Big Legacy Raises Big Questions for Couple

Some people might view a financial windfall as an excuse to splurge. But Alison Dobbs is adamant about not blowing the $200,000 she recently inherited from her father.

Alison, 27, and her husband, Jimmy, 25, plan to use the money to help them further their own education, establish a college fund for their new baby and save for retirement. Still, the inheritance carries emotional weight for this South Bay couple.

“My dad worked really hard for his money. In some ways, I feel that contributed to his early death because he had such a stressful job,” said Alison, whose father, a doctor, passed away in October. “That’s why I want [to make] . . . wise decisions.”

Linda Barlow, a fee-only certified financial planner in Santa Ana, said it’s natural for Alison to view her inheritance as a gift that must be preserved.

“Her father’s face is on that money,” Barlow said. “A lot of people who inherit money feel guilty, and they’ll feel double guilty if they lose it.”

“The key is to move extremely slowly, to gradually get the money into the stock market, rather than plunging the whole thing in right now.”

Even before the inheritance, the Dobbses had firm control over their finances. Jimmy, a lieutenant in the U.S. Air Force, draws an annual income of $48,000, plus $12,600 in non-taxed basic housing allowances. And although Alison, who formerly worked in human resources, now stays at home with their daughter, the couple are managing to save more than $900 a month.

Each month, the Dobbses direct $166 to Jimmy’s Roth IRA, $25 to U.S. savings bonds, $300 to a money market fund and $450 to two mutual funds: $150 to USAA Cornerstone Strategy and $300 to Janus Twenty.

They have about $6,000 in checking and money market accounts and almost $10,000 in their Roth IRAs, invested in USAA Income and USAA Growth. They also have $1,000 in U.S. savings bonds and $4,500 in their two mutual funds. In addition, Alison has $1,600 in a California Public Employees Retirement System account through her former employer, the city of El Segundo.

Barlow praised the pair for their savings discipline and well-researched investment selections, recommending only minor changes in their allocations.

Keeping the Money Separate Is Essential

Instead, Barlow focused her attention on devising an appropriate plan for Alison’s inheritance. The couple has no consumer debt to pay off, which would be the logical first use for a financial windfall, nor a mortgage, so most of the money can be earmarked for investment.

First, Barlow encouraged Alison to open an account at a discount brokerage in her own name and to deposit the inheritance sum initially in a money market fund. This gives her full control of the money, which the couple feels is appropriate.

“Any inherited money is legally separate as long as it’s kept separate,” the planner said. “If you put it in a joint account, then it becomes joint money.”

Although a sensitive subject for most people, it’s wise to consider how money would be distributed in case of death or divorce. For example, Alison might want to distribute the inheritance differently from the rest of her assets in case she dies, and separate assets are not figured into divorce property settlements.

Jimmy said he has no problem keeping the money in Alison’s name. “I see it as her money,” he said. “And I want her to feel comfortable.”

Alison’s next priority should be to start educating herself about investing, Barlow said. She suggested that Alison enroll in a personal finance class or seminar at a local university or community college and start reading financial publications. She recommended investment books by Warren Buffett, John Bogle and Benjamin Graham.

Barlow also urged Alison to start thinking about her goals for the money, distinguishing long-term ones from short-term priorities.

Alison has already spent $20,000 of the inheritance on a new Volkswagen Passat, but she wants the rest to be tucked away for long-term needs. Her only exception would be for education, since her father placed great importance on learning.

“That was the most important thing to him, to expand your mind,” Alison said. “I also see education as the one thing no one can take away from you. You could put money in the stock market and it could crash. You could put it in a house and it could burn down. But if you put something in your mind, no one can take it back.”

In July, the couple plans to move to Arizona, where Jimmy will continue to serve in the Air Force and begin a night MBA program, which will cost him about $10,000, or 25% of the tuition. The Air Force will pay the rest.

A Careful Plan for Investment Novice

Alison sees Jimmy’s tuition and her own further education as logical uses for the money. And she wants ample funds set aside for her child’s college education. Although part of the money could be a down payment on a home, the couple may decide to wait until they settle down in one place and even then might want to take advantage of a loan backed by the Department of Veterans Affairs.

Once she knows her goals, Alison can begin selecting appropriate investments, Barlow said. Short-term goals require relatively safe investments, while longer-term goals allow Alison to take more risk.

Money for Jimmy’s education, for example, should be kept in a six-month bank certificate of deposit. Money for the baby’s college fund and their own retirement can be invested more aggressively, since they can expect greater returns but will have time to ride out any bear markets.

Selecting investments is particularly daunting to Alison, who is a novice when it comes to the stock market. She’d like to invest the bulk of the money for the long term, but she’s skittish about equities because of the risk.

“Part of the reason I want to be conservative with the money is because Jimmy has done all the investing, and I haven’t paid much attention,” she said. “I might feel more comfortable with risk if I knew more about the stock market and investing. In a couple of years, when I know more and see how things work, I may be able to take more risks.”

Jimmy said he would like to steer clear of foreign equities now because of instability in global markets. He and Alison also would like to invest a portion, about 20%, in individual stocks, because they can have more control over the investments--including when to take taxable gains.

Barlow usually favors some foreign equity exposure for the sake of diversification, but she heeded the couple’s concerns and restricted her recommendations to domestic mutual funds and stocks.

