You may find that all of the terminology in the finance world (and the retirement world) makes your head spin. There are so many acronyms and technical terms that it can be hard to follow. To help you out, we’re going to define some of the most important terms when it comes to retirement planning so that you can have a better grasp on how you should make your financial choices.

1. Annual Rate of Return

This is the change in your funds over the course of a year. It will be a percentage, so it may not be immediately obvious how much your money has increased or decreased in dollars.^[1] For example: If you had $100,000 in your retirement account at the start of the year and your annual rate of return was 10% at the end of the year, that would mean that your account gained $10,000 for a total of $110,000. Then, if your account went down 10% in the following year, your account value would be $99,000. Note that while your average rate of return for those two years is 0%, your account would have actually lost money!

2. Compounding Interest

This is one of the most important concepts in retirement. Compounding interest means that you are earning interest on your initial investment AND the interest you gain.^[1] So, for example, if you had $100 in an account that had 10% compound interest each year, you would have $110 after the first year. But then the $10 you earned would also start to accumulate interest. So, in the second year, you would have $121 (a gain of $11). In the third year, you would have $133.10 (a gain of $12.10). In simple terms: Each year, the amount you gain grows exponentially, assuming principal protection and that you don’t take any out.

3. Dollar-Cost Averaging

This means that you are investing the same amount of money regardless of the underlying asset’s performance or price.^[1] This allows you to effectively purchase more assets when prices are relatively low and less when they’re relatively high, giving you a passive way to potentially buy more at relative lows and benefit more from upswings in the market.

If you find that retirement terminology makes it hard for you to make informed decisions, consider reaching out to one of our professionals today for a complimentary review of your finances. We can help you understand exactly what is happening with your money so that you can decide what you want your money to do.