Investopedia

Navigating the Complexities of Rental Property Depreciation

For rental property owners, understanding depreciation is an important consideration for maximizing tax benefits and maintaining compliance with IRS regulations.

This tax deduction allows property owners to account for the wear and tear on their investment over time, potentially saving thousands of dollars annually in tax liability. However, working through the complexities of rental property depreciation requires careful attention to the rules and reporting requirements.

Key Takeaways

• Property owners use depreciation to deduct certain costs of a rental property over its useful life.
• Eligibility for depreciation requires the property to be owned, used for income, and have a determinable useful life.
• The modified accelerated cost recovery system (MACRS) is commonly used to depreciate residential rental properties.
• Calculating depreciation involves determining the property’s basis and applying the right method.
• Depreciation must be reported to the Internal Revenue Service (IRS) on Schedule E.

Understanding Rental Property Depreciation

Depreciation is the gradual decline in an asset’s value due to wear and tear, age, and obsolescence. For rental properties, it creates a tax deduction that owners use to recover some of the cost of their investment over time. Rather than deducting the entire allowed amount in the year you’ve bought a property, the IRS requires spreading this deduction across what it considers the property’s useful life.

Depreciation of rental properties has evolved since its 1913 introduction in the U.S. tax code. While owners initially estimated their property’s useful life, the 1981 Economic Recovery Tax Act standardized depreciation periods. The current system was established in 1986.

Using depreciation for rental properties reflects a fundamental principle in tax law, namely that rental properties generate income over many years and their costs should be allocated across those years.

While properties often appreciate over time, depreciation is recognized for tax purposes given the ongoing costs of aging structures and mechanical systems, even in rising markets.

Eligibility Requirements for Rental Property Depreciation

Not all properties automatically qualify for depreciation. To be eligible, the IRS states that a property must meet specific criteria:

1. The property owner must own the property outright, including if it’s subject to a mortgage. Renters, lessees, and property managers don’t qualify for depreciation deductions.
2. The property must be used in a business or income-producing activity, such as rental operations. Personal residences or vacation homes used primarily by the owner aren’t eligible unless they meet strict rental use requirements.
3. The property must have one or more permanent structures. Land can’t be depreciated because it doesn’t wear out.

Modified Accelerated Cost Recovery System

The modified accelerated cost recovery system (MACRS) is a standard method for depreciating residential rental properties in the U.S. Under MACRS, properties are assigned a recovery period of 27.5 to 30 years.

There are two variations of MACRS—the general depreciation system (GDS) and the alternative depreciation system (ADS). Property owners must choose which one they prefer for tax purposes. Once made, this choice is final throughout the property’s useful life.

General Depreciation System (GDS)

GDS is the standard method that most property owners use, and it is automatically applied unless ADS is specifically elected or required.

GDS provides a recovery period of 27.5 years (330 months) for residential rental properties and uses the straight-line depreciation method, meaning the depreciation deductions should be the same each year.

Other assets used for rental activities—such as appliances, fixtures, and furniture—can be depreciated using the accelerated methods under GDS (like the 200% declining balance method), which yield larger deductions in the earlier years. However, residential rental real estate must always use the straight-line method.

Alternative Depreciation System (ADS) 

ADS extends the period of useful life to 30 years (or up to 40 years for those placed in service before 2018), using the straight-line method for the property and any assets within it. While this means smaller annual deductions than GDS, ADS may be preferable or required in certain situations, such as:

• Properties used predominantly outside the U.S.
• Tax-exempt use properties
• Properties financed with tax-exempt bonds
• Properties owned by certain types of business entities (e.g., when owned by real estate investment trusts)
• Properties used by foreign persons or entities not subject to U.S. income taxes

Calculating Your Property’s Depreciation

The process of calculating depreciation begins with determining your property’s cost basis. This is the purchase price plus certain capitalized costs, including closing costs, fees, and any capital improvements made before or shortly after placing the property in service. From this total, you subtract the value assigned to the land (since land is not depreciable).

The resulting figure is your depreciable basis, which is the starting amount you’ll use for the depreciation period.

Example

Step 1: Compute the Depreciable Basis

Suppose you purchase a rental property with the following details:

• Purchase price: $250,000
• Closing costs: $5,000 (includes legal fees, commissions, transfer taxes, recording fees, title insurance, etc.)
• Capital improvements: $10,000 (e.g., initial minor renovations and repairs)
• Total initial cost: $250,000+$5,000+$10,000=$265,000
• Land value: $70,000 (non-depreciable)

Depreciable Basis = Total Initial Cost – Land Value

= $265,000 – $70,000 = $195,000

Step 2: Determine the Annual Depreciation

For residential rental property under the MACRS using the GDS, the recovery period is 27.5 years.

The full-year depreciation (if placed in service for a full year) is calculated as follows:

Annual Depreciation = (Depreciation Basis / 27.5) = ($195,000 / 27.5) = $7,090.91 per year (about $591 per month)

Step 3: Apply the Mid‑Month Convention

Residential rental property is often depreciated using the mid‑month convention. This means that regardless of when the actual service or lease date is during a month, the IRS treats the property as placed in service in the middle of that month.

Let’s assume the property is placed in service on April 15:

First Year

Depreciate from the midpoint (April 15) through Dec. 31, about 8.5 months

• First year depreciation: $591 × 8.5 = $5,023.50

Subsequent Full Years

A full 12 months of depreciation = $7,092

Final Year

The remaining depreciation is needed to fully recover the $195,000 basis.

• Since you used 8.5 months in the first year and 12 months in each of the following 26 full years, you’ve depreciated for 320.5 months, so 330 – 320.5 = 9.5 months remaining.
• Final year depreciation: $591 × 9.5 = $5,614.50

Year	Months Depreciated	Depreciation Expense
1	8.5	$590.92 × 8.5 ≈ $5,023
2	12	$590.92 × 12 ≈ $7,091
…	…	…
28	9.5	$590.92 × 9.5 ≈ $5,614
Total	330	$195,000

Tax Implications and Reporting Requirements

Depreciation must be reported on IRS Schedule E and filed with your tax return. This form details rental income and expenses, including depreciation deductions.

Note that depreciation is mandatory for rental properties, even if you choose not to claim it. The IRS will still assume you’ve taken the deduction when calculating depreciation recapture taxes upon the property’s sale.

Depreciation Recapture

When you sell a rental property, the IRS will reclaim part of the tax benefit you received from depreciation by taxing it at a rate of up to 25%. In essence, it “recaptures” those depreciation deductions by taxing that amount as ordinary income (up to certain limits).

Say you purchased a rental property for $200,000 ($160,000 for the building + $40,000 for the land). During eight years of ownership, you claimed $46,545 in depreciation deductions ($160,000 ÷ 27.5 × 8 years). You then sell the property for $250,000, representing a gain.

• The $46,545 in depreciation you claimed is “recaptured” and taxed at up to 25%. Your maximum tax is $11,636.
• The remaining gain of $50,000 ($96,545 net gain – $46,545) is taxed at capital gains rates (typically 15% for most taxpayers).

Important

Recapture applies whether or not you actually claimed the depreciation deductions you were entitled to take.

Common Mistakes and Pitfalls

• Failing to separate land value from the building’s value is a frequent error. Remember, land can’t be depreciated, and failing to make this distinction can result in incorrect deductions.
• Another common error is neglecting to start depreciation from the date the property is placed in service rather than the purchase date.
• Some owners also forget to account for improvements separately from repairs. While repairs are immediately deductible, improvements must be depreciated over time.

The Bottom Line

Rental property depreciation offers significant tax advantages for landlords, but it requires careful attention to detail and thorough record-keeping. While the concepts may seem complex, understanding the basics of depreciation can help you maximize your tax benefits while maintaining compliance with IRS regulations.