To save for their daughter’s college education, Barlow recommended that $22,000 of Alison’s inheritance go to Vanguard Tax-Managed Capital Appreciation (three-year average annual return: 23.4%). In 18 years, the planner believes, the sum should cover their daughter’s college costs, although there are no guarantees, and the fund’s tax-efficient mandate should keep income taxes from eating up much of the returns.

For the couple’s retirement fund, Barlow recommended Alison aim to eventually get 60% of the sum invested equally in two large-cap mutual funds, 20% in a small-to-mid-cap fund and the remainder in individual stocks.

Barlow said she favors the Spectra Fund (three-year average annual return: 34%). The growth fund, Barlow said, has a long record of high returns and has a manager with a 13-year track record. She also recommends the tax-efficient Vanguard Index 500 (three-year average annual return: 28%).

In the mid-cap category, Barlow likes Berger Select, a fund that opened in 1997 and has a one-year return of 34%. The planner thinks highly of the holdings in this growth fund, which include companies such as Texas Instruments, Barnes & Noble and Tyco.

Dollar-Cost Averaging Is Measured Approach

Alison said she needs time to think about what types of companies she wants to invest in. For instance, she’s hesitant about buying health-care stocks because she doesn’t believe medicine should be about making money.

“I want to pick stocks I feel good about,” she said. “I’m going to do what I think is right.”

Barlow suggested that Alison do as much research as possible on a variety of companies.

“You should pick between four to six stocks that you feel comfortable with and offer diversification,” Barlow said. “And go at it slowly. I would recommend buying 100 shares of one stock one month, then maybe buying 100 shares of another stock the next. Don’t buy everything at once.”

The planner recommended a similar strategy with the couple’s mutual fund investments. Instead of investing the entire inheritance at one time, she said, the couple should try dollar-cost averaging on a monthly basis, which means investing a fixed amount of money each month in the same investment. Since a stock’s price fluctuates, investors who apply this strategy will, over time, be buying more of a stock or mutual fund at lower price levels.

The planner suggested the couple invest a total of $5,000 each month, although she said that amount could be scaled back if Alison wants to move slowly.

“With dollar-cost averaging, the big temptation is to not do it when the market is down,” Barlow said. “But you can’t let your emotions get to your brains. It’s suicide if the market is down and you don’t put money in.”

Thinking Ahead to Retirement

In other matters, Barlow said Alison’s inheritance gives the couple enough of a cushion so that they don’t need to add to their emergency fund. Instead, she suggested they make maximum contributions to Roth IRAs. The planner also recommended that Alison roll over the relatively small $1,600 cash value in her CalPERS account to an IRA and then convert the IRA to a Roth and combine those funds with the rest of her Roth account.

Overall, Alison said she liked many of Barlow’s suggestions. She’s still a bit skittish about investing the money too quickly, but she said it’s helped her to see various possibilities.

“I think it’s a good start to get it out there and start batting around ideas,” she said. “But I want to make sure I have a good idea of what I’m doing. I don’t want to do something and say, ‘That was a big mistake.’ I’m the kind of person who puts my toe in the pool first.”

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Diane Seo is a regular contributor to The Times. She can be reached by e-mail at diane.seo@latimes.com. To be considered for a published Money Make-Over, send your name, age, phone number, income, assets and financial goals to Money Make-Over, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053. You can also send e-mail to money@latimes.com, or you can save a step and print or download the questionnaire at https://www.latimes.com/HOME/BUSINESS/FINPLAN/make-over.htm.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

The Situation

* Investors: Jimmy and Alison Dobbs

* Major goal: Use Alison’s $200,000 inheritance from her father wisely.

* Plan: Distinguish short-term priorities from long-term priorities. After putting funds aside for education costs for themselves and, later, their new baby, steadily invest rest over next year or two for retirement. Continue regular saving as well.

Meet the Planner

Linda Barlow is a fee-only certified financial planner and certified tax preparer. She is based in Santa Ana.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

This Week’s Make-Over

*n Investor: Jimmy Dobbs, 25, and Alison Dobbs, 27

* Occupations: Jimmy is a lieutenant in the Air Force; Alison formerly worked in human resources and is now a stay-at-home mother.

* Gross annual income: About $48,000, plus $12,600 in non-taxed basic housing allowances

* Goals: Invest Alison’s inheritance wisely for education and retirement.

Current portfolio

* Cash: About $6,000 in money market and checking accounts, plus $180,000 of remaining inheritance in separate account.

* Savings bonds: $1,000

* Mutual funds: $4,500, divided between USAA Cornerstone Strategy and Janus Twenty

Retirement accounts

* Jimmy: Roth IRA worth $5,300, invested in USAA Income

* Alison: Roth IRA worth $4,300, invested in USAA Growth; $1,600 in California Public Employees’ Retirement System through former employer

Recommendations

* Invest inheritance slowly, through monthly dollar-cost averaging, while learning more about investment options.

* Establish college education fund for daughter.

Recommended mutual fund purchases

* Berger Select (800) 333-1001

* Spectra Fund (800) 711-6141

* Vanguard Index 500 (800) 662-7447

* Vanguard Tax-Managed Capital Appreciation (800) 662-7447