My Condolences to your sister, not an easy thing to do after a loss (sorting out your finances).
Heres a couple of questions She coulds ask herself to clarify what may be best for her:
-What is rental income like in her area (ie if she kept her existing house to rent out, what would she expect to receive).
-Has she an idea of where she would like to move and how much it would cost?
-If she was married, has she factored in widows pension?
Given the fact that its a bad time to be selling property, she should strongly weigh up the pro's and con's of buying a property to live in, with the intention of renting her existing property (obviously factoring in all expenses involved).
To be honest, her immediate concern should be deciding above before working out her savings for her children. I say this because it should be roughly an 8 and 11 year plan for her children (ie assuming they will be in college by 18).
Any Excess profit made on monthly Rental income should be put (if possible) straight into a savings account (perhaps notice deposit for better rates). In 5 years time your Sister would hopefully be more comfortable financially to save more and would of course be more used to saving and spending for the 3 of them (as opposed to 4).