ONE FAULTY INVESTMENT

You rarely find me so deeply angry at a common investment product that I dream of blowing it to smithereens. Especially one that's sold by America's leading financial institutions, commands $393 billion in assets and sounds like a winner for retirees. But stand back, I'm going to light the fuse. My target: tax-deferred, variable annuities--a name that hints of probity, with a soupcon of tax savings on the side. What a laugh. It will cost you more in taxes and possibly risk your security, too. "I cannot imagine a personal financial situation where I'd recommend a VA as a good idea," says actuary John Biggs, former chair of TIAA-CREF pension funds.

Before going forward, let me define the battlefield. I am not dissing tax-deductible retirement annuities that come with employer-sponsored plans. Nor "fixed annuities" that pay a set rate of interest. Nor "immediate annuities" that pay you a monthly income for life.

My quarry is the commercial tax- deferred annuity sold by stock brokers, insurance agents, banks and financial planners. Their market: older people--so they're lying in wait for boomers approaching retirement. Savers in their 70s and 80s could be roadkill, too (do you know where your parents' money is?). Here's how VAs work:

You put up a sum of money for a long-term investment in mutual funds. But instead of buying the funds directly, you buy through the annuity. Any investment growth (dividends, capital gains) accumulates tax deferred, to be taxed as ordinary income when you take the money out. Typically, you're penalized for withdrawals made during the first five to seven years, says the National Association for Variable Annuities, although modest sums may be taken free.

The VA usually comes with some guarantees--for example, that your investment will never be worth less than you put in. That especially appeals to retirees. But true long-term investments aren't likely to shrink, so the guarantees are vastly overvalued and overpriced, Biggs says. And you're still losing money steadily, compared with other investment options.

Start with the costs. You may think that you're paying no sales commission, because it's not visible. But the sales machine earns 5 percent to 8 percent. The broker's earnings are buried in the annual costs--contract costs, investment management, insurance guarantees, administration--typically about 2 percent a year. That's $1,000 on a $50,000 investment, and more as the investment grows. You'd be horrified if you saw what you were paying in dollars and cents, says attorney Ronald Uitz of Washington, D.C., who has sued annuity firms for misleading sales tactics.