Retiring home downsizer wonders where to park his money

— -- Money Watch, a personal finance column that runs every Saturday, features a financial planner from the |-| National Association of Personal Financial Advisors|-| |-|answering reader questions about saving, protecting and growing your money. To submit a question, e-mail USA TODAY personal finance reporter Christine Dugas at: |-| cdugas@usatoday.com.

Q: I am selling my house and will net $700,000. I plan to rent for a few years while I build a smaller retirement home. Where should I park the money until I need it for the new home? I'm 61 and plan to work until I am 65 and part-time after that.

A: It's great that you were able to sell your home and net substantial proceeds in this tough real estate climate. The decision to downsize your house heading into retirement is very common and will hopefully allow you more financial flexibility.

You plan to build a new retirement home. But I would urge you to also look into the purchase of an existing home. The real estate downturn has created substantial value in existing homes, as prices have come down significantly from their peak.

The same is not true for new construction. If anything, new construction prices have increased since the real estate downturn, due to considerable increases in the cost of building supplies.

You just don't get the same bang for your buck in new construction right now that you do in buying an existing house. Additionally, building a new house turns into an open-ended financial "pit" in some cases, since often times folks go over budget on upgrades when they are in the midst of construction.

You should put the money you have budgeted for the new home into either a high-yielding money market or CDs. The first stop may be at your local bank or credit union because they will sometimes offer "bonus" rates for new deposits.

You also should check out online sites, such as bankrate.com, for the best rates. Please make sure that the bank is FDIC insured. And do not exceed the FDIC insurance limit of $250,000 on any one CD.

None of the money earmarked for the new house should be invested in the stock market given your short time horizon. But whatever excess amount you have that will not go toward the new house should be invested in a diversified mix of no-load stock and bond mutual funds for your retirement.

Since this money is an after-tax account, you should use a tax-efficient approach with passive investment instruments, such as index funds and ETFs. If you are a do-it-yourself investor, Vanguard has a nice mix of offerings, and if you work with a professional adviser, then Dimensional Fund Advisors (DFA) is very good.

Because you will continue to work for a while longer, you should not need the retirement money for a significant amount of time, giving it the opportunity to increase in value before your full retirement.

James Miller, NAPFA-registered financial adviser

Woodward Financial Advisors, Chapel Hill, N.C.

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