Financial Glossary

Review clear definitions for retirement, investing, and personal finance terms used throughout Fire-Calc tools.

Why Shared Definitions Matter

Consistent terminology reduces confusion and helps ensure scenario comparisons are based on aligned assumptions.

When to Reference the Glossary

Review definitions before adjusting advanced inputs or discussing results with collaborators who use different financial frameworks.

Financial Terms

401(k)
An employer-sponsored retirement savings plan that allows employees to contribute pre-tax dollars. Contributions reduce your taxable income, and investments grow tax-deferred until withdrawal. Many employers offer matching contributions. Example: If your employer matches 50% of contributions up to 6% of your salary, contributing 6% means you get an immediate 50% return on that money.
4% Rule
A guideline suggesting that retirees can withdraw 4% of their portfolio in the first year of retirement, then adjust for inflation each year, with a high probability of not running out of money over 30 years. Based on the Trinity Study. Example: With a $1,000,000 portfolio, the 4% rule suggests withdrawing $40,000 in year one.
Asset Allocation
The strategy of dividing your investment portfolio among different asset categories (stocks, bonds, cash, real estate) based on your goals, risk tolerance, and time horizon. Example: A young investor might use 90% stocks / 10% bonds, while someone near retirement might shift to 60% stocks / 40% bonds.
Barista FIRE
A FIRE variation where you have enough savings to cover most expenses but work a part-time job (like a barista) primarily for health insurance benefits and supplemental income. Example: Someone with $500,000 saved might work 20 hours a week at Starbucks for health insurance while their investments cover most living expenses.
Coast FIRE
The point where you have enough invested that compound growth alone will fund your retirement by a traditional age (65), even if you never save another dollar. You can "coast" with a lower-paying job that just covers current expenses. Example: A 35-year-old with $250,000 invested might be Coast FIRE, as that money could grow to over $2 million by age 65 at 7% returns.
Compound Interest
Interest calculated on both the initial principal and the accumulated interest from previous periods. Often called the "eighth wonder of the world" for its powerful wealth-building effect over time. Example: $10,000 invested at 7% annual return becomes $19,672 after 10 years and $76,123 after 30 years-without adding any additional money.
Dollar Cost Averaging (DCA)
An investment strategy where you invest a fixed amount at regular intervals regardless of market conditions. This reduces the impact of volatility and removes the temptation to time the market. Example: Investing $500 every month into an index fund, buying more shares when prices are low and fewer when prices are high.
Emergency Fund
Cash savings set aside for unexpected expenses or income loss. Typically recommended to cover 3-6 months of essential expenses, held in easily accessible accounts like savings or money market. Example: If your monthly expenses are $4,000, an emergency fund of $12,000-$24,000 provides a safety net.
ETF (Exchange-Traded Fund)
A type of investment fund that trades on stock exchanges like individual stocks. ETFs typically track an index, sector, or asset class and offer diversification with low expense ratios. Example: VTI (Vanguard Total Stock Market ETF) holds over 4,000 U.S. stocks and has an expense ratio of just 0.03%.
Expense Ratio
The annual fee charged by mutual funds and ETFs, expressed as a percentage of assets. Lower is better-a 1% vs 0.03% expense ratio can cost hundreds of thousands over a lifetime. Example: On a $500,000 portfolio, a 1% expense ratio costs $5,000/year vs $150/year for a 0.03% fund.
Fat FIRE
A FIRE approach targeting a higher level of spending in retirement, typically $100,000+ per year. Requires a larger portfolio but allows for a more comfortable lifestyle. Example: Targeting $120,000/year in retirement spending requires a portfolio of $3 million using the 4% rule.
FIRE (Financial Independence, Retire Early)
A movement focused on extreme savings and investment to achieve financial independence and the option to retire much earlier than traditional retirement age. The core idea: save 50-70% of income, invest aggressively, and reach freedom in 10-20 years. Example: Someone earning $100,000 who saves $50,000/year might achieve FIRE in 15-17 years.
FIRE Number
The amount of invested assets needed to achieve financial independence. Commonly calculated as annual expenses x 25 (based on the 4% rule). Example: If you spend $40,000/year, your FIRE number is $1,000,000 ($40,000 x 25).
Index Fund
A mutual fund or ETF designed to match the performance of a market index (like the S&P 500). Offers broad diversification, low costs, and historically outperforms most actively managed funds. Example: An S&P 500 index fund holds all 500 companies in the index, providing instant diversification across major U.S. companies.
