Both my lawyer and CDFA advised me to take a lump sum divorce settlement that came from the sale of a rental home my ex-husband and I had in lieu of alimony. I have not invested my money and am not sure what is best (at my age of 56). My CDFA thinks I should put a third into annuities, but my estate planner says those fees are much too high. I want to make it last and make sure I’m making wise investments. — Karen
Although the circumstances are intense both financially and emotionally, you’re taking charge of your future by becoming educated. You should take a diversified approach to your investments, encompassing both bonds and stocks.
Taking into account your age and risk tolerance, and assuming you’re a moderate investor, you should allocate approximately 45 percent of your funds into bonds, with the balance in diversified domestic and international stocks. The closer your proximity to retirement, the more conservative you should be to shield you from stock volatility.
Bonds are debt investments. When you invest in a bond, you’re effectively loaning money to that institution for a specified amount of time at a fixed interest rate. Bonds are frequently described as fixed-income securities, because you know from the outset the amount of cash to be returned to you if you hold the bond until maturity. When you buy a bond you essentially become a creditor of that institution.
Were you to buy a bond with a face value of $1,000, a coupon of three percent and a 10-year maturity, by age 66, you would have received $30 of interest payments each year. At maturity, following the full ten year period, your initial $1,000 principal payment would have been repaid to you.
Consider investing a portion of your fixed income position in unconstrained bond mutual funds, as they are less sensitive to movements in interest rates. Similar to stock mutual funds, with bond mutual funds, you pool your money with other investors. Traditional bond funds, also known as core bond funds, are diversified among U.S. government, corporate and mortgage-backed bonds. This 45 percent of your portfolio should be allocated to four or five bond funds, incorporating both core and unconstrained funds.
You should not invest the same amount in each mutual fund. For example, you would not allocate as high a percentage to the PIMCO local emerging market bonds as you would to the PIMCO total return fund. They represent different asset classes and therefore warrant a divergent allocation.
In terms of the remaining 55 percent of your portfolio, consider allocating both to growth stocks and dividend paying stocks. While dividends may change over time as companies increase and decrease their profit, typically large, well-established companies pay higher dividends than newer, smaller companies.
Lastly, although it may be tempting to invest in annuities, they may not be the answer for everyone. These products are typically highly complex and require a great deal of research. Understand that high commissions are frequently paid to the individual selling them to you. For instance, a seven to eight percent commission split with a firm will still yield the seller a sizeable three to four percent commission. In addition, annual fees are often hefty at two to three percent per year if additional living benefit riders are attached. Do your research and if you still don’t fully understand the product then it may not be right for you.