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New home and a nest egg
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October 2, 2000: 11:22 a.m. ET
Take an inheritance and split it between a mortgage and mutual funds
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NEW YORK (CNNfn) - If you get a $50,000 inheritance you may be torn between putting money down on a new home and building a nest egg for retirement. How do you balance today's needs with tomorrow?
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Debra Morrison, a certified financial planner from Fairfield, N.J., answered questions on Your Money's "Viewer Mail" segment.
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Debra Morrison, a certified financial planner from Fairfield, N.J., suggested a way to do both. She appeared recently on CNNfn's Your Money program and also answered some questions via e-mail for CNNfn.com.
Lynn writes: I am about to receive $50,000 inheritance from a farm sale. There is a home I am interested in purchasing for $120,000. Do you suggest putting the $50,000 down on the mortgage, have low monthly payments and save quite a bit on interest, or should I invest the $50,000 and hopefully have a nice retirement in 25 years? I earn approximately $45,000 per year and expect no inheritance after this. If you think investing the $50,000 is the way to go, where do you think the best place is to put the money and possibly have $300,000 to $400,000 to retire on in 25 years?
I may only recommend putting 20 percent down, or $24,000, on the home, mortgaging the remainder, or $96,000. Typically I prefer a fixed-rate mortgage for 30 years, since the deductibility of the interest is highest. Your monthly mortgage payment would be well within what is considered a reasonable range, given your $45,000 annual income.
I would invest the remaining $26,000 in a diversified portfolio of stock mutual funds whose objective is weighted towards growth rather than dividends, which would only exacerbate your income taxes.
You may consider up to 25 percent concentration in international markets, presuming that your risk tolerance is moderately high. Your time horizon of 25 years until retirement allows for investments that will provide capital appreciation potential, and while the Securities and Exchange Commission mandates that we do not presume that future returns will mirror past performance, historically common stocks have provided the same.
Malay writes: I am 27 and have inherited $250,000 in cash. What are my investing options? How much should I put in a retirement nest egg?
What a great windfall! You will want to divide this sum into at least three categories, in my opinion. First, maintain some liquid funds that you would use in the next 12 months to supplement your living expenses, or to treat yourself to something that your loved one would have wanted you to enjoy.
Secondly, you should invest a portion for the short term (one to 5 years). You can choose a cash, money market or Treasury Bill with a maturity of less than one year. Or you can choose a Treasury Bond with a maturity of more than one year, or a short-term bond fund.
Finally, the balance should be invested for the long term (5 or more years) in stocks or stock mutual funds. Clearly, you will want to overweight the long term investing portion in order to maximize the compounding effect that several years will afford you.
A retirement nest egg is a great idea, and this extra cash would allow you to contribute the maximum into a pre-tax retirement savings plan, like a 401(k) or a 403(b), should your employer have one.
The current maximum contribution is $10,500, so you should maximize the contribution to the greatest extent possible even for this tax year, 2000. This COULD mean telling your payroll clerk that you wish to defer the equivalent of $10,500, which MAY represent a good portion of your salary, for the remaining pay periods this year.
Do not panic that you would receive a small check for the last three months of 2000, since you could take living expenses from your inherited principal. All the earnings on this pre-tax savings plan would accrue tax-deferred until you withdraw the funds at retirement. Plus, maybe your employer even has a match program established, which would really accelerate your compound earnings! Good luck!
Amos writes: I am pastor at a local church and I have a regular IRA. However, I was told I would come out better in the long run if I put my money in a 403(b) instead of a traditional IRA. What do you think?
If your church will institute a 403(b) you would be afforded the possibility of investing up to $10,500 per year, versus the $2,000 maximum on an IRA. Additionally, depending on the funding vehicle, you could be eligible for loans, whereas an IRA does not carry loan provisions.
Finally, the church could decide -- either immediately or in the future -- to provide a matching contribution to your 403(b), which would not be available in an IRA. 
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