Working with qualified tax professionals can help ensure you’re taking full advantage of depreciation benefits while avoiding the common pitfalls.

Reviewed by David Kindness
Fact checked by Yarilet Perez

The capital adequacy ratio (CAR), also known as capital to risk-weighted assets ratio, measures a bank’s financial strength by using its capital and assets. It is used to protect depositors and promote the stability and efficiency of financial systems around the world.

Key Takeaways

• The capital adequacy ratio (CAR) is a measure of how much capital a bank has available, reported as a percentage of a bank’s risk-weighted credit exposures.
• The purpose is to establish that banks have enough capital on reserve to handle a certain amount of losses before being at risk of becoming insolvent.
• Capital is broken down as Tier-1, core capital, such as equity and disclosed reserves, and Tier-2, supplemental capital held as part of a bank’s required reserves.
• A bank with a high capital adequacy ratio is considered to be above the minimum requirements needed to suggest solvency.
• Therefore, the higher a bank’s CAR, the more likely it is to be able to withstand a financial downturn or other unforeseen losses.

Components of the Capital Adequacy Ratio

The capital adequacy ratio is calculated by dividing a bank’s capital by its risk-weighted assets. The capital used to calculate the capital adequacy ratio is divided into two tiers: Tier 1 and Tier 2.

Tier-1 Capital

Tier-1 capital, or core capital, is comprised of equity capital, ordinary share capital, intangible assets, and audited revenue reserves, or what the bank has stored to help it through typical risky transactions, such as trading, investing, and lending. Tier-1 capital is used to absorb losses and does not require a bank to cease operations.

Tier-2 Capital

Tier-2 capital comprises unaudited retained earnings, unaudited reserves, and general loss reserves. This capital absorbs losses in the event of a company winding up or liquidating. Tier-2 capital is seen as less secure than Tier-1.

The two capital tiers are added together and divided by risk-weighted assets to calculate a bank’s capital adequacy ratio. Risk-weighted assets are calculated by looking at a bank’s loans, evaluating the risk, and then assigning a weight.

Note

Generally, a bank with a high capital adequacy ratio is considered safe and likely to meet its financial obligations.

The Minimum Ratio of Capital to Risk-Weighted Assets

Basel II and Basel III, which are international banking regulations, set the minimum ratio of capital to risk-weighted assets at 8%; however, additional requirements can bump it up to 10.5%.

Minimum capital adequacy ratios are critical in ensuring that banks have enough cushion to absorb a reasonable amount of losses before they become insolvent and consequently lose depositors’ funds.

Example of a High Capital Adequacy Ratio

For example, suppose bank ABC has $10 million in Tier-1 capital and $5 million in Tier-2 capital. It has loans that have been weighted and calculated as $50 million.

The capital adequacy ratio of bank ABC is 30% (($10 million + $5 million) / $50 million). Therefore, this bank has a high capital adequacy ratio and is considered to be safer. As a result, Bank ABC is less likely to become insolvent if unexpected losses occur.

What Is a Capital Adequacy Ratio?

Capital adequacy ratios (CAR) help banks determine if they have enough capital to cover potential losses. The ratio divides a bank’s capital by its risk weighted assets. The higher the ratio, the more the bank can cover its losses. Many regulatory bodies set minimum CAR requirements for banks to maintain to help prevent solvency issues and protect customers.

How Can Banks Improve Their Capital Adequacy Ratios?

Banks can improve their capital adequacy ratios in two ways: (1) increase their capital base or (2) reduce their risk-weighted assets. To increase their capital base, banks can keep more earnings within the bank as opposed to distributing them out via dividends to shareholders. Banks can also issue new equity by selling shares, which brings in more money. To reduce risk-weighted assets, banks can invest in less risky financial products or issue less risky loans.

What Is Basel II and III?

Basel II and III are international regulations aimed at making sure banks have enough capital to cover risks. The regulations were designed to protect depositors and the larger economy. Basel II was introduced in 2004, and Basel III after the 2008 financial crisis. Both regulations focus on improving the risk management of banks, primarily by setting capital reserve requirements and the ways in which banks should manage risk. Basel III tightened some of the rules in Basel II.

The Bottom Line

A bank’s capital adequacy ratio is an indicator of its financial health and stability. It helps to ensure it has enough capital to cover losses and, as such, assess its ability to remain solvent.

Regulatory standards, such as Basel II and III, set minimum capital adequacy thresholds to protect bank depositors and maintain financial stability in the wider economy. A higher ratio the better, as it shows a bank is better placed to withstand economic downturns or unexpected losses.

Solar energy, energy storage, high-speed automated manufacturing equipment, and AI

Reviewed by Robert C. Kelly
Fact checked by Vikki Velasquez

Tesla: An Overview

Tesla Inc. (TSLA) designs, manufactures, leases, and sells high-performance, fully electric vehicles. It also offers energy generation and storage systems, and services related to its products.

The company was founded in 2003 by Silicon Valley engineers Martin Eberhard and Marc Tarpenning. Their goal was to design electric cars that would be less reliant on fossil fuels but as quick and as fun to drive as vehicles that run on gasoline.

Elon Musk was an investor in Tesla and became its CEO in 2008.

Also in 2008, the company launched its Roadster. That car was followed by the Model S, Model X, and Model 3. Tesla then expanded its electric vehicle offerings with an SUV, called the Model Y, and two different types of trucks – the Tesla Semi and the Cybertruck.

In December 2020, after reporting consistent profits, the company was added to the S&P 500 Index.

Tesla has since become the largest automaker in the world as measured by its market capitalization of $892 billion in March 2025. For the year ending Dec. 31, 2024, Tesla posted an annual net income of $7.15 billion on revenue of $97.7 billion.

Tesla’s rapid growth into the most valuable automaker has been supported by a number of key acquisitions. Those acquisitions have primarily been aimed at increasing manufacturing capacity, boosting operational speed and efficiency, and reducing costs.

Below, we look at five of Tesla’s acquisitions. The company does not provide a breakdown of how much profit or revenue each acquisition contributes.

Key Takeaways

• Tesla is the world’s largest automaker as measured by market cap, which in March 2025 was $892 billion.
• It acquired Hibar Systems in late 2019 to enhance its battery manufacturing capability.
• Tesla’s 2019 purchase of DeepScale added power to its goal of assisted and autonomous driving.
• The company was founded by Martin Eberhard and Marc Tarpenning in 2003.
• Tesla’s mission is to accelerate the world’s changeover to sustainable energy.

1. Hibar Systems, Ltd.

• Type of Business: High Speed Battery Manufacturing Systems
• Acquisition Price: Undisclosed
• Acquisition Date: 2019

Canada-based Hibar Systems was founded in 1974. The company specialized in designing and building high-precision dispensing pumps and filling systems, including automated vacuum filling systems for lithium-ion batteries used in electric vehicles.

It’s unclear exactly when the acquisition took place because Tesla made no announcement of it. But in October 2019, Tesla listed Hibar as one of its subsidiaries in an October 2 filing with the Canadian government. It is now known as Tesla Toronto Automation.

Tesla’s strategy in acquiring Hibar was to boost its ability to produce high quality battery cells in house. The move was also made to help lower key operating expenses and make it less reliant on Panasonic Corp. (6752), with which Tesla jointly owns and operates a Nevada-based battery factory.

2. DeepScale

• Type of Business: Developer of Perceptual Systems for Autonomous Driving
• Acquisition Price: Undisclosed
• Acquisition Date: October 2019

DeepScale was a four-year old startup technology company located in Mountain View, California when it was acquired by Tesla. Before the purchase, DeepScale was operating on $18 million in venture capital.

