Should I Save for Retirement or College for My Kids?

Editor’s note: This is one of the 20 tough financial questions posed in the “Do This or That?” cover story in the September 2011 issue of Kiplinger’s Personal Finance. Use the drop-down menu above to consider other financial conundrums and the right answers for you; share your own experiences and insights in the Discuss field at the bottom of this page.

Save for retirement if you are 20 years or less from retirement and you haven’t met your retirement-savings goals. In fact, if you are that close to retiring, throw everything you have at your retirement accounts. Remember, you won’t get any grants, scholarships or federally guaranteed loans to support you in your old age, nor will you have the income or time to catch up once you retire. And by forgoing tax-favored retirement accounts, such as a 401(k), you not only miss out on any employer match but also lose the tax benefit and opportunity for long-term growth that these accounts offer. You could even harm your student’s chances for financial aid: The federal financial-aid formula ignores assets in tax-sheltered retirement plans but assesses up to 5.6% of other parental assets.

Save for college if you are lucky enough to fit one of the following scenarios, says Deborah Fox, of Fox College Funding: You know you will receive an inheritance or are the beneficiary of an irrevocable trust that will cover your retirement needs. You plan to retire at midlife with a pension and start a lucrative second career. You have a guaranteed pension that will be enough to support you in old age (and that neither state legislature nor employer is likely to take away). You are in a profession in which your income will jump significantly later in your career, allowing you to catch up on retirement saving. You have income-producing property or other assets that will provide enough money to support you after you leave the workforce.