Dr. Don, I am in need of advice. I just received a long-awaited divorce settlement. I am in my early 40s and have two teenage children. They have trusts that will cover their college expenses. I have no debt. I receive $9,500 monthly and will continue to do so until 2009. This is adequate for us to live off of and pay taxes, but I will need to receive the same amount from my investments after 2009. My problem is I have been sitting on this money due to the recent volatility in the stock market and I do not know if and when to get in. The remainder is invested as cash in a money market at 5% -- $1,485,000. I do have a friend who is an adviser; however, I am not sure I want to go that route. I really need to get the annuity invested, as it is all cash. I am not good at taking a lot of risk. Please Help! P.L.

P.L.,

Don't kick yourself for sitting in cash over the past few months. A lot of people are reading this wishing they had been in cash during the same time frame. You're certainly starting over with a clean slate in terms of your portfolio. The good news is that you can be fairly conservative with this portfolio and still meet your needs for income starting in 2009. The bad news is that your income target may be too low.

If you expect to be able to spend less than your stipend this year, it could be a very different situation eight years from now because of how inflation erodes your purchasing power over time. With a 3% annual inflation rate, it will take about $12,000 in 2009 to give you the same purchasing power as $9,500 today. And if there's no cost-of-living escalator in your monthly stipend, then you may need income from your portfolio prior to 2009.

Your current mutual fund and stock holdings are such a small part of your overall portfolio that I'm not going to focus on them here. Instead, I'll focus on the cash and the tax-deferred annuity. The annuity was purchased just last year, so switching firms would be fairly expensive because of the surrender charges.

As you point out, it makes sense to invest the annuity in several of the stock subaccounts rather than keeping it in a money fund. Early distributions before age 59 1/2 will incur a 10% penalty, so you have close to a 20-year investment horizon with this money. The money belongs in the stock market. Shop among the subaccounts looking for diversified, broad-based stock investments, while keeping an eye on the annual expenses for the accounts.

You can always consider a Section 1035 exchange to another low-fee annuity after the surrender charges have expired if you're not satisfied with the investment choices or annual expenses. (To find out more about the exchange process, see this

Investor Alert from the

NASD

.) Just be sure you don't let a salesperson talk you into a bonus annuity as a way of changing annuity providers. Some annuities offer a signing bonus to get you to switch into their annuity, but in most cases, these won't be enough to compensate you for the new fees you'll have to pay and the fact you'll be subject to new surrender charges.

It's important to take a holistic approach to the investments in your portfolio. Because you can't take distributions from the annuity until age 59 1/2 without paying a penalty on top of the income taxes due on the distribution, you'll be using your taxable account to meet your income requirements between 2009 and the time when you turn 59 1/2.

You'd normally want to concentrate your stock investments in your taxable accounts because you can manage capital gains there and any long-term gains are taxed at the lower capital gains rate. But because you'll be drawing from your taxable account to meet your income needs, you'll want to have a higher percentage of stocks in your tax-deferred accounts. Qualified distributions from the IRA accounts and the variable-annuity subaccounts will be taxed at your ordinary income rate, so you're indifferent as to how these tax-deferred accounts earn their returns.

As for your reluctance to get into the market now, it's always difficult to jump right in when you have a lump sum to invest. Setting up a schedule to invest part of the money each quarter over the next year is a reasonable approach to this problem.

What you really need to do, though, is find an investment adviser to take on the responsibility of running this portfolio -- along with a good accountant. This money has to sustain you for the rest of your life; although it may seem like a lot, a few mistakes can derail the portfolio, leaving you without the financial security that this wealth was intended to provide you.

First, you should decide whether you want to hire a fee-based financial planner to periodically review your portfolio and make suggestions, or a money manager to oversee the accounts. If you decide to hire a money manager, don't give that person discretionary authority over the account -- at least not until you've gained confidence in the money manager's abilities and trust his or her judgment. Either a manager or a planner should be able to lay out a plan, showing you how you can meet your income goals while managing the portfolio's risk.

It's important that you interview several firms before you choose somebody to help manage your money. The

Certified Financial Planner Board of Standards

provides a

framework for interviewing planners that will help you ask the right questions. Like any other decision, an informed consumer makes a better decision. Even if you ultimately choose your friend to manage your accounts, you'll have a better idea of account fees, account allocations and performance objectives. Keep in mind that if you don't think you can muster the courage to fire your friend if necessary, then you shouldn't hire that person.

One more thing: You're already paying quite a bit in annual expenses for the tax-deferred annuity, so you don't want to pay an annual management fee to the investment adviser on top of what you're already paying the insurance company. Be willing to pay for advice on the initial allocation to the variable subaccounts, but keep the annuity balances out of any assets-under-management fee calculation.

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Dr. Don Taylor has been an investment professional for nearly 15 years, most recently as the treasurer for a nonprofit organization where he managed more than $300 million in assets. He is a chartered financial analyst, holds a Ph.D. in finance and has taught investment and personal finance courses at the University of Wisconsin and at Florida Atlantic University. At the time of publication, he owned shares of the Vanguard Growth Index fund, though positions can change at any time. Dr. Don's Portfolio Rx aims to provide general investing information. Under no circumstances does the information in this column represent a recommendation to buy or sell. Dr. Don welcomes your inquiries and feedback at

portfoliorx@thestreet.com.