It specialized in designing technology for automakers that used low-wattage, multi-use processors to provide highly accurate computer perception.

Tesla’s purchase of the company was seen as part of its strategy to develop assisted and autonomous driving systems for its cars. The automaker gained high-value personnel with exceptional expertise in this efficient AI niche.

Note

In February 2025, Tesla announced that it intended to acquire certain assets of the insolvent German high technology auto parts maker, Manz AG. The companies did not disclose the purchase price.

3. Grohmann Engineering GmbH

• Type of Business: Automated Manufacturing Systems
• Acquisition Price: $135.3 million
• Acquisition Date: January 3, 2017

German-based Grohmann Engineering was founded in 1963 by Klaus Grohmann. The company specialized in the design and development of automated manufacturing systems.

When Tesla announced in November 2016 that it was acquiring Grohmann, the firm had 700 employees and revenue had been growing at an average annual rate of 6% over the previous 20 years.

Tesla said that the acquisition would help it improve the speed and efficiency of its manufacturing processes, significantly reducing expenses. It is now called Tesla Automation.

The total cost of acquisition was an initial cash-payment of $109.5 million plus an additional $25.8 million paid in the first quarter of the year as part of an incentive compensation arrangement.

Months after the acquisition, Mr. Grohmann was ousted over a disagreement with Musk concerning the treatment of Grohmann’s existing customers, several of which were German auto rivals to Tesla.

4. Perbix Machine Co. Inc.

• Type of Business: Automated Manufacturing Machinery
• Acquisition Price: Estimated at $10.5 million.
• Acquisition Date: November 7, 2017

Perbix, founded in 1976, specialized in designing and building custom, highly-automated high-volume manufacturing machinery. It was purchased by Tesla in 2017.

Perbix was acquired by Tesla to enhance its ability to make more of its vehicle parts in-house, giving it greater control of auto production.

Following on the Grohmann purchase, this acquisition was another step by Tesla to optimize and accelerate the production process of its electric vehicles.

5. SolarCity Corp.

• Type of Business: Solar Energy
• Acquisition Price: $2.1 billion
• Acquisition Date: November 21, 2016

SolarCity, now known as Tesla Energy, was founded in 2006 by two brothers who are cousins of Elon Musk. The idea for the company was Musk’s, who also provided the initial working capital and served as chair.

SolarCity designs, manufactures, and installs solar energy systems, and sells solar-generated electricity.

Tesla announced that the acquisition would create the world’s first vertically integrated sustainable energy company. Tesla would take advantage of the synergies created by linking its energy storage with SolarCity’s solar generation.

Despite the merger being approved by a majority of Tesla shareholders, some Tesla investors later filed a lawsuit against the company. They claimed that the real motivation for the deal was to bail out SolarCity, which was beset by financial difficulties. The courts ruled in favor of Musk.

What Is Tesla’s Mission?

According to its 2024 annual report, Tesla’s mission is to “accelerate the world’s transition to sustainable energy.”

Did Elon Musk Start Tesla?

No, he did not. It was founded by engineers Martin Eberhard and Marc Tarpenning. However, Musk invested in it early and served on its board of directors before becoming its CEO in 2008.

What Was Tesla’s Profit in 2024?

Tesla’s net income for the year ending Dec. 31, 2024 was $7.15 billion. It posted revenue of $97.7 billion for the period.

The Bottom Line

Tesla is the world’s largest automaker by market cap. Its goal is the world’s transition to sustainable energy and it has achieved remarkable success in the development and sale of electric cars.

The companies it has acquired along the way have provided it with a greater ability to increase manufacturing efficiency, lower its manufacturing costs, and incorporate groundbreaking technologies, such as artificial intelligence, to improve the driving experience.

You don’t have to be wealthy to own a home

Fact checked by Vikki Velasquez

Homeownership has always been central to the idea of the American dream. Unfortunately, due to skyrocketing housing prices and high mortgage rates, it’s harder than ever for many people to achieve that dream.

If you’re living in a below-average income household, you may feel like you’re completely priced out of the housing market. But thanks to some state and federal low-income mortgage options, the dream of homeownership doesn’t need to be out of reach.

Key Takeaways

• Agencies like U.S. Housing and Urban Development (HUD) and the Federal Housing Authority (FHA) have homeownership programs available for low-income households.
• Your household income level determines whether you can qualify for these loans.
• In addition to federal government programs, state and U.S. territory programs are available that grant loans without a large down payment.
• It’s important to find out whether you qualify as low-income before applying for state or federal homeownership programs.

Government-Backed Home Loans

The federal government has historically been one of the largest provider of loans, grants, and other forms of assistance in the country. After all, it’s in the government’s best interest to keep as many of its citizens housed as possible to maintain a happy and healthy workforce. This is why agencies like the U.S. Department of Housing and Urban Development (HUD) and the Federal Housing Administration (FHA) have programs aimed at helping lower-income households afford homes.

Borrowers who meet certain criteria can seek and obtain government-backed mortgages with varying requirements, down payment minimums, and perks through several programs, including FHA loans and VA loans. Because the U.S. government backs these programs, lenders often see these programs as a low-risk investment, leading to better terms and potentially more affordable rates.

FHA Loans

With generally less strict requirements than other government-backed programs, the FHA loan program is designed to help first-time low-income buyers enter the housing market.

To qualify for the program, borrowers should have a median credit score of 580 and be able to afford at least a 3.5% down payment on the home. You can determine your FHA loan limit—which will depend on the county where you plan on making your purchase—by consulting the HUD website.

Important

Regardless of your credit score and available down payment, all borrowers are required to pay the closing costs. These costs, including lender fees, third-party fees, and any prepaid items, can’t be financed. Borrowers are also on the hook for annual mortgage insurance premiums.

Good Neighbor Next Door Program

Eligible public service employees can purchase a home at 50% off through the Good Neighbor Next Door program, which HUD provides. All that’s required is that you are currently working as a full-time:

• Pre-K through 12th-grade educator
• Emergency medical technician
• Firefighter
• Law enforcement officer

You should also plan to buy a home in a HUD-designated revitalization area and be willing to commit to living in that home for at least three years.

There are a few caveats, however. You can only buy properties through the Good Neighbor Next Door program, and properties are only listed for seven days. If multiple people bid for the same property, the winning offer will be selected by random lottery. A silent second mortgage will also be required for the discount amount, though you won’t be making payments and no interest will accrue as long as you stay in that home for the requisite three years.

USDA Section 502 Guaranteed Loan Program

Also known as the Rural Development loan, this option helps prospective low-income homeowners buy a home without making any down payment at all. The major requirement for this loan, however, is that it’s only available for certain properties that are located in rural parts of the country.

According to the USDA, eligible applicants can use the loan to purchase, build, rehabilitate, improve, or relocate a dwelling in an eligible rural area with 100% financing. Furthermore, the program guarantees 90% of the loan, so lenders are extremely comfortable knowing there’s less risk to approve such a loan without a down payment.

Applicants looking to get into this program cannot exceed 115% of the median household income in the chosen region. They must also agree to personally live in the home as their primary residence and be a U.S. citizen, U.S. non-citizen national, or qualified alien.

VA Loans

Veterans, active members, and surviving spouses with a low annual income may be eligible for a VA loan. Provided by the U.S. Department of Veterans Affairs (previously the Veterans Administration), these loans are designed to connect current or former military personnel with access to loans from private lenders at competitive rates.

If you’re obtaining mortgage assistance from the VA, know there’s no requirement for a down payment, and the seller can help cover your closing costs. Furthermore, it doesn’t require any monthly mortgage insurance.

