Tag Archives: investment

Introduction to annuities

Those with fixed incomes or living on their retirement savings are often looking for a safe, low risk place to invest their money. They will often turn to annuities, which are sold through insurance companies. Basically, an annuity is a contract between you and the insurance company that provided for tax-deferred earnings.

There are several insurance guarantees that come with annuities, including the option to “annuitize,” or turn the principal into a lifetime stream of income. However, the fees are often quite high, and the earnings are taxed as ordinary income, not long-term capital gain.

The FDIC does not insure annuities, even if they are sold through a bank. The safety of your principal depends on the financial strength of the annuity provider. If the company fails, you might have $100,000 of coverage by your state’s guaranty association. But these associations operate under state law and vary on what they cover and how much they pay.

Fixed-rate annuities

With a fixed-rate annuity, you pay the insurance company a certain amount of money. The insurance company then guarantees you a certain periodic payment for the life of the annuity. This is often a way to se up a lifetime stream of income. The insurance company’s goal is to invest your deposit and make more money than they have promised to pay you.

There are often higher interest rates on annuities than on CDs. But fixed rate doesn’t mean the same thing for annuities as it does for a CD. With a CD, the rate is fixed for the full term of the CD. Fixed-rate annuities do not have a maturity date. The rate is usually only guaranteed for the first year. The rate will then drop after the guaranteed period, and then be adjusted annually.

There may be penalties charged if you withdraw money during the penalty period. You may have to pay an 8% penalty if you withdraw money during the first year. After that, the penalty is usually decreased by 1% each year.

Annuities have tax-deferred features, so if you withdraw money before the age of 59, you may have to pay a hefty 10% penalty to the IRS. The earnings on annuities are taxed as ordinary income by the IRS no matter how long you have invested.

Variable annuities

Variable annuities offer investors unique features, but they are quite complicated. They combine the elements of life insurance, mutual funds and tax-deferred savings planes. When you invest in a variable annuity, you select from a list of mutual funds to place your investment dollars. Your options may include balanced mutual funds, money market funds and several international funds.

Variable annuities have tax-deferred benefits, and they have income guarantees that you don’t find in other investments. For example, for a fee, your variable annuity will pay a death benefit.

Let’s look at how this works. You invest $100,000 in a variable annuity. In a few years, the value of the mutual funds in your account has fallen to $75,000. If this was a straight mutual fund, your heirs would only receive the $75,000. With this annuity, your beneficiaries are guaranteed the $100,000 if you pass away. If you have opted for the death benefits, the market value of the annuity may be as much as $125,000. Your beneficiaries would receive this amount.

Taxes are imposed in the same manner as for fixed-rate annuities. The earnings are taxed as ordinary income. You do not want to use the annuities inside of your 401(k) or IRA. These plans are built for accumulating money on a tax-deferred basis. You don’t want to pay the higher costs of an annuity when you can invest in a mutual fund that benefits you at less tax expense.

There are instances when variables are a good fit. If you’ve already reached the limit on your other retirement savings vehicles, you might investigate a variable annuity. You aren’t limited in the amount you can invest in an annuity. Many allow you to convert your investment to an annual income stream, for a slight fee. The insurance company will guarantee that you will receive income payments for a certain period or for life.

CD-type annuities

A CD annuity is a fixed-rate annuity with a guaranteed rate that matches the penalty period. For example, you buy a five-year CD annuity at 4%. If you hold the CD for five years, then you will receive the 4% annually. If rates rise, you are already locked in at the lower rate.

Insurance companies developed CD annuities to help prevent insurers from making empty promises to continue to pay a high interest rate after the guaranteed period. Rates were falling, and customers were not getting what they expected. Customers began to pay a penalty to get out of the investment.

There are usually higher interest rates offered on CD annuities than on traditional CDs. The investment is tax-deferred, but if you cash out your five-year CD before the age of 59, you will pay a 10% penalty on the gain to the IRS. Many contracts will allow you to take up to 10% of the balance or up to 100% of the interest annually without any insurance company penalties charged.

The surrender charges for a CD-type annuity are like those of fixed-rate annuities. There is no FDIC coverage on the investment. Some CD annuities have escape clauses in which the company penalty is waived if the customer allows the payments to be made over a five-year period or longer.

3 Stocks Your Children Will Brag About Someday

Like a fine wine or a family heirloom, the best stocks only get better with age. Investing in great companies will build wealth over the long run that you can pass down to your children and grandchildren. After all, many of today’s most valuable companies were just starting up a generation or two ago, so tomorrow’s titans of industry are available on the cheap today. If you’re looking for stocks that could one day make your children rich, take a look at these three recommendations from three of our Motley Fool investors: Netflix (NASDAQ:NFLX)Electronic Arts (NASDAQ:EA), and Vail Resorts (NYSE:MTN)

The one that started it all

Danny Vena (Netflix): Just 10 years ago, it would have been difficult to imagine the changes that would occur in media consumption over the coming decade, and the birth of streaming has changed the entertainment landscape forever. Netflix started it all, and its investors have been richly rewarded — and I think it’s just the beginning.

Netflix began its international expansion with Canada in 2010. The real revolution, however, happened in 2016 when the company announced its expansion to 130 additional countries simultaneously, growing its worldwide total to over 190 countries and becoming a global media empire in the process. 

