Real Money: Dividing a Legacy to Meet Two Goals

Making Your Money Last

Real Money: Dividing a Legacy to Meet Two Goals

This young woman's inheritance needs to secure her future as well as pay for graduate school now.

Sarah Plumridge, 23
Nashville, Tenn.
How should I invest my inheritance?

Five years after her parents' fatal car crash, Sarah is ready to take control of the money her folks left to her. So far, a relative has been handling Sarah's inheritance, holding $200,000 in a balanced array of mutual funds, $100,000 in bonds and the remaining $37,000 in a money-market fund. Now Sarah is interested in a more aggressive approach. "But I don't know what I should invest in," she says. "There are so many options."

Before Sarah can craft a long-term investment plan, she has to answer this basic question: How much money will she need in the next year or two, and how much can she afford to put aside for long-term goals?

Sarah lives rent-free with a relative in Nashville, so the $2,000 a month she earns as a science writer at Vanderbilt Medical Center and as a freelancer for the local public-television station covers her everyday expenses. But she is entering a one-year master's degree program in journalism at Northwestern University, which means she'll need to cover the costs of being a student again.


Lynn Mayabb, senior managing adviser with BKD Wealth Advisors, in Kansas City, Mo., recommends that Sarah set aside $80,000 for tuition, room and board, and other expenses -- plus an extra $10,000 for unexpected bills -- in a savings account that's insured and accessible despite the low yield.

Two strategies. Sarah's remaining $240,000-plus deserves to be considered separately. Nicholas Yrizarry, a financial planner with offices in Reston, Va., and Newport Beach, Cal., says that because Sarah has a lot of time and a chunk of cash, she could reasonably place 100% of her $240,000 in an assortment of broad-based stock funds.

Mayabb recommends, however, that Sarah put just half of her money into stock funds and the other half into safe funds that generate income. One idea: a floating-rate bank-loan fund. The average current yield is about 3% and should rise when short-term interest rates go up. Fidelity Floating-Rate High Income Fund (symbol FFRHX) is the best of the bunch.

For a young single like Sarah with enough money to live on, one alternative could be to put most of her inheritance into a tax-advantaged retirement account, such as a permanent life-insurance policy or a low-cost deferred annuity. But that would be premature. She could be hit with taxes and penalties if she taps such an account early. If she takes a job that pays the typically modest salary of a young journalist, she might have to dip into her investments to rent and furnish an apartment. With an all-stock portfolio in a taxable account, she could end up selling when the market is falling.


So a balanced mix of stock and bond funds would be ideal. Looking ahead to retirement, she should open a Roth IRA, contribute the maximum $5,000 this year, and add to the account when she can. More critical to her future is the right outlook. "She needs to embody discipline and act as if she doesn't have the money," says Yrizarry.