Eligibility is based on the kind of service and how long you or your loved one served. If you’re currently on active duty or your service was during wartime, you need at least 90 days of experience. If your service was during peacetime, you need 181 or more days. If you were separated from the service, you must have been in the service for 24 months or the full ordered period of the service. And if you were in the National Guard or Reserve, you must have served at least six years.

States May Offer Assistance

Along with assistance from the federal government, all 50 states and U.S. territories have the capability to provide rental, homeownership, and house-buying assistance. Sponsored by your state or local governments, these programs vary from state to state.

To find out more about your state’s housing assistance programs, including any mortgage loan programs, be sure to check out your state’s HUD page. Depending on the state and its resources, assistance may come in the form of down payment assistance, grants, or forgivable loans. Eligibility and requirements may vary depending on the state where you’re looking to become a homeowner.

Warning

Some programs don’t finance loans for investment or mixed-used properties, so review the rules before applying if you are seeking property beyond a more typical condo or single-family home.

What Constitutes Low Income?

Knowing where your income stands can help you find the right home loan for you. Not only will you know how much you can afford per month in payments, but you may also be able to take advantage of special loans or programs if you need additional help.

The threshold for low-income housing and other programs for low-income households can vary widely from state to state. For example, a family of four in Jersey City, New Jersey, is considered low income if they bring in $107,000 per year, while that same family in Jackson, Mississippi, is considered low income if they earn $66,800 per year, according to the latest data from HUD.

All of this is to say that the concept of low income is relative. As you seek out a low-income loan option, ensure you qualify before applying by starting with your state-specific guidelines. Most loan options will specify the maximum amount of money an applying household can make if they want to be considered for a loan.

Can I Buy a Home Without a Down Payment?

Since the subprime mortgage crisis, it’s harder to buy a home with no down payment. However, some programs can help, provided that you qualify, including VA home loans, USDA loans, and local down payment assistance loans.

What Credit Score Do I Need To Buy a Home With No Down Payment?

Mortgage lenders typically require a credit score in the high-600s to qualify for a home loan with no down payment. Keep in mind, however, that requirements vary by lender and program.

The Bottom Line

Homeownership isn’t automatically out of reach for lower-income households. State and federal programs can help subsidize the costs of buying a home.

Remember that the definition of low income varies from state to state. Areas with higher cost-of-living will have higher income thresholds than those with lower COL. Check your income against local guidelines to ensure eligibility.

Reviewed by Charlene Rhinehart
Fact checked by Maddy Simpson

Since they first took off in 1979, frequent flyer programs have undergone as many changes as the airline industry itself. While it’s still possible to reap some major rewards—or to waste time collecting points you’ll never use—today’s programs look very different from those of even a few years ago.

A huge shift, notes Brian Kelly, who calls himself “The Points Guy” and runs the website ThePointsGuy.com, has been in the way many airlines now calculate their rewards. Often called a “revenue-based model,” it rewards travelers for the amount of money they spend rather than the miles they fly. In other words, frequent flyer programs are becoming serious spender programs.

That can be a good thing or a bad one depending on the type of traveler you are. If you typically fly in economy class, you’re likely to benefit less than before. On the other hand, Kelly says, “just a couple of trips a year in a premium class of service” could mean many thousands of miles added to your account.

Most people love to travel. If you’re a traveler, you may be interested in the best ways to save money on flights. Though there may be more changes on the horizon, here are some of today’s best ways to earn airline miles.

Key Takeaways

• Earning frequent flyer miles can land you free flights, upgrades, and other travel perks.
• The most basic way to earn points is to fly often with the same airline, or one of its partner airlines.
• You can earn points without flying by signing up for a rewards credit card and using it and shopping with program partners.

1. Focus on Where You Fly

You’re most likely to earn enough points to actually get something in return if you concentrate on just a couple of airlines that ply the routes you expect to fly. For instance, it’s better to have 100,000 points with one carrier than 10,000 each with 10. The only exception to this general rule is if you’re able to transfer points or miles between programs on a 1:1 basis.

Note, too, that points may expire if your account is inactive for a certain period (typically 12 to 18 months). You’ll need to monitor any account you open or risk losing your miles—another reason to keep the number manageable.

2. Consider Airline Partners

Many airlines belong to networks of domestic and foreign carriers, such as Oneworld, SkyTeam, and Star Alliance. These organizations, which you become part of by signing up for a member airline’s frequent flyer program, allow you to earn, combine, and redeem miles on any partner airline.

Again, which of these you might want to become part of will depend on the airlines you primarily fly. Their partners are listed on their sites, which can help you determine at a glance which airline frequent flyer programs to enroll in.

3. Get a Points or Miles Bonus

To entice you to sign up for credit cards co-branded with airlines, credit card issuers frequently offer bonus miles, sometimes enough for a reward all by themselves. Of course, that’s in the big print on their promotions. In the smaller print, you’ll find the terms. For example, some require you to spend a certain amount of money within a certain time to get travel rewards.

Important

Most frequent flyer programs are free to join, so there’s no harm in signing up for a flock of them. If you sign up for a miles credit card, you may earn initial bonus miles, but your card may carry an annual fee in addition to typical credit card interest and charges.

Alina Comoreanu, a research analyst with the finance website WalletHub.com, says that these cards are attractive if you are planning a big trip in the near future and already expect to spend a certain amount of money. Bear in mind that they often have hefty interest rates. So, unless you pay your bill off each month, you need to weigh the value of your bonus against the interest charges.

4. Choose the Right Credit Card

Using a rewards credit card for all of your purchases (and paying it off each month) can be another way to rack up enough miles for a reward. There are two basic types of cards to consider: the co-branded cards affiliated with an airline and more general rewards cards that offer an assortment of awards, including airline miles.

“The main difference between the cards would be that the airline-affiliated cards are more rewarding when used with said airline, while the generic one offers a larger spectrum of redeeming options,” Comoreanu says.

For example, the more general rewards cards typically allow you to use your miles on a variety of airlines, rather than just one. If you know you’re unlikely to use your miles for travel, you can redeem them for other things, including cash.

“Straight-up cashback is always more reliable,” Comoreanu says. “Points can devalue easily and customers may find themselves receiving less than when they first applied for the card.”

1,200,000

The number of miles civil engineer David Phillips earned after purchasing $3,150 worth of pudding (12,150 cups, which he donated to the Salvation Army and local food banks), taking advantage of an unusual and ill-conceived mileage-earning promotion.

5. Dine Out

Another good way to pile up points and keep them from expiring is to link your credit card to a frequent flyer plan’s dining program, Kelly notes. When you charge a meal on that card at a participating restaurant, you’ll earn points based on the size of the tab.

You could also earn points or miles toward flights on other dining purchases when you use a general travel rewards card. When using a rewards card to pay for meals, be sure to pay attention to credit card merchant category codes to ensure that you’re getting the most number of miles or points possible for those purchases.

6. Use Shopping Portals

Many airlines also have shopping portals on their frequent-flyer websites. By going to that page first and clicking through to a participating merchant, you can earn points on your purchases.

Keep in mind, however, that spending through a shopping portal just to earn miles or points could backfire. If you’re carrying a balance on your card month to month, the value of any additional travel rewards you’re earning could be negated by the interest you pay.

Tip

Airline frequent flyer programs can also allow you to buy miles but before you do, calculate what you’ll pay to make sure it’s worth it.

7. Fly

Yes, you can still earn miles by flying, a fact easily overlooked among all the other ways to earn them. Because of the move to revenue-based programs, a costly ticket may get you more miles than a cheap one, even if the latter’s route covers a greater distance. That, of course, is rarely a good reason to spring for a crazy high fare, especially if you’re the one paying the bill.

