Structured settlements offer recipients a steady stream of income paid out over months or years, often arising from personal injury claims or legal settlements. While the payments provide financial stability, many recipients want to use this predictable income to build wealth over time. One of the best ways to do this is by creating a balanced investment portfolio that matches your financial goals, risk tolerance, and timeline.
In this article, we will explore how to create a balanced portfolio using your structured settlement income to grow your wealth safely and effectively.
Understanding the Importance of a Balanced Portfolio
A balanced portfolio is an investment strategy that spreads your money across different asset classes, such as stocks, bonds, and cash equivalents, in proportions that align with your financial goals and risk tolerance.
Why balance your portfolio?
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Risk management: Different asset classes perform differently under various market conditions. Diversification reduces the impact of any one asset’s poor performance.
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Steady growth: A mix of growth-oriented and income-generating assets helps you build wealth while generating regular income.
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Flexibility: Balanced portfolios can be adjusted as your financial situation or goals change.
For structured settlement recipients, a balanced portfolio is especially important because your settlement payments are designed to provide financial security. Your investment strategy should complement this by protecting your principal while seeking growth.
Step 1: Assess Your Financial Situation and Goals
Before creating a portfolio, understand your:
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Monthly structured settlement income: How much do you receive, and when?
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Living expenses: What are your essential costs, and do your payments cover them fully?
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Investment goals: Are you investing for retirement, education, buying a home, or other purposes?
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Risk tolerance: How comfortable are you with market fluctuations and potential losses?
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Investment timeline: When will you need access to your invested funds?
This assessment helps determine how aggressive or conservative your portfolio should be.
Step 2: Decide on an Asset Allocation
Asset allocation means deciding what percentage of your portfolio to invest in various asset classes. A common guideline is:
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Stocks (equities): Offer growth but are more volatile.
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Bonds (fixed income): Provide steady income and lower risk.
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Cash or cash equivalents: Offer liquidity and safety but low returns.
Example allocations based on risk tolerance:
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Conservative: 30% stocks, 60% bonds, 10% cash
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Moderate: 50% stocks, 40% bonds, 10% cash
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Aggressive: 70% stocks, 25% bonds, 5% cash
For structured settlement recipients, many experts recommend a moderate to conservative allocation because the goal is to protect your guaranteed income.
Step 3: Choose Investment Vehicles
Now that you know your allocation, decide which types of investments to use within each asset class.
Stocks
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Index funds or ETFs: These track a broad market index (e.g., S&P 500) and offer diversification with low fees.
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Dividend-paying stocks: Provide income through dividends, complementing your settlement payments.
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Blue-chip stocks: Established companies with stable earnings.
Bonds
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Government bonds: Low risk and provide steady interest income.
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Municipal bonds: Often tax-exempt, suitable if you have tax liabilities.
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Corporate bonds: Higher yields but slightly more risk.
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Bond funds or ETFs: Diversify across many bonds, reducing risk.
Cash and Equivalents
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High-yield savings accounts: Safe and liquid.
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Certificates of deposit (CDs): Provide fixed returns for set terms.
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Money market funds: Offer liquidity and modest returns.
Step 4: Invest Your Structured Settlement Income Regularly
Since your structured settlement income is paid periodically, you can use a strategy called dollar-cost averaging (DCA):
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Invest a fixed amount of your payments regularly (e.g., monthly).
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DCA reduces the risk of investing a lump sum at the wrong time.
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It smooths out market volatility by buying more shares when prices are low and fewer when prices are high.
Regular investing aligns perfectly with the steady income from structured settlements.
Step 5: Rebalance Your Portfolio Periodically
Market movements can shift your portfolio away from your target allocation. For example, if stocks perform well, they may become a larger percentage of your portfolio, increasing your risk.
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Rebalancing means selling some assets that have grown disproportionately and buying others to restore balance.
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Schedule portfolio reviews every 6 to 12 months.
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Rebalancing maintains your desired risk level and helps lock in gains.
Step 6: Consider Tax Implications and Use Tax-Advantaged Accounts
Although structured settlement payments themselves are typically tax-free, any earnings from investing those payments may be subject to taxes.
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Use tax-advantaged accounts like IRAs or Roth IRAs if eligible.
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These accounts help grow your investments tax-deferred or tax-free.
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Consult a tax professional to optimize your investment strategy.
Step 7: Protect Your Investments and Plan for Emergencies
Ensure your portfolio supports your financial security:
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Maintain an emergency fund with 3 to 6 months of expenses in liquid accounts.
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Avoid investing money you might need soon.
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Stay wary of scams targeting structured settlement recipients.
Step 8: Seek Professional Advice
Creating and managing a balanced portfolio can be complex. Consider:
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Hiring a certified financial planner (CFP) experienced with structured settlements.
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Getting ongoing advice as your life circumstances change.
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Using robo-advisors for low-cost, automated portfolio management.
Example Balanced Portfolio Using Structured Settlement Income
Let’s say you receive $2,000 monthly from your settlement and want to invest $1,000 each month.
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Asset allocation: 50% stocks, 40% bonds, 10% cash
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Stocks: Invest $500 monthly into an S&P 500 index ETF and a dividend-focused ETF.
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Bonds: Invest $400 monthly into a mix of government and corporate bond funds.
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Cash: Keep $100 in a high-yield savings account for liquidity.
Using dollar-cost averaging, you steadily build a diversified portfolio designed to grow over time without taking excessive risks.
Benefits of a Balanced Portfolio for Structured Settlement Recipients
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Steady growth: Stocks provide capital appreciation.
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Income generation: Bonds and dividend stocks provide regular income.
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Risk reduction: Diversification protects you from market swings.
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Financial security: Cash reserves ensure you have funds for emergencies.
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Flexibility: You can adjust your portfolio as goals or income change.
Final Thoughts
Your structured settlement income offers a unique opportunity to invest regularly and build wealth over time. Creating a balanced portfolio tailored to your financial goals and risk tolerance is the key to maximizing your settlement’s potential without sacrificing security.
Remember to:
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Assess your financial situation and goals.
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Choose an asset allocation that fits your comfort level.
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Invest regularly using dollar-cost averaging.
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Rebalance periodically.
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Protect your investments with emergency savings.
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Seek professional advice when needed.
With patience, discipline, and the right strategy, your structured settlement income can become a powerful tool for lasting financial growth.