annuity
IncomeAn insurance product that converts a lump sum into a guaranteed income stream, often for life. Annuities transfer longevity risk to the insurance company and can be immediate or deferred.
Asset Allocation
PortfolioThe division of an investment portfolio among different asset classes — typically stocks, bonds, and cash. Asset allocation is the primary driver of portfolio risk and return.
B
Black Swan Event
Risk & ModelingAn extremely rare, high-impact market event that is difficult to predict — such as the 2008 financial crisis or the 2020 COVID crash. Modeled as discrete jump events layered on normal market volatility.
Bonds (Fixed Income)
PortfolioDebt securities that pay periodic interest and return principal at maturity. Bonds typically have lower returns than stocks but provide portfolio stability and often have low or negative correlation with equities.
Bucket Strategy
Spending StrategiesA retirement income approach that divides the portfolio into separate time-horizon buckets — short-term cash, medium-term bonds, and long-term stocks — to avoid selling equities during downturns.
C
Capital Gains Tax
TaxA tax on profits from selling an investment for more than its purchase price. Long-term gains (held over one year) are generally taxed at lower rates than ordinary income.
Cholesky Decomposition
Risk & ModelingA matrix factorization method used to generate correlated random variables from independent ones. It transforms independent random draws into correlated asset returns reflecting real-world co-movement.
Correlation Matrix
Risk & ModelingA table showing correlation coefficients between pairs of asset classes. Values range from -1 (perfect inverse movement) to +1 (perfect co-movement). Used with Cholesky decomposition for realistic multi-asset scenarios.
D
Degrees of Freedom (DOF)
Risk & ModelingA parameter of the Student's t-distribution that controls tail thickness. Lower DOF values produce heavier tails; as DOF approaches infinity, the t-distribution converges to the normal distribution.
Diversification
PortfolioSpreading investments across multiple asset classes, sectors, or geographies to reduce portfolio risk. Losses in one holding may be offset by gains in another, reducing unsystematic risk.
Dollar-Cost Averaging
PortfolioContributing a fixed dollar amount at regular intervals regardless of market price. More shares are purchased when prices are low and fewer when high, reducing the impact of short-term volatility.
Drawdown
Risk & ModelingThe peak-to-trough decline in portfolio value before a new high is reached, expressed as a percentage. Deep drawdowns combined with withdrawals can permanently impair a portfolio's recovery capacity.
Dynamic Spending
Spending StrategiesAny retirement withdrawal approach that adjusts spending in response to portfolio performance or market conditions, as opposed to a fixed or purely inflation-adjusted strategy.
E
Equities (Stocks)
PortfolioOwnership shares in publicly traded companies. Equities historically offer the highest long-term returns but with the greatest short-term volatility, providing growth potential to combat inflation and longevity risk.
Expected Return
Risk & ModelingThe average annual return anticipated from an asset class over the long term. Expected returns for stocks, bonds, and cash are key inputs driving portfolio growth projections in retirement simulation.
F
Fat-Tail Distribution
Risk & ModelingA probability distribution where extreme events occur more frequently than predicted by a normal distribution. Financial markets exhibit fat tails — crashes and booms happen far more often than bell-curve models suggest.
Fernandez-Steel Distribution
Risk & ModelingA method for introducing asymmetry (skewness) into symmetric distributions like the Student-t. A skewness parameter stretches one tail relative to the other, capturing asymmetric market behavior.
FIRE (Financial Independence, Retire Early)
PlanningA movement focused on aggressive saving and investing to achieve financial independence and retire decades before the traditional age. Practitioners typically target a portfolio of 25x annual expenses.
Fixed Withdrawal
Spending StrategiesA spending strategy where the retiree withdraws a constant nominal dollar amount each month, regardless of inflation or portfolio performance. Simple but purchasing power erodes over time.
Floor & Ceiling Strategy
Spending StrategiesA percentage-of-portfolio strategy with monthly minimum (floor) and maximum (ceiling) withdrawal bounds. Provides downside income protection while capping upside withdrawals to preserve capital.
G
Geometric vs Arithmetic Return
Risk & ModelingArithmetic return is the simple average of annual returns. Geometric (compound) return accounts for compounding and is always lower when returns vary. Monte Carlo simulations use arithmetic returns as inputs.
Glide Path
PortfolioA predefined schedule for shifting asset allocation over time, typically from stocks toward bonds as the retiree ages. Target-date funds use a glide path to automatically reduce risk.
Guyton-Klinger Rules
Spending StrategiesA dynamic withdrawal strategy that adjusts spending based on portfolio performance using guardrail percentages. When the withdrawal rate exceeds upper guardrails, spending is cut; below lower guardrails, it is boosted.
I
Inflation Risk
Risk & ModelingThe risk that rising prices erode the purchasing power of retirement savings over time. Even moderate 3% annual inflation cuts purchasing power in half over roughly 24 years.
Inflation-Adjusted Spending
Spending StrategiesA withdrawal strategy where the initial withdrawal amount increases each year by the rate of inflation, maintaining constant purchasing power regardless of portfolio performance.
K
L
M
Marsaglia Polar Method
Risk & ModelingAn efficient algorithm for generating pairs of standard normal random variables from uniform random numbers by sampling within a unit circle and applying a transformation.