The value of miles varies from airline to airline, but figure they’re worth about a penny apiece on average. That makes it pretty easy to compare fares and do the math.

How Many Airline Miles Do I Need to Fly Free?

Each program will have a varying answer to this, and the location you’re flying to also matters. On average, a one-way domestic flight can range from anywhere between 5,000 to 20,000 airline miles. International coach flights may be more than twice as much. Again, the nature of your flight and class of your seat will heavily dictate the airline miles needed to fly free.

Are Airline Miles Worth It?

For some, airline miles are absolutely worth it. Though some credit cards offer rewards of a fixed percentage in cashback, others offer potentially greater percentage rewards in the form of travel miles. In addition, airlines may further incentivize by having lower prices for certain flights that points or miles can be used towards. For those traveling frequently or already incurring many travel expenses, airline miles can certainly make sense to capture.

Do Airline Miles Expire?

Though every airline has different rules, miles very often expire. Most miles will expire after several years, though some airlines allow you to extend this period if you’ve flown with them. In addition, some time periods may be extended based on the purchase history of a select credit card. In all, be prepared to track your miles; otherwise, you’ll likely notice some fade away when unused.

The Bottom Line

Frequent flyer programs are changing to reward high rollers, but there are still ways to earn miles without overpaying for them. Understanding how to earn miles versus cash back, and choosing the right rewards credit card, can help you rack up free flights that much faster.

Billionaire investor Ray Dalio has survived more market crashes than most people have experienced bull markets. The founder of Bridgewater Associates, considered among the world’s most successful asset managers, is now warning about “shocking developments” in the U.S. economy in the mid-2020s, comparing today’s market environment to the dot-com tech bubble.

Rather than advocating panic selling or attempting to time the market, Dalio offered surprising advice in an Investopedia Express interview for investors looking to protect themselves when market troubles arrive.

Key Takeaways

• His “holy grail” investing approach uses 15 uncorrelated investments to lower investment risks without sacrificing returns, he says.
• Rather than trying to perfectly time crashes, Dalio suggests building a properly diversified portfolio before trouble strikes.

Dalio’s “Holy Grail” for Surviving Market Crashes

Many investors fearing a coming crash flee for safety, often selling their stocks and buying bonds, gold, and other “safe havens.” Dalio told Investopedia he takes a very different approach.

“My mantra of investing is 15 good uncorrelated return streams, risk-balanced,” Dalio said. This strategy, which he calls the “holy grail of investing,” allows investors to “maintain the same return as any one of those investments with [an] 80% reduction in risk.”

This approach, he said, works whether markets are crashing or soaring.

Dalio told the Investopedia Express that newer investors should approach markets “with great humility” and view losses as “valuable learning opportunities.”

Understanding Correlation: The Key to Dalio’s Strategy

In investing, correlation measures how much investments move in relation to each other. It’s measured on a scale from -1 to +1:

• +1: Perfect positive correlation (investments go up or down in lockstep)
• 0: No correlation (movements are absolutely independent)
• -1: Perfect negative correlation (investments move in opposite directions)

Traditional diversification can fail during market crashes because most assets in the same class tend to move in the same direction. As such, even if you think you’re diversified—for example, you think you’ve done enough since you’ve diversified among different types of stocks or different types of bonds—you might not be.

For example, during the 2008 financial crisis, many “diversified” portfolios suffered because stocks across different sectors and regions all plummeted at once. This led financial professionals to darkly note that “in a crash, all correlations go to 1,” meaning there was no safe haven.

Of course, this was meant to be overblown, dark humor in a very dark time. Still, given that it’s not wholly wrong—many assets do go down all at once in a crash—Dalio counsels finding truly uncorrelated holdings for your portfolio.

For example, when inflation is headed upward, stocks may struggle, while commodities like gold, oil, and agricultural products often do better since they tend to do well with rising prices. Alternatively, as interest rates rise, bank stocks might benefit while real estate investments suffer since fewer people can afford home loans.

Applying Dalio’s “all-weather” approach, the SPDR Bridgewater All Weather ETF (ALLW) began trading in March 2025.

Dalio’s “All-Weather” System For Surviving Market Storms

Dalio says he breaks down economic conditions into four fundamental scenarios:

1. Rising economic growth
2. Falling economic growth
3. Rising inflation
4. Falling inflation

To come up with what he calls his “all-weather” system, Dalio accounts for the following:

• Stocks typically excel when growth is rising.
• Long-term government bonds typically perform best during periods of falling growth.
• Inflation-linked bonds like TIPS shine when inflation rises unexpectedly.
• Commodities often thrive in inflationary environments.

Instead of attempting the impossible and trying to predict which market environment you’re in, Dalio says he builds portfolios that can do well across all four scenarios.

“The risk of being wrong is the problem, and the world is filled with surprises,” Dalio said. “Portfolio construction is more important even than the picking of the best thing you like.”

While Dalio’s approach at Bridgewater may involve having 15 uncorrelated return streams, he offers a simplified version that most individual investors can do. For that approach, you would choose exchange-traded funds (ETFs) that are themselves diversified within an asset class. You would then allocate them as follows:

The Bottom Line

Dalio’s approach to market crashes centers on preparation rather than prediction. By building a diversified portfolio of uncorrelated assets before trouble strikes, he says, you can cut your risks without missing out on higher returns when the markets are rising.

Dalio, who has seen significant losses in his long and storied career, told Investopedia that this background taught him a key insight that “pain plus reflection equals progress.” “Learning comes from the pain” of major losses “and how you would change things,” he said. Applying his system might be one way to avoid learning important investing lessons the hard way.

Reviewed by Thomas J. Catalano
Fact checked by Vikki Velasquez

In February 2015, RadioShack, a renowned electronics store, filed for Chapter 11 bankruptcy protection following many financial and operational missteps. The company had too many stores that cannibalized revenues from each other and generated losses. RadioShack failed to adapt and stay relevant when most electronics sales shifted online, and the retailer was stuck in brick-and-mortar locations only.

From 2013 to 2014, RadioShack had a high sales concentration coming from cellphones, which accounted for over 50% of the total sales and generated poor profit margins. The company frequently changed its management and direction for the turnaround. In addition, RadioShack made a financial mistake by taking a loan from Salus Capital in 2013, which prevented it from closing more than 200 stores.

In 2023, Unicomer Group, an El Salvadorian company, acquired the RadioShack brand and relaunched it. The company operates online in addition to traditional brick-and-mortar stores.

Key Takeaways

• RadioShack, one of the most prominent electronics stores, made many errors, causing it to go out of business.
• The company had too many stores located within the same area, which hurt business rather than help it.
• Like many businesses, RadioShack suffered when online shopping took off as it did not adapt to e-commerce strategies and lost out to companies like eBay and Amazon.
• RadioShack was heavily concentrated in cell phones; however, RadioShack’s profits were hurt when carriers altered how they sold phones.
• Constant shuffling of CEOs and a bad loan deal further hurt RadioShack, making it difficult to turn around before going bankrupt.

1. High Store Concentration

In 2014, RadioShack operated about 4,300 stores in North America. However, there were many stores that were located too close to each other. For example, there were 25 stores near Sacramento, California, located within a 25-mile radius, and seven stores within five miles around Brooklawn, New Jersey.

With so many stores within close proximity to each other, RadioShack experienced a significant drop in profitability and inventory problems as store traffic dried up. It became very costly to maintain so many stores with sometimes insufficient inventory in one area.

2. Online Competition

Relying solely on its brick-and-mortar sales network, RadioShack began experiencing significant profitability and sales pressure as consumers were buying electronics parts and other gadgets from online retailers such as Amazon and eBay.

