Investing our house proceeds

Dear Dr. Don,
I will be retiring from teaching in December. My wife and I are in excellent health and have just sold our home. We are moving back to New York and do not have to use any of the money from the sale of the house, which is nearly a $200,000 profit. What do you suggest I do with this money to gain interest? I may not have to touch it for a few years. Thanks.
-- Vince Venue

Dear Vince,
Don't look at this investment in isolation from all of your other investments or sources of retirement income. Take a big-picture approach to how you want to invest this money.

Because you're nearly retired, you'll want to be fairly conservative in how this money is invested. Your two biggest concerns should be safety of principal and protecting your purchasing power. Safety of principal deals with how much risk you face in the investment. At retirement, your portfolio doesn't have any rebuilding years, so you don't want to take on any unnecessary risk when investing the funds.

Why take on risk at all? You could split the money between FDIC-insured deposits and short-term U.S. Treasury securities and not face any risk to principal. Well, then you run the risk that you won't preserve the money's purchasing power.

Protecting the investment's purchasing power requires earning a return that's higher than the inflation rate. If inflation causes prices to rise by 3 percent annually and your money's invested at 2 percent, then the purchasing power of the investment is eroding with time. Historically investments in stocks and real estate have outpaced inflation, but these investments aren't risk-free. One good alternative as an inflation hedge that has no risk to principal, as long as the investment is held to maturity, is the U.S. Treasury's Inflation Protected Securities.

Treasury Inflation Protected Securities (TIPS) can provide an investment return that is guaranteed to earn a return higher than the inflation rate. That's because the principal on these debt securities is indexed to the Consumer Price Index. The income tax implications of owning these securities in taxable accounts is a little complex, so you should discuss this investment with your tax professional before investing in TIPS.

Along with the existing 10-year issue, the U.S. Treasury will resume offering five-year TIPS and has started offering 20-year TIPS. The debt securities can be purchased using the Treasury Direct program or through banks and brokerage firms.

If you go this route, I suggest buying new issue securities and matching the maturity date of the security with your expected investment horizon. The next five-year and 10-year TIPS aren't expected until October and the Treasury just issued a 20-year TIPS.

If you seek the security of insured deposits, use Bankrate's "Highest Yields" page to find the best interest rates in your market or nationwide.

-- Posted: July 30, 2004