A Keogh plan (also called HR10 plans) is a tax-deferred retirement plan for self-employed individuals or unincorporated businesses.
Why It's Important
It's important to note that contributions to these plans are tax-deductible up to a certain amount. There are two types of Keogh plans. One type is a qualified defined-contribution plan. This type of plan is typically in the form of a profit-sharing plan. The beauty is that a business doesn't have to generate profits to participate in this type of plan. As of 2019, a business can put 100% of their income or up to $56,000 of funds into this plan. Profit-sharing plans are only contributed to by the employer (yourself if you are self employed) not the employee. It's a good way to squirrel away money when your company is doing well.
The other type of Keogh plan is a qualified defined-benefit plan. These types of plans are similar to pensions in that you get paid out annually after retirement. Payouts are typically determined based on the salary while working and the length of service.
Keogh plans have more administrative burdens and higher upkeep costs than Simplified Employee Pension (SEP) or 401(k) plans, but the contribution limits are higher, making Keogh plans a popular option for many high-income business owners.
The geometric mean is the average of a set of numbers.
Why It's Important
This is not to be confused with arithmetic mean. Arithmetic mean is what you learned in school when your teacher taught you about "mean". As a refresher, let's look at the following set of numbers: 3%,7%,10%,6%,4%. You find the mean by adding all the numbers together (3+7+10+6+4=30%) then dividing by the total number of records (5). The arithmetic mean in this scenario would be 6%. In contrast, a geometric mean would be calculated as (1.03x1.07x1.10x1.06x1.04)^(1/5)=~5.5015%.
Now that you have the concept, let's apply it to personal finance and investing. The geometric mean is typically used to calculate the average return on investments. You would look at the past annual rates and calculate the mean to find out what your overall return was over the time period.
For example, let's say one year you enjoyed 10%, the next 15%, and the next 8%. Your average return over the three years would be (1.10x1.15x1.08)^(1/3)=~10.627%!