Annuities: a valuable asset.

Now's the time to reassess how you allocate your assets. In today's low-interest environment, you want to make the most of the money you earn. Whether you're 25 or 45, the asset mix in your investment portfolio should pave the way for your future.

Buying an annuity can be a great way to fund your golden years or to grow assets for any other future cash needs, says Vernon Brown, certified financial planner and owner of V. Brown & Co. Inc., White Plains, N.Y. An open-ended contract between an investor and a life insurance company, an annuity is designed to pay a set amount of money at a future date. Annuities, however, are not cheap. Most companies require that you plop down a minimum of $5,000.

Still, these investment vehicles are increasingly popular with Americans, who last year poured a record $25 billion into them. Part of their appeal: Annuities are one of the few remaining investments offering a tax-break for retirement. Earnings, interest dividends and capital gains all compound tax free until you start receiving payments. "As the population ages, the concern for saving and investing grows," says Ellie Etter, director of marketing for Boston-based Fidelity Investments' Insurance and Annuity Group.

Several types of annuities are ideal for disciplined savers who are over 30 and seeking relief from high taxes, says Brown. Most annuity holders opt to receive their money at retirement - and for good reason. The IRS imposes a 10% tax penalty on withdrawals before age 5 91/2. But investors can wait until the ripe old age of 85 to let their savings grow tax-free. Annuity holders can take their money in a lump sum, or receive lifetime monthly checks payable to them or their spouses (known as annuitizing).

An annuity can also help avoid the costs and other hassles associated with probate. in the event of your untimely death, some contracts, called life with period certainty, allow the value of the annuity to pass directly to a named beneficiary, who receives payments for up to 10 years.

Gauging Your Options

Most annuities are fixed-rate, offering a set interest rate over a 12-month period or longer (currently about 5% ). Fixed annuities come in two varieties. The first, so-called "CD annuities," lock in a rate, usually for a year. You could take the money out after a year and pay the taxes on it. Or you could roll it over with no back-end penalties. But, as a general rule, annuities are not recommended for people who want quick access to their funds.

The second kind of fixed annuity offers a guaranteed interest rate for longer time periods - up to 10 years. At the end of the term, the company offers a renewal rate; then you can reinvest, seek another insurer or cash out.

Today's investors have more annuity choices, including variable annuities, whose rates fluctuate with stock and bond prices. The result? More avenues to diversification. "Most people who are in fixed annuities are very risk adverse," says Lynn Ballou, certified financial planner and president of Ballou Financial Group Inc., a tax preparation and investment advisory firm in Lafayette, Calif. The principal is guaranteed against loss and the account's value is immune to market swings.

With variable annuities, your portfolio's performance flows with the market tide, but you can invest in several vehicles. Your choices might include a mixture of a balanced mutual fund, money-market fund, bond fund or stock fund. Ideally, variable annuities are for people looking to outperform interest rates. Like many planners, Ballou believes those under 50 with long investment horizons are better off in variable annuities. "Presently, they are doing much better than fixed-rate annuities. You could get a variable annuity holding growth stock funds rendering returns between 8% and 12%."

Another good reason to get a variable annuity: The money goes into a separate account, so ifs not part of the insurance company's assets. Money in fixed annuities goes into a general account - one of the first things creditors tap [if the company goes belly up], says Etter. So, it's important to check the credit worthiness of the insurance company.

Investors shouldn't plunge into annuities lightly. Unlike mutual funds, ifs tough to track an annuity's portfolio. You won't find them listed in the daily paper, so contact the company managing the funds to find out how they are performing.

Building A Nest Egg 

There's no limit on the amount you can invest in an annuity, but you will have to put up a minimum initial investment - typically $5,000 or more. Some firms give you the option of making period investments - for as little as $50 a month - to buy an annuity.

The downside to annuities: Outside of your initial investment, they are costly. Investors are normally subject to annual contract maintenance fees for administrative costs, asset management and/or mortality expenses (death benefit guarantee).

If you take your money, expect to pay the insurer surrender charges or back-end load fees. They are designed to keep you locked into the contract until it runs its course. Generally, these fees are 5% to 10% for the first year of the annuity contract, then decline to zilch after five to 10 years. Most insurance companies let you withdraw up to 10% of the value of your annuity each year without penalties. But you'll still owe Uncle Sam.

