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Back In Business
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What Retirees Need To Know Before Starting Their Own Companies
By Kim O'Connor
The number of Americans who go back into business after retirement is on the rise.
The 2010 Kauffman Index of Entrepreneurial Activity showed 23 percent of new entrepreneurs are 55 to 64, a figure that was just 18 percent in 2000.
Some retirees start a business out of financial necessity. According to a 2010 survey of more than 5,000 people over age 50, the AARP Public Policy Institute found that more than half of respondents weren't confident they had saved enough for retirement.
Other retirees simply aren't ready to relax. The 2009 data from the Centers for Disease Control and Prevention show that life expectancy is at a record high. That means the golden years can stretch into golden decades—which can be dull when you don't feel productive.
Whether your goal is to fund your retirement, stay sharp and busy, or build the company of your dreams, here are six things you need to know before launching a venture later in life.
1. Understand how it will impact your Social Security benefits
Even if your retirement plan doesn't depend on Social Security, it’s important to understand how your new business might affect your benefits.
“Sit down with an accountant or a tax professional so that you can make calculations as to what the real dollar return from your new business will be,” says Gene Fairbrother, the lead consultant for the NASE's Business 101 program.
The profit from your business might reduce your Social Security benefits if you begin taking them before you reach full retirement age (which is 66 or 67, depending on what year you were born). Generally speaking, your benefits will be reduced by one dollar for every two or three dollars you earn in excess of a set amount.
After you've reached full retirement age, your benefits can’t be reduced. They can, however, be taxed if your total annual income exceeds $25,000.
Learn more about how work can affect your benefits at the Social Security Administration website.
2. Find ways to minimize risk
Starting a new business involves some amount of financial risk, no matter your age. But the stakes are especially high for older entrepreneurs, who may not have time to rebuild if the business fails.
Ideally, your new business will have little to no startup costs if you don’t have reserves of discretionary cash. That way, you won’t have to worry about digging yourself out of debt or rebuilding your nest egg in a hurry.
“If you can’t afford to lose it, don’t invest it,” Fairbrother advises.
If you assume more financial risk, Fairbrother recommends planning for the worst and hoping for the best. Talk about the big financial picture with someone you trust who can offer an objective opinion.
“You need someone to help you evaluate the financial risk that you are about to take,” he says. “It’s important that you talk to people who aren’t looking through your rose-colored glasses.”
3. Weigh the pros and cons of different funding sources
If you decide to borrow money, consider your options carefully.
For many borrowers, a home-equity loan may offer the best terms. But if you’re dependent on Social Security for financial stability, banish the thought. You could lose your home if the business fails.
Nest eggs aren't off-limits, though you should dip into those funds with extreme caution.
“A lot of people in all age brackets have started very successful businesses on their retirement plans,” Fairbrother says.
But any money you withdraw may be subject to penalties or taxes (or both!), depending on your plan.
4. Be mindful of your lifestyle and your limitations
Be realistic about the amount of time you are willing—and able—to commit to your new business.
Make sure the demands of the work align with your day-to-day life. For example, if you hope to spend more time with your grandkids, or if your spouse is unwell, you may not want to put in 40-hour weeks.
Also, be brutally honest with yourself about your health situation. Running a business can be physically, mentally and emotionally challenging. Talk to your doctor about how it could impact your short- and long-term well-being.
5. Build on what you know and then fill in the gaps
As a seasoned professional, you have a lifetime of experience and contacts upon which you can draw. Try to build your new business around your proven skills and talents. Even if that’s not possible, make sure to leverage your existing network.
While it might seem like you’ve seen it all, there may be times you need to seek outside expertise. Remember that as an NASE Member you have free, 24/7 access to our team of experts who can answer your questions, offer advice and give you guidance.
In addition to the research it requires to launch any new business, there may be a specific skill you should develop.
If you’re entering a new industry, or you have never owned a business, seek out someone who can give you words of wisdom.
“Find somebody who can mentor you,” Fairbrother suggests. “It’s just as important to have a mentor at 65 as it was when you were 25. People who have been there and done that can help prevent you from making mistakes.”
6. Don’t forget to plan for your real retirement
Right now, it may seem like you’ll want to work forever, but chances are the day will come when you’ll want (or need) a break. Careful planning will help ease the transition into full-time retirement.
Think about what will happen to your business after you move on. If you’re a consultant who works from home, you can probably shutter your business without fuss. If operations are more complex, take steps to ensure that the business will be ready to sell or to bequeath to an able successor.
Finally, if you plan to dip into your retirement savings to fund the new business—or if you’re not yet satisfied with what you've saved so far—make sure you establish a retirement plan that suits your new circumstances.
Kim OConnor is a freelance writer with plans to perfect her Bingo game after retirement.
- The legalities of running a business
- Developing smart financial habits
- How to choose the right business structure
- Tax responsibilities
- And so much more
Read this article in PDF form here.