Mean Reversion
Risk & ModelingThe theory that asset returns tend to drift back toward their long-term historical average over time. Entering retirement after a long bull market may increase sequence-of-returns risk.
Monte Carlo Simulation
Risk & ModelingA computational technique that runs thousands of randomized scenarios to estimate the probability distribution of outcomes. In retirement planning, it produces a range of possible portfolio trajectories and a probability of success.
N
P
Pension
IncomeA defined benefit plan paying guaranteed monthly income in retirement based on years of service and salary history. Reduces reliance on portfolio withdrawals and lowers the risk of running out of money.
Percentage of Portfolio
Spending StrategiesA spending strategy where withdrawals are a fixed percentage of the current portfolio value each year. Withdrawals adjust with market performance, eliminating the risk of portfolio depletion.
Percentile (Confidence Interval)
Risk & ModelingA value below which a given percentage of simulation outcomes fall. The 10th percentile means 90% of scenarios performed better. Used to visualize the range of best-case, worst-case, and typical outcomes.
Poisson Process
Risk & ModelingA statistical model for events occurring randomly at a constant average rate. In retirement simulation, black swan events are modeled as a Poisson process with a fixed annual probability of occurrence.
Portfolio Rebalancing
PortfolioPeriodically buying or selling assets to restore the portfolio to its target allocation. Without rebalancing, a portfolio can drift beyond the intended risk level after market movements.
Pseudorandom Number Generator (PRNG)
Risk & ModelingAn algorithm producing numbers that approximate true randomness from an initial seed. A fixed seed guarantees identical sequences, making simulations reproducible and deterministic.
R
Real vs Nominal Returns
PortfolioNominal returns are raw percentage gains. Real returns subtract inflation, reflecting actual purchasing power change. A 7% nominal return with 3% inflation yields roughly 4% real return.
Replacement Ratio
PlanningThe percentage of pre-retirement income needed to maintain living standards in retirement. Common targets range from 70% to 85%, reflecting reduced work expenses offset by increased healthcare costs.
Required Minimum Distributions (RMDs)
TaxMandatory annual withdrawals from tax-deferred accounts beginning at age 73 in the U.S. Calculated by dividing the account balance by an IRS life expectancy factor. Failure triggers a 25% excise tax.
Retirement Age
PlanningThe age at which an individual stops working and begins relying on savings and other income sources. Delaying retirement significantly improves portfolio survival odds by shortening the drawdown period.
Retirement Income
IncomeTotal cash flow a retiree receives from all sources — portfolio withdrawals, Social Security, pensions, annuities, and other income. Modeled with configurable start/end ages and inflation adjustments.
Roth Conversion
TaxTransferring money from a tax-deferred account to a Roth IRA, paying income tax now. Future growth and qualified withdrawals are then tax-free. Strategic conversions in low-income years can reduce lifetime tax burden.
S
Safe Withdrawal Rate (4% Rule)
Spending StrategiesA guideline suggesting retirees can withdraw 4% of their initial portfolio annually, adjusted for inflation, with a high probability of not running out of money over 30 years. Derived from historical U.S. market data by William Bengen in 1994.
Sequence-of-Returns Risk
Risk & ModelingThe risk that the order of investment returns negatively impacts a portfolio being drawn down. Poor returns early in retirement are far more damaging than poor returns later, even if the average return is identical.
Sharpe Ratio
Risk & ModelingA measure of risk-adjusted return — the portfolio's excess return above the risk-free rate divided by its standard deviation. A higher Sharpe ratio indicates more return per unit of risk.
Skewness
Risk & ModelingA statistical measure of asymmetry in a probability distribution. Negative skewness means large losses are more likely than large gains of the same magnitude. Equity returns tend to be negatively skewed.
Social Security
IncomeA U.S. government program providing monthly retirement benefits based on lifetime earnings. Benefits can begin at age 62 (reduced) or as late as 70 (increased), providing an inflation-adjusted income floor.
Standard Deviation (Volatility)
Risk & ModelingA statistical measure of how much investment returns deviate from their average. Higher standard deviation means greater volatility and wider swings in portfolio value.
Stochastic Modeling
Risk & ModelingA modeling approach that incorporates randomness to simulate a range of possible outcomes rather than a single deterministic forecast. Monte Carlo simulation is the most common stochastic method in retirement planning.
Student's t-Distribution
Risk & ModelingA probability distribution resembling the normal distribution but with heavier tails, controlled by a degrees-of-freedom parameter. Lower DOF values produce fatter tails and more frequent extreme events.
Success Rate (Probability of Success)
PlanningThe percentage of Monte Carlo iterations where the portfolio survives the full retirement period. A 90% success rate means the portfolio lasted in 9 out of 10 simulated scenarios.
Sustainable Spending
PlanningThe maximum annual withdrawal a portfolio can support over a given retirement period without depletion. Unlike the static 4% rule, it accounts for individual circumstances and is best estimated using Monte Carlo simulation.
T
Tax-Deferred Account
TaxAn investment account where contributions and growth are not taxed until withdrawal. Withdrawals in retirement are taxed as ordinary income. Tax treatment affects net retirement income and optimal withdrawal sequencing.
Tax-Efficient Withdrawal Order
TaxThe sequence in which retirees draw from taxable, tax-deferred, and tax-free accounts to minimize lifetime taxes. Optimal ordering depends on tax brackets, RMDs, and Social Security thresholds.