What To Look For

Not long ago, annuities were sold exclusively by brokers and insurance agents. Today, banks and thrifts sell them, usually as alternatives to taxable CDs. But no matter where you buy, no annuity is federally insured - your contract is only as strong as the insurance company that issues it. Other considerations: * Look over all the investment choices the issuer has to offer. Never give a broker or agent carte blanche. * Look at reports on insurers from rating firms like A.M. Best Co. Inc. (908-439-2200) and Moody's Investors Service Inc. (212-553-0300). You want a company that can pay your money when the time comes. * Ask to see the interest rates the company paid over the last few years. Consult rating data compiled by Lipper Analytical Services (908-273-2772) and Morningstar Mutual Funds (800-876-5005). * Roll over the assets in your account if you are dissatisfied with the way your money is being handled. in response to a federal tax law, Section 1035 Exchange, you can instruct the insurance company to take the proceeds of your annuity and send it directly to another insurer. This is a tax-free exchange, with no IRS penalty. You can also change the investment mix in your portfolio at anytime without any tax consequences.

A financial adviser can help tailor your mix of assets to reflect your appropriate level of risk and address your spending needs.

F.Y.I.

B.E. STOCK TIP

Toy stocks: definitely a growth industry with appeal to investors. Our recommended play is Tyco Toys Inc., based in Mt. Laurel, N.J., the world's third largest toy manufacturer. it was recently trading on NYSE at $12.50, less than half the price of other toy stocks. As it gobbles up global market share, earnings could grow 15% to 20%. New product lines, such as the popular incredible Crash Dummies action figures should boost company sales.

EARLY RETIREMENT

Decades ago, the decision to retire was strictly personal. Employees took the initiative and notified their employers. But more recently, in the wake of corporate restructurings and downsizings, companies are pushing their employees toward early retirement.

Any worker who isn't ready to leave but is in a quandary over early retirement incentives should look at a free booklet from the American Association of Retired Persons, Washington, D.C. Look Before You Leap: A Guide to Early Retirement Incentive Programs provides invaluable tips on what to look for in such programs and how to negotiate a viable package.

MUTUAL FUND UPDATE

If you think you need a lot of bucks in order to invest you're dead wrong. You can easily start a portfolio of top-notch mutual funds with as little as $250. Better yet, a New York portfolio management firm, Neuberger and Berman Management Inc., is offering you the benefits of investing in the "Big Apple." At its peak, the six months ending June 1992 the firm's Manhattan Fund was up 22.6%, and it closed offering 17.7%

This fund has "GARP" (Growth at a Reasonable Price). Just $250 down and $50 a month and you're in on the ground floor because the firm offers would-be investors a special dollar-cost averaging deal.

However, the Manhattan Fund is a fast-tracker, which means ifs an aggressive capital appreciation fund - investing in riskier companies but offering a greater return on your investment. ifs not for the timid.

If you're still undecided, call and ask for a free customized illustration. Tell the representative how much you want to invest and for how long. h could be anywhere from $1,000 to $5,000 and from five to ten years. The rep will then tell you the projected value of your investment For more information, call 1-800-877-9700.

F.Y.I.

EASY

MONEY

With interest rates at an all-time low, many homeowners see a home equity line of credit as a cure-all for their financial ills. Bin if you're hard-pressed for money, putting up your home as collateral is not a smart move. You could lose it

Home equity lines of credit are undoubtedly easy to get and easy to use. And they can be viable. The test? Just make sure you can pay back the loan within five years.

Most lenders now allow you to apply by mail, fax or telephone. Once approved, funds are available on demand by using a personalized checkbook. The size of the line of credit could run from $10,000 to $1 million, depending on the amount of equity in your home, your personal credit history and your income. As a revolving credit line, the credit becomes available again as you pay back the principal.

The adjustable rate on a home equity line of credit (currently about 7.5%) is a percentage point or two above prime and is charged on the money withdrawn. However, if the prime shoots up, so does the rate on your payments.

SOCIAL SECURITY CHECK

So you think you need not worry about Social Security until you hit age 65? Guess again. Employees should peek into their earnings records at least every three to four years. To ensure that your payments are being credited correctly - and to get an estimate of your benefits upon retirement - request a Personal Earnings and Benefits Estimate from the Social Security Administration; 800-772-1213.

PAYING FOR COLLEGE

Too many high school students stride down the commencement aisle with a diploma, but little else in hand to finance their next step. The key to financing college is to plan way in advance - years before graduation.

Parents and students who own an IBM-compatible computer can take advantage of $25 billion in college funds, thanks to a novel, if pricey, software developed by the College Board.

The College Cost Explorer Fund Finder lets users tap into a database of thousands of public and private scholarships, loans and other fund sources. The software program, which sells for $395, plus $2.95 shipping, was also produced in part by the American Student Assistance and the Education Resources Institute.

For more information, call 212-713-8000.