For many consumers, RadioShack became irrelevant; any electronics part could be purchased cheaper with a click of a button and delivered anywhere within the United States. Moreover, consumers made numerous complaints that RadioShack lacked certain inventory, making it even less likely that shoppers would come back.

3. Product Concentration

In the early 2000s, the company made a strategic shift towards selling cellphones and accessories that proved to be lucrative for some time. By 2014, cellphones alone accounted for about 50% of the company’s total sales, making it a very risky proposition of a high product concentration.

Things began changing rapidly after the introduction of the iPhone in 2007. As the sales channels for cell phones began shifting towards buying phones through wireless operators, many carriers substantially reduced payments to RadioShack and similar resellers to mitigate the rising cost of subsidizing iPhones

As a result, RadioShack’s profit margins and sales deteriorated significantly, precipitating the company’s bankruptcy.

Note

RadioShack is one of many successful and popular companies that ceased to exist as they failed to adapt to the Internet, such as Blockbuster.

4. Management Problems

The constantly changing management did not help the company’s efforts to turn itself around. From 2005 to 2014, the company changed its chief executive officers seven times. Joseph Magnacca joined RadioShack in 2013 as its CEO to speed up the turnaround.

The company set a goal of restoring profitability by 2015 with product revamps, changes in compensation structure, and aggressive marketing campaigns.

However, as Magnacca’s effort started rolling out, the results got worse due to rising costs, constantly shifting management orders on short notice, and confusing commission structures. The workers’ morale and the company’s profits slipped even further.

5. Financial Missteps

Because RadioShack had experienced negative earnings since 2012, the company needed significant capital infusions to stay solvent. In December 2013, RadioShack was able to obtain a $585 million line of credit from GE Capital and a $250 million term loan from Salus.

As RadioShack’s cash burn accelerated in 2014, the company attempted to close over a quarter of its stores to stop the cash outflows; however, Salus thwarted the closure efforts due to a lack of confidence that the company’s business plan would succeed. This accelerated the bankruptcy filing due to lackluster 2014-2015 holiday season sales and continuing cash burn.

What Happened to RadioShack?

RadioShack in its original iteration failed to adapt to market changes brought on by the Internet and made a slew of poor business decisions resulting in its bankruptcy in 2015 and eventual closure of the business. In 2023, the company was bought by Unicomer Group, a company based in El Salvador, and was relaunched. It now operates both online and with physical stores.

Why Did RadioShack Fail?

RadioShack failed for a variety of reasons. The company failed to adapt to the changing technological landscape that was brought on by the Internet and, with that, online shopping. The company couldn’t compete with big box stores like Walmart and Best Buy, and it couldn’t compete with online retailers like Amazon because it failed to adapt its business model. Many of these competitors offered better prices and convenience. RadioShack continued to push its cellphone business, which didn’t fit with the changing times or consumer preferences.

What Popular Companies Went Out of Business?

Popular companies that went out of business include RadioShack, BlockBuster, Toys “R” Us, Sears, Sports Authority, and Circuit City. While a few of these still exist in some form, like Sears, they are not the grand businesses they used to be. These companies are a warning for all businesses that regardless of how popular, successful, and prominent you are, poor business decisions and a failure to adapt to market changes can cause you to go out of business.

The Bottom Line

RadioShack’s downfall was a mix of poor business decisions and bad timing. With too many stores competing against each other, a failure to adapt to e-commerce, and relying too heavily on low-margin cellphone sales, the company wasn’t able to remain competitive or relevant.

Fact checked by Vikki Velasquez

Retiring in California might bring images of sun-drenched beaches, majestic mountains and a vibrant lifestyle. The third-largest state offers diverse landscapes and weather, providing potential retirement spots for various preferences, with excellent outdoor activities and healthcare services. However, it’s essential to consider the high cost of living, state income taxes and other factors when planning your retirement.

Here’s an overview of key factors to consider when planning your retirement in California to help you make a more informed decision.

Key Takeaways

• California offers diverse retirement destinations, from coastal cities to mountain retreats, catering to various retirees’ preferences.
• The cost of living is generally higher than the national average, with housing being a significant factor.
• While California has high state income taxes, it offers tax benefits for retirees.
• California is home to some of the best hospitals and medical systems, providing comprehensive healthcare services.

Living and Housing Costs

One of the most significant considerations when choosing where to retire is the cost of living, and in California, housing is the primary driver of these costs.

David Rae, a Los Angeles and Palm Springs-based financial planner and President of DRM Wealth Management, suggests researching what your housing budget will get you, whether you rent or buy. 

“When planning to move to California in retirement, be aware that your housing dollars won’t likely go as far here as where you are moving from,” he says. 

Regional Variation in Housing Costs 

Southern California 
This region has some of the highest housing prices in the country. Areas like Los Angeles and San Diego often average home prices nearing or even exceeding $1 million. More inland areas and towns further from big cities will have more affordable options. The Legislative Analyst’s Office (LAO) highlights that California home prices exceed the national average.

Northern California 
The San Francisco Bay Area is known for exceptionally high housing costs, primarily driven by the tech industry. While Sacramento is more affordable within Northern California, it still has higher prices than many other areas.

More Affordable Areas
Retirees looking for more budget-friendly options might consider areas further inland, such as the Central Valley (Fresno) or the Inland Empire (Riverside, San Bernardino). However, these still exceed the national average.

“While cities like San Diego and San Francisco have high living costs, California is not entirely unaffordable,” says Michelle Perry Higgins, CFT and Principal and Financial Planner of California Financial Advisors. 

She adds that there are also attractive 55+ communities that offer affordable housing with social and recreational perks. 

Comparison to the National Average 

Data from the Bureau of Economic Analysis (BEA) and the Bureau of Labor Statistics (BLS) consistently show that California’s cost of living, including housing, is higher than the national average.

According to RentCafe’s Cost of Living in California 2025 report, it is 38% higher than the national average, with housing costs being 97% higher. The LAO also found that mid-tier home prices in California are more than double those in the rest of the U.S.

Rent vs Home Ownership

When deciding between renting and owning, weigh stability and potential equity against flexibility and lower upfront costs. The initial cost of purchasing a property and ongoing expenses like mortgage payments, property taxes, and insurance can be pricey.

Note

According to the LAO, monthly payments for a mid-tier home reached nearly $5,800 in late 2024, an 84% increase since January 2020. Renting also presents challenges, including potential rent increases and finding suitable, affordable units.

Higgins suggests considering your long-term goals and lifestyle preferences when deciding between renting and owning in retirement in California. Ask yourself what your priorities are at this stage of life.

“Depending on your budget and long-term plans, renting may be more financially viable than buying,” Higgins says. “If homeownership makes sense for you, downsizing can be a smart choice, as it reduces maintenance, utility, and potentially property tax costs.” 

State Taxes

Understanding the state tax system and its implications for retirement income is essential when considering retiring in California or building a retirement plan in any state.

Rae says “California has [one of the] highest marginal tax rates in the nation. However, many people will find that they pay fewer state taxes when living in California than in other states.” He also advises working with a CFP to compare how your retirement income would be taxed in your current state versus California, as the results may pleasantly surprise you. 

Higgins agrees, adding, “Working with a financial advisor and accountant can help retirees optimize withdrawals, leverage tax deductions, and create a tax-efficient budget to extend the longevity of their retirement savings.”

Understanding sources of tax-free income can significantly reduce your tax burden.

State Income Tax, Social Security Benefits, and Pensions 

California has a progressive income tax system, with rates considered among the highest in the nation. However, a significant benefit for retirees is that Social Security benefits are not subject to state income tax.

“By strategically managing withdrawals and income streams, retirees may keep their provisional income low enough to receive up to 100% of their Social Security benefits tax-free at the federal level,” Higgins says. As for pension income, it is subject to California state income tax.