Inflation
The rate at which the general level of prices for goods and services rises over time, reducing purchasing power. Historically averages 2-3% annually in the U.S. Example: At 3% inflation, something that costs $100 today will cost $134 in 10 years and $181 in 20 years.
IRA (Individual Retirement Account)
A tax-advantaged retirement account for individuals. Traditional IRAs offer tax-deductible contributions; Roth IRAs offer tax-free withdrawals in retirement. Annual contribution limit is $7,000 (2024). Example: Contributing $7,000/year to a Roth IRA from age 25-65 at 7% returns could grow to over $1.4 million-all tax-free.
Lean FIRE
A FIRE approach with lower spending targets, typically under $40,000/year. Requires a smaller portfolio but demands a more frugal lifestyle. Example: Living on $30,000/year requires only $750,000 invested (using the 4% rule).
Net Worth
The total value of everything you own (assets) minus everything you owe (liabilities). A key metric for tracking financial progress. Example: $300,000 in investments + $200,000 home equity - $150,000 mortgage = $350,000 net worth.
Nominal Returns
Investment returns before adjusting for inflation. The "headline" number you see, but not the true increase in purchasing power. Example: If your investments return 10% but inflation is 3%, your nominal return is 10% but your real return is only about 7%.
Portfolio
The collection of all your investments, including stocks, bonds, real estate, and other assets. Diversification across your portfolio helps manage risk. Example: A balanced portfolio might include: 60% U.S. stocks, 25% international stocks, 15% bonds.
Real Returns
Investment returns after adjusting for inflation. Represents the actual increase in purchasing power. More meaningful for long-term planning than nominal returns. Example: The stock market's historical real return is about 7% annually (10% nominal minus ~3% inflation).
Rebalancing
Periodically adjusting your portfolio back to your target asset allocation by selling overweight positions and buying underweight ones. Maintains your intended risk level. Example: If stocks surge and your 80/20 stocks/bonds allocation becomes 90/10, you sell some stocks and buy bonds to return to 80/20.
Roth IRA
A type of IRA where contributions are made with after-tax dollars, but qualified withdrawals in retirement are completely tax-free, including all investment gains. Example: Contributing $7,000/year of after-tax money that grows to $50,000 means $43,000 in gains you'll never pay taxes on.
Safe Withdrawal Rate (SWR)
The percentage of your portfolio you can withdraw annually with a high probability of not running out of money. The most cited SWR is 4%, based on the Trinity Study. Example: A 4% SWR on a $1 million portfolio means withdrawing $40,000/year, adjusted for inflation.
Savings Rate
The percentage of your income that you save and invest. The single most important factor in achieving FIRE-higher savings rates dramatically reduce time to financial independence. Example: At a 50% savings rate, you can retire in about 17 years. At 70%, it drops to about 8.5 years.
Sequence of Returns Risk
The risk that poor investment returns early in retirement can significantly impact portfolio longevity, even if average returns over time are acceptable. Early losses combined with withdrawals can be devastating. Example: Two retirees might both average 7% returns over 20 years, but one who experienced losses in years 1-5 could run out of money while the other thrives.
Tax-Advantaged Account
Investment accounts that offer tax benefits, either through tax-deductible contributions (Traditional 401k/IRA), tax-free growth (Roth), or both (HSA). Using these effectively is key to building wealth. Example: 401(k), Traditional IRA, Roth IRA, HSA, and 529 plans are all tax-advantaged accounts with different rules and benefits.
Time Value of Money
The concept that money available today is worth more than the same amount in the future due to its potential to earn returns. Foundational to understanding compound growth and the cost of waiting to invest. Example: $10,000 today invested at 7% will be worth $19,672 in 10 years. The $10,000 you don't invest today costs you $9,672 in missed growth.
Trinity Study
A 1998 academic study by three Trinity University professors that analyzed historical data to determine sustainable withdrawal rates for retirement portfolios. The origin of the famous "4% rule." Example: The study found that a 4% withdrawal rate from a 50/50 stock/bond portfolio had a 95% success rate over 30 years.
Withdrawal Rate
The percentage of your investment portfolio that you withdraw each year to fund living expenses in retirement. Lower withdrawal rates increase the probability of your money lasting. Example: A 3% withdrawal rate is more conservative than 4%, providing a larger safety margin but requiring a bigger portfolio.

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