Q. My wife and I have $500,000 in fixed annuities earning about 5 percent. Recently a broker made a proposal to us to make a tax-free exchange into a variable annuity with MFS Regatta Annuity program. The benefit of this program is a 5 percent extra credit on your contribution and under Death Benefits Option 1 your beneficiary receives 40 percent enhanced benefit. My question to you: "Does this sound too good to be true?"

---R.V., Arlington, TX

 

A. It isn't "too good to be true" because you'll be paying a major annual expense burden to secure those benefits. Worse, the returns on comparable underlying funds will be less than 5 percent.

MFS can make the 5 percent credit offer because you'll pay that, or more, in fees before you can retrieve your money if you change your mind. Then, while the Death Benefit is sweetened over the standard contract, the amounts are not gigantic: 40 percent of investment earnings up to 40 percent of your original investment. It amounts to a small life insurance policy of uncertain amount.

To get these benefits, you need to commit to a product that has an annual charge of 1.45 percent (1.30 percent for the mortality and risk expense and 0.15 percent for administration). These charges are in addition to the expense ratio of the underlying mutual fund sub-accounts. According to the Morningstar Principia database, the total expenses will range from 2.01 percent a year for the government securities fund to a whopping 2.82 percent a year on their money market fund.

As a consequence, the annualized return on the government securities sub-account over the last 5 years was 4.34 percent---that's less than you are currently earning. The return on the money market fund over the last 5 years was 3.62 percent. On returns like that even the 40 percent Death Benefit sweetener isn't worth much.

The only way to get a higher return is to take significantly more risk by investing some of the money in equities or junk bonds. If you put your money in the most popular of the funds in this contract, Capital Appreciation, you'll be investing in a fund that has ranked at the 75th and 60th percentiles over the last 3 and 5 years, respectively. This means that 75 percent and 60 percent of comparable funds have done better. The second most popular fund, Total Return, has ranked in the 73rd percentile and 69th percentile over the last 3 and 5 years, respectively. So you're not exactly buying into star quality money management.

What to do? Pass on this offer and consider some of the "CD" type annuities that are available. According to Fisher Publishing, a Dallas firm that tracks fixed annuity returns, CD type annuity yields range from 5.53 percent for one year up to 6.43 percent for five years.

 

Q. I am currently paying $700 per month in apartment rent. I am contemplating buying a house in San Marcos, Texas where a decent house costs about $100,000. My assets include a $30,000 CD earning a little more than 5 percent and $50,000 split among various mutual funds. To qualify for the mortgage I would need to use all of the $30,000 CD for down payment and closing costs. I am a state employee and am eligible for retirement in 12 years. I do not intend to live in this area after retirement so I would live in the house for only 12 years. Is it wiser to use the CD for the purchase of the home or should I leave the money in the CD and continue to pay apartment rent?

---M.L., San Antonio, TX

 

A. If the total monthly cost of owning the house will be close to the total monthly cost of renting, including utilities, buy the house. While your tax benefits from ownership will be small to non-existent and you will lose the taxable earnings on the $30,000 CD, there is a good chance that the house will appreciate at least 4 percent a year over the next 12 years. One reason: the Austin-San Marcos metropolitan area is one of the top ten growth areas in the country.

When you sell the house every dime of appreciation will be tax-free--- so there is a very good chance that you will do much better than holding the CD and paying rent.

One caution: for things like this to be good bets you've got to be intent on owning for a long period. Where people get hurt in residential real estate is in short-term ownership periods.