Property Tax Protections for Homeowners Aged 55 or Older

California offers property tax relief for those aged 55 and older through Proposition 60 and Proposition 90. These propositions allow for transferring a property tax base under certain conditions when selling and purchasing a new primary residence within or outside the county, according to the California State Board of Equalization. These propositions can save significant property tax for retirees who downsize or move within the state.

Tax Implications of Selling Property 

When selling your home, you may be subject to capital gains tax on any profit from the sale. However, federal and California tax laws offer substantial exclusions for the sale of your primary residence.

For single individuals, the federal exclusion can be up to $250,000, and for married couples filing jointly, it can be up to $500,000, provided ownership and residency requirements are met.

California generally follows these federal guidelines. If the gain exceeds the exclusion, it is considered taxable. For many retirees selling their primary home, the substantial federal and state exclusions can significantly reduce or even eliminate capital gains tax liability.

Climate and Weather 

Considering the climate and weather is essential when choosing a retirement location in California, as they impact lifestyle and costs.

“Now that you are in California, close to the beaches, mountains, and outdoor activities, can you reduce your entertainment, travel, or country club membership?” Higgins suggests.

Mediterranean Climate (Coastal Regions)

Much of the coastal area, stretching from Southern California to parts of Northern California, enjoys a Mediterranean climate with warm, dry summers and mild, wet winters.

This consistent weather is often a significant draw for retirees seeking an active outdoor lifestyle. Since this encourages a more active lifestyle, retirees could benefit indirectly from better health and lower healthcare expenses. The weather can also lead to lower heating costs but often comes with higher living expenses.

Desert Regions 

Eastern and southeastern California experience desert-like climates with hot summers, mild winters, and unique landscapes. Some things to consider about this climate are water conservation and the impact of extreme temperatures on daily life, which can impact air conditioning costs. Housing in some desert areas might be more affordable than in the prime coastal regions, which could be attractive for retirees on a tighter budget.

Cooler Climate (Higher Altitudes)

The Sierra Nevada mountains and other higher-elevation areas enjoy a cooler climate, with significant snowfall during the winter months. There are opportunities for winter sports, but consideration should be given to heating costs and potential snow-related maintenance.

Risks of Natural Hazards and Impact on Insurance Costs

Living in California means awareness of natural hazards like wildfires, droughts, and earthquakes, which can affect insurance costs and financial planning. 

“Even before the recent wildfires, getting homeowners insurance has been challenging in many parts of California,” Rae says. 

Areas with higher wildfire risk often face higher premiums and may struggle to find coverage at all, according to ABC. Homeowners are also advised to have earthquake insurance, which adds to the total cost of home ownership. Prolonged droughts can also affect property values and the overall cost of living. 

“By using risk maps to identify safer areas and obtaining adequate insurance coverage, retirees can effectively reduce risks and gain peace of mind,” Higgins says. 

Important

Although homeowners insurance, particularly natural disaster coverage, can be costly in high-risk areas, it does not affect every state region.

Outdoor Activities and Lifestyle Benefits 

California’s climate supports year-round outdoor activities like hiking and swimming, contributing to a healthy lifestyle and potentially reducing entertainment expenses. The diverse landscapes offer a variety of recreational options. Exposure to nature and time outdoors for older adults has been linked to a higher quality of life and less risk of depression.

Healthcare and Senior Services 

California offers a robust healthcare system, particularly in its major cities like Los Angeles, San Francisco, and San Diego, home to world-renowned hospitals and medical centers, including UCLA Medical Center, UCSF Medical Center, and UC San Diego Health. Healthcare costs are something to consider if you’re retiring on a budget.

Healthcare Access in Major Cities vs. Rural Areas

While large cities offer easy access to specialists and cutting-edge medical facilities, rural areas may face limited healthcare options. The California Public Policy Institute (PPIC) has reported that some rural areas struggle with healthcare access due to fewer providers and hospital closures.

Still, the availability of telehealth services in the state has been expanding, meaning more access for folks across the state.

California is known for its high-quality healthcare and role as a medical innovation hub. The state has many medical research institutions and strongly emphasizes healthcare advancements. For example, the University of California has over 800 research centers and laboratories across ten campuses.

Availability of Senior Services

There’s a variety of senior services, from home care to long-term care, available in California. Still, Rae says that planning for long-term care is challenging no matter where you live. 

“The costs are likely to be well above the national average here in California,” he says. “When it comes to care while aging, you should consider where your friends and family live who may be able to offer a little bit of oversight as you get closer to needing long-term care.” 

Medicare Advantage Plans

Medi-Cal is California’s Medicaid program. It generally provides free or low-cost health coverage to eligible low-income individuals and families, including eligible seniors. A recent survey of Medi-Cal members by the California Healthcare Foundation (CHCF) found that 90% of respondents rate Medi-Cal as a good or excellent program.

According to Rae, the majority of people in nursing homes rely on Medicaid to pay for long-term care, and the California government has been more proactive than many other states in fighting to keep and expand Medicaid benefits for its citizens. 

The California Department of Aging has many great resources on senior services and programs across the state. “Many retirees qualify for Medicare Advantage plans, which offer comprehensive and often affordable coverage options,” Higgins says. “With careful planning and the right Medicare selection, retirees can access quality healthcare while managing costs effectively.”

The Bottom Line 

California offers retirees an attractive mix of great weather, a wealth of healthcare options, and a lively, active lifestyle. However, the high cost of living and state income taxes are significant factors to consider.

Higgins and Rae recommend meeting with financial advisors to better understand how moving to California might impact your retirement plan and to help optimize tax strategies.

Reviewed by Margaret James
Fact checked by Yarilet Perez

A stock-for-stock merger occurs when shares of one company are traded for another during an acquisition. Shareholders can trade the shares of the target company for shares in the acquiring firm’s company when and if the transaction is approved. These transactions are typically executed as a combination of shares and cash and they’re cheaper and more efficient because the acquiring company doesn’t have to raise additional capital.

Key Takeaways:

• A stock-for-stock merger occurs when shareholders trade the shares of a target company for shares in the acquiring firm’s company.
• This type of merger is cheaper and more efficient because the acquiring company doesn’t have to raise additional capital for the transaction.
• A stock-for-stock merger doesn’t impact the cash position of the acquiring company.
• Acquisitions can be made with a mixture of cash and stock or with all-stock compensation.

What Is a Stock-for-Stock Merger?

An acquiring company can pay for the assets it will receive for a merger or acquisition in various ways. Acquisitions can be made with a mixture of cash and stock or with all stock compensation which is referred to as a stock-for-stock merger.

The acquirer can pay cash outright for all the equity shares of the target company and pay each shareholder a specified amount for each share or it can provide its own shares to the target company’s shareholders according to a specified conversion ratio. The shareholder will receive X number of shares of the acquiring company for each share of the target company owned by a shareholder.

Example of a Stock-for-Stock Merger

A stock-for-stock merger can take place during the merger or acquisition process.

Company A and Company E might form an agreement to undergo a 1-for-2 stock merger. Company E’s shareholders will receive one share of Company A for every two shares they currently own. Company E shares will stop trading and the outstanding shares of Company A will increase after the merger is complete. The share price of Company A will depend on the market’s assessment of the future earnings prospects for the newly merged entity.

Important

It’s uncommon for a stock-for-stock merger to take place in full. A portion of the transaction is typically completed through a stock-for-stock merger and the remainder is completed through cash and other equivalents.

Stock-for-Stock Mergers and Shareholders

The acquiring company proposes payment of a certain number of its equity shares to the target firm in exchange for all the target company’s shares when the merger is stock for stock. The offer will include a specified conversion ratio. The acquiring company issues certificates to the target firm’s shareholders provided the target company accepts the offer.