In Netflix’s most recent quarter, global revenue increased to $2.985 billion, up 30% year over year, while net income reached $130 million, more than double the $52 million achieved during the prior-year period. That wouldn’t have been possible without solid customer growth, which continued unabated to 109.25 million total subscribers, up 26% year over year.

The solid growth in new viewers was the result of a continued push for quality content. Netflix dominated this year’s Emmy awards, scoring 91 nominations and 20 awards — more than any other network with the exception of HBO. This is a stunning achievement, considering the streaming giant released its first original series only four years ago.

The key to Netflix’s future will be to succeed internationally, but significant penetration in early markets like Brazil and the U.K. show why that success is likely to continue. If you own Netflix, your kids will brag about it someday.

eSports is the future

Daniel Miller (Electronic Arts): One stock your kids could grow up to brag about might be a company they become very familiar with in the coming decades — well, as long as your kid becomes a gamer. Electronic Arts is one of the world’s largest third-party video game publishers, and has recently expanded beyond console games to include PC and mobile games. It has well-known titles such as MaddenFIFA, and Battlefield, among others, and the company recently signed a 10-year contract with Disney to develop Star Wars games across all platforms.

The video game maker has done incredibly well for its investors: EA’s stock price is up more than 760% over the past five years. But it’s the opportunity in eSports and its massive growth that could be an X-factor for the company’s future. 

Consider that eSports and other video game broadcasts already attract hundreds of millions of people across the planet, and it’s still in the early stages of what could be a lucrative long-term story. As my colleague Keith Noonan points out, some popular eSports events already amass similar viewer numbers as sporting events such as the NBA Finals — and the audience is more receptive to ads, to boot. 

The truth is simple: Young Americans love to play video games on multiple platforms, and they also love to watch competitive games. However, eSports is such a young growth story, it’s not totally clear how EA could end up monetizing the competitive gaming scene.

It’s reasonable for investors to expect management to figure it out over the long term. Until that plays out, EA still dominates the sports genre of today’s gaming industry and has expanded its top line through mobile and PC gaming, in addition to its console business. If management does figure out how to capitalize on eSports, and perhaps other segments such as virtual reality, Electronic Arts could easily become a stock your kids will brag about owning in two decades.

 Image result for Stocks Your Children

Peak elevation

Jeremy Bowman (Vail Resorts): A great way to get your kids interested in investing is to buy them shares of a company they’re already interested in. Vail Resorts presents an appealing investment idea for youngsters who like skiing and snowboarding.

Not only does Vail own some of the premier ski resorts in North America, including its eponymous mountain, as well as Whistler/Blackcomb and Park City, but the company has been a winner for investors, too. The stock is up more than 300% over the last five years and has a number of features that give it a competitive advantage that should ensure it continues to outperform.

Its brand name itself is an asset, as Vail has long been known as one of the best ski resorts in the country, with a glitzy image to boot, and the company’s portfolio allows it to offer access through the Epic Pass, which gives skiers and snowboarders unrestricted access to Vail’s 15 mountains in North America, as well as 30 European resorts.

With the company’s acquisition strategy, those advantages should continue to grow as it adds new properties to the Epic Pass. In addition to acquisitions, the company is also growing organically by amping up its off-season attractions, like ziplines, adventure courses, and a mountain coaster, which should also help improve the bottom line over the long haul.

The preference of millennials for spending money on experiences rather than things should give the company a tailwind, as real-world experiences become more valuable in the e-commerce era. Catch some big air with Vail Resorts. Your kids will thank you for it.

10 stocks we like better than Netflix
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the ten best stocks for investors to buy right now… and Netflix wasn’t one of them! That’s right — they think these 10 stocks are even better buys.



A 31-year-old millionaire who’s read 360 personal finance books shares his favorite

After graduating from college, Grant of Millennial Money moved back home with just $2.26 in his bank account.

“That was a huge wake-up call for me,” the now 31-year-old — who goes by his first name exclusively — told CNBC. He took a screenshot of his balance, set the goal of having $1 million in assets in five years, and immediately started educating himself.

“As soon as I began this journey, I looked up the best reviewed personal finance books on Amazon,” says Grant, who reached seven-figures exactly five years after taking the screenshot, thanks to a side hustle that he turned into a lucrative consulting company.


Since, the Chicago-based self-made millionaire has read over 360 personal finance books and “the best book on money period” happens to be the first one he picked up: “Your Money or Your Life,” by Joe Dominguez.

It changed his relationship with money, and his approach to spending and saving, he told CNBC: “The premise of it is that you exchange your time for money. And when you start thinking about how many hours of your life it took to save up the money to buy something, you really start thinking twice about your purchases.”


For example, “say I work eight hours a day and after taxes, make $10 an hour, meaning I’m earning $80 a day. I want to go out for a nice dinner on Friday and that costs about $80, meaning I spent an entire day of my life working for this meal. And then you start thinking about even larger purchases, like a $1,000 TV, and you think, ‘How much of my life did I trade for this? Is it worth it?'”

During his five-year journey to seven figures, Grant saved 50% of his income. Today, despite his financial success, he still focuses on living simply and sets aside 40% to 50%.

He doesn’t just save half of his income — he puts it to work. After all, “in order to build wealth you need to be making as much money as possible on your money,” Grant writes on his blog. “Because you can only make so much money at any career, investing is truly the key to wealth.”