My husband and I recently inherited some money, but we may need access to it for health reasons. How should we invest it?

QUESTION: Recently my husband and I inherited a nice sum of money. What is the best way to go? CDs, money-market (accounts), mutual funds? We are both in our mid-50s but my husband is in poor health and I may need quick access to the funds.

-- Evelyn Laird
ANSWER:

If you haven't done so already, your first step should be to create an emergency slush fund. Typically this should cover three to six months' worth of living expenses, but you may want to increase that amount significantly due to your husband's health condition, says certified financial planner Sue Stevens, Morningstar's director of financial planning. Think about what sort of medical costs could arise over the next year for your husband, and what sort of cash you'll need on hand to cover them. Of course, just because your money has to be accessible doesn't mean you should stash it in a savings account at your local bank, where it will earn 2% or less. Place at least half that sum in a money-market mutual fund, says Stevens, which these days earns about 3.5%. You also should consider a short-term bond fund, such as the Vanguard Short-Term Corporate fund (VFSTX), notes Stevens. Also, if you have assets in a retirement plan, keep in mind that many of these plans allow penalty-free withdrawals in case of illness.

Now think about your long-term goals. Chances are retirement is looming on the horizon -- have you saved enough? If not, then thank your lucky stars for this generous inheritance. To begin to determine the best asset allocation for your retirement portfolio, plug your numbers into our asset allocator, or if retirement is in the near future, check out our asset allocator for retirees. Even if you are a conservative investor, you should aim to keep some of your assets in stocks. After all, retirement can easily span 25 years these days. This means that one of your biggest adversaries is inflation, warns CFP Dee Lee, president of Harvard Financial Advisors. Having some stocks in your portfolio will help you beat it.

Allocating the stock portion of your portfolio can be as simple as investing in a few solid mutual funds, says Lee. This means mainly investing in large-cap portfolios such as an S&P 500 index fund. The Vanguard S&P 500 fund (VFINX) and the California Investment S&P 500 Index fund (SPFIX) both offer low fees. A growth-and-income fund is another good choice, since these funds are generally low risk and offer a bit of income. Fidelity Growth & Income fund (FGRIX) and T. Rowe Price Growth & Income fund (PRGIX) are two no-load, low-cost selections.

For the more conservative part of your portfolio, chances are you'll want income-producing securities, like intermediate- or long-term bond funds, which are available from almost every fund complex. Keep a sharp eye out for low fees when picking these portfolios, as high expense ratios can really damage your returns. Stevens also suggests battling inflation via inflation-indexed bond funds or I Bonds, which can be purchased directly from the government. One thing to look out for? The variable-annuities pitch, which we can pretty much guarantee is headed your way once you start shopping for investments. While variable annuities in some cases do indeed make sense for investors, more often it's the salesperson who really benefits from the deal, thanks to a fat commission.

If you're uncomfortable investing your newfound wealth on your own, you may want to chat with a CFP before you invest the money. Our article can help you find a good one. No matter what, though, "don't let anyone talk you into something you don't understand" or don't feel comfortable doing, whether that person is a relative or financial planner, says Stevens.