INHERITING: DON'T BLOW IT

Family money, passed down, may be your last, best shot at living well when you retire.

By Jane Bryant Quinn

Many a boby boomer has a single retirement strategy: inherit the money. That's not an unreasonable idea. Thanks to America's sturdy economic growth, the older generation holds a vast amount of wealth. More than half of the boomers 50 to 53 expect an inheritance of some sort, according to a recent survey by the AARP Investment Program for Scudder.

But how well will baby boomers manage their windfall? A reader from Texas speaks for much of her generation: "We recently received an inheritance," she writes, "But we have never had money to invest and are completely at a loss." A more experienced investor from Woodmere, N.Y. is throwing in the towel. "My father left me an inheretance and I have been trying to manage that portfolio, as well as my husband's pension plan," she writes. "I need advice."

Financial planners see all too many mistakes:

• Squandering money. In the excellent book "Managing Your Inheritance" (Times Books. $15), authors Emily Card and Adam Miller speak of a friend with modest earnings who unexpectedly inherited $125,000. Thrilled, he and his wife took a Carribean cruise, redid the kitchen and living room, bought new furniture, hit the best restaurants and generally lived high. Three months later, they had $35,000 left--with nothing set aside for their children's education or their own retirement.

  Card and Miller, both financial advisors, put their friend on a budget and helped him invest what he had left. But he'd lost his chance to build a major nest egg for himself.

• Eyes wide shut. Some heirs say, "I'm not even going to look at what I got," says psychologist and planner Sharon Rich of Womoney in Belmont, Mass. "They just do what their parents did." Others feel that their parents would be upset if they sold certain cherished stocks.

  But what's good for an older parent is rarely good for someone middle-aged (and besides, who says your parents were immune from investment mistakes?). "On average, inherited money stays where it was for six months to a year," says planner Ginger Applegarth of First Financial Advisors in Framingham, Mass. "Then it stops feeling like your parents' money becomes your own."

• Delusions of wealth. "People often have unrealistic ideas of how much 'big money' is, or how far their inheritance will carry them," says planner Harold Evensky of Evensky, Brown & Katz in Coral Gables, Fla. They might quit their jobs or jump to a wealthier mode of life, then discover they can't sustain themselves. This happens to people especially in their 50s and under, who may not understand how expensive their next 50 years are going to be.

  When you come into money, don't do anything right away--not even pay off credit-card debt, says planner Pat Kambourian of Raskob/Kambourian Financial Advisers in Tucson, Ariz. If you clean up your cards without reducing your expenses, you'll soon be in debt again. That might call for a second dip into your inheritance, and then a third. You'd have nothing to show for it.

  Inheriting money calls for introspection first. List all of the things you'd like to accomplish, put them in order and ask whether having money helps, Kambourian says. Rough out a budget, reflecting how much of your widfall, if any, will go toward current expenses. If you haven't had decent health and liability insurance, get them now. If you haven't been able to afford the full contribution to your company's 401(k), set up your payroll deduction and use your inheritance to plug the gap in your take-home pay. Don't touch an inherited IRA until you've seen an accountant or tax planner. How much tax you pay depends on how you draw the money out.

  If you want some fast fun with your money, blow 5 percent. But conserve the rest, Card and Miller say. Their thoughts on how to conserve your good fortune:

• On a modest inheritance (up to $250,000): you can afford more pleasures (big vacations, extra purchases), while still padding your education and retirement funds. But don't quit your job unless you also have money of your own.

• On a major inheritance (up to $1 million): you might be able to flee the office, depending on your age. Or you might change careers or do nonprofit work, and also live at a higher level. Larger inheritances usually come with a team of advisors to help you out.

  Divide your investments between two accounts, says Cynthia Conger of the Arkansas Financial Group in Little Rock.

  First, a "savings to spend" account, kept in a bank or a money market fund. These are your emergency funds, plus any cash you expect to spend from your inheritance over the next two years. If you're using part of your windfall to live on, replenish this cash account from time to time by selling some of your investments.

  Second, an investment account, split between stocks and bonds (held individually or in mutual funds). Conservative accounts rarely exceed 60 percent in stocks, Evensky says. Do-it-yourselfers should consider index funds, which follow the market as a whole. Evinsky's suggestion for allocating stock-market assets: half in a fund that follows Standard & Poor's 550-stock average, 25 percent in an index fund for smaller stocks and 25 percent in international stocks. Two good places for index funds: Vanguard (800-523-9936) and the brokerage firm Charles Schwab (800-225-8570).

  To make a well-invested portfolio last for life, withdraw no more than 5 percent of the original assets per year, in real, inflation-adjusted dollars, Evensky says. For example, say you inherit $100,000 with an inflation of 3 percent. You'd take $5,000 the first year, $5,150 the second year, $5,305 the third year and so on. There's no guarantee that will work, but it often does. It pays to be careful with the biggest check you may ever get.