This entitles them to trade in their current shares for rights to acquire a pro-rata number of the acquiring firm’s shares. The acquiring firm issues new shares to provide shares for all the target firm’s converted shares, adding to its total number of shares outstanding.

This action causes the dilution of the current shareholders’ equity because there are now more total shares outstanding for the same company. The acquiring company obtains all the target firm’s assets and liabilities, however, effectively neutralizing the effects of the dilution. The current shareholders will gain in the long run from the additional appreciation provided by the target company’s assets should the merger prove beneficial and provide sufficient synergy.

What Is Outstanding Stock?

Outstanding stock is the shares a company has issued to date and that are currently owned by shareholders. The total number of a company’s outstanding shares should appear on its balance sheet.

What Is Shareholders’ Equity?

Shareholders’ equity is the remaining value of a company’s assets after accounting for and subtracting its liabilities and debts owed. Shareholders maintain a claim to equity.

What Are Preferred Shares?

Preferred shares are a percentage of ownership in the issuing company. These shareholders have a proportional claim to the company’s assets and earnings based on the number of shares they hold. They have a claim that’s superior to the assets in the event the company must liquidate and it’s superior to that of common shareholders. They have no say in company operations, however.

The Bottom Line

Taking over a company can be expensive. The acquirer may have to issue short-term notes or preferred shares if it doesn’t have enough capital and this can affect its bottom line. Initiating a stock-for-stock merger prevents a company from taking those steps, saving both time and money. It doesn’t impact the acquiring company’s cash position so there’s no need to go back to the market to raise more capital.

A stock-for-stock merger is attractive for companies because it’s efficient and less complex than a traditional cash-for-stock merger. The costs associated with the merger are well below traditional mergers.

Fact checked by Yarilet Perez
Reviewed by Somer Anderson

An IPO, or initial public offering, is the process a private company undergoes to sell shares of its stock to the public for the first time and become a public company. When a company makes this transition, it is no longer in the hands of the private owners and investors but is now under public ownership. Every public company has had an IPO, from small businesses listed on the exchanges to the biggest companies, such as Apple and Amazon.

Key Takeaways

• An initial public offering (IPO) is when a private company becomes public by selling its shares on a stock exchange.
• Private companies work with investment banks to bring their shares to the public, which requires tremendous amounts of due diligence, marketing, and regulatory requirements.
• Purchasing shares in an IPO is difficult as the first offering is usually reserved for large investors, such as hedge funds and banks.
• Common investors can purchase shares of a newly IPO-ed company fairly quickly after the IPO.

How an Initial Public Offering (IPO) Works

IPO is one of the few market acronyms that almost everyone is familiar with. Before an IPO, a company is privately owned—usually by its founders and maybe the family members who lent them money to get up and running. In some cases, a few long-time employees might have some equity in the company, assuming it hasn’t been around for decades.

The founders give the lenders and employees a piece of the action in lieu of cash. They know that if the company falters, giving away part of the company won’t cost them anything. If the company succeeds and eventually goes public, theoretically everyone should win. A stock that was worth nothing the day before the IPO will now have value.

However, because those private owners’ shares don’t trade on an open market, their stakes in the company are hard to value. Contrast that with an established company like IBM; anyone who owns a share knows exactly what it’s worth with a quick look at the financial pages.

A privately held company’s value is largely a guess, dependent on its income, assets, revenue, growth, etc. While those are certainly much of the same criteria that go into valuing a public company, a soon-to-be-IPO-ed company doesn’t have any feedback in the form of a buyer willing to immediately purchase its shares at a particular price.

Important

An IPO is a form of equity financing, where a percentage ownership of a company is given up by the founders in exchange for capital. It is the opposite of debt financing.

The IPO process works with a private firm contacting an investment bank that will facilitate the IPO. The investment bank values the firm through financial analysis and comes up with a valuation, share price, a date for the IPO, and a tremendous amount of other information.

A business that plans an IPO must register with the stock exchanges and the Securities and Exchange Commission (SEC) to ensure it meets all the necessary criteria. Once all of the required processes are completed, a company will be listed on a stock exchange and its shares will be available for purchase and sale. This is one of the main ways a business raises capital to fund its growth.

Anonymity vs. Fame

The vast majority of NYSE and Nasdaq-listed companies have been trading in anonymity from day one. Few people are concerned with every company listed on an exchange, especially ones that don’t make a splash or control a significant amount of market share.

When most companies offer shares to the public, initially the news barely registers with anyone outside of the securities industry; however, when a highly publicized Meta—formerly Facebook—or Google walks into the room, most people take notice.

That’s because such companies operate on the retail level or its equivalent. They’re ubiquitous. There aren’t hundreds of millions of people logging into their Cisco account to post photos multiple times a day, and no one makes a Hollywood feature film about people and companies that most of the population isn’t interested in.

Fame can be a positive attribute as it requires little marketing to bring attention to the IPO and will more often than not result in high demand for the shares. Fame also comes with a lot more pressure, as investors, analysts, and government bodies all scrutinize every move of the popular company.

Can You, and Should You, Buy?

When a company sells shares during its IPO, it is known as the primary distribution. So why doesn’t every investor, regardless of expertise, buy IPOs the moment they become available? There are several reasons.

The first reason is based on practicality, as IPOs aren’t that easy to buy. Placing a “buy newly issued stock X” order is harder than it sounds.

The company that’s about to go public sells its shares via an underwriter, an investment bank tasked with the process of getting those shares into investors’ hands. The underwriters give the first option to institutions, large banks, and financial services firms that can offer the shares to their most prominent clients.

Note

If you invest in an exchange-traded fund (ETF) or a mutual fund, they may purchase the shares of an IPO, which is an easier way for you to gain exposure to the IPO.

When a stock goes public, the company insiders who owned the stock in the first place may be subject to a lockup agreement that prevents them from selling their shares for a fixed period (usually 180 days). Up until that point, the insiders are rich only on paper.

The moment they can sell, they usually do—all at once. This, of course, depresses the stock price. It’s at that point, with a glut of shares entering the market, that ordinary investors often get their first crack at what is now an IPO well along in its infancy.

Is Buying an IPO a Good Idea?

Buying an IPO can be a good idea. It’s a regular practice of crossover investors who get in on the ground floor of a stock with high upside potential. They may reap the rewards at some point in the future as the stock appreciates over time. This would have been the case, for example, if an investor bought the IPO of Apple or Netflix. That being said, there is also a downside: The IPO may be overvalued and the stock does not appreciate at all and even depreciates from the IPO price.

How Can I Buy an IPO?

Buying an IPO starts with having a brokerage account. From there, you must ensure you meet the eligibility requirements of the IPO. You will then need to request the shares from your broker. A request does not ensure that you will have access to the shares as brokers typically get a set amount. If you do have access, then the final step is placing the order. Most IPOs are not accessible to the average retail investor but rather only to institutional investors.

Do IPOs Always Have a Profit?

No, IPOs do not always have a profit. Many times a company is overvalued or valued incorrectly and its stock price falls after the IPO. It never reaches the IPO value that investors paid for, and they therefore don’t make any money but rather lose money.

The Bottom Line

The late and legendary Benjamin Graham, who was Warren Buffett’s investing mentor, decried IPOs as being for neither the faint of heart nor the inexperienced. They’re for seasoned investors; the kind who invest for the long haul, aren’t swayed by fawning news stories, and care more about a stock’s fundamentals than its public image.

For the common investor, purchasing directly into an IPO is a difficult process, but soon after an IPO, a company’s shares are released for the general public to buy and sell. If you believe in a company after your research, it may be beneficial to get in on a growing company when the shares are new.