When you think about retirement, you might picture weekdays on the beach with a tall drink, thriving off your 401(k) savings. But today, for many, retirement doesn't promise much-rewarded time off. In fact, it often means more free time to pursue other types of employment, from freelance work to part-time gigs. Some workers even choose to follow entrepreneurial dreams.
"Starting a business in retirement is becoming a popular next chapter as many pre-retirees or retirees re-examine what they want to do with their lives," said Kristen Edens, content and brand developer.
Jane Emery of the Business.com community asked: "Is starting a new business a good plan during retirement?" We outlined some ways to determine if you're in the right position to do so, and how to approach the endeavor.
Ask yourself the right questions
Starting a business any time in your life requires hard work, time and resources. To ensure you're ready for that type of responsibility, Edens recommended asking yourself these questions, and answering them honestly:
- What skills, knowledge and interests do you have to build a business?
- Who would your intended audience be?
- How do your talents fit with what's needed for your audience?
- How much time, money and energy do you have to dedicate to this business?
- What resources are available to help you build your business?
"Following the introspective questions, determine what's needed to move your plan forward," said Edens.
Know the risks
There's always a risk when creating a business from the ground up, and some might seem too severe to follow through with your plan. Weigh out the possibilities to determine the best course of action.
"Starting a business in retirement is not a risk-free endeavor," said Wendy Ann Payne, CSA, CEP, founding partner of Centurion Wealth Management, LLC. "Be certain that your business structure protects your personal assets. If your business venture does not work out the way you intended, you certainly don't want to lose your personal savings and assets."
You don't necessarily have to go all-in for your business. If you aren't sure your idea will take off, proceed with caution and go part-time until you're more confident in your plan.
"Possible risks are based on an individual's time, money and energy," said Eden. "There is give and take at all levels, and the risk is how much is one willing to dedicate to their business."
Consider your finances
According to Payne, you should be mindful of start-up costs and ongoing expenses. Will your business require a physical location? Will you need a substantial amount to launch your brand, or can you do so without breaking the bank? Calculate all possible costs, then map out your financial plan from there.
If you're in good shape to retire, then you likely have hefty retirement savings. And while you might be tempted to dig into your 401k to fund your business, you shouldn't blow it all in one place.
"Many people will cover their business expenses with distributions from their 401k or IRA," said Nathan Garcia, CFP(r) and retirement planning specialist at Strategic Wealth Partners. "Most of the time these distributions are taxable as ordinary income. Large distributions can cause higher tax bills, thus reducing your capital base."
Garcia advised outlining your personal expenses before withdrawing money to limit taxes and extend your savings.
"Most businesses will require 18 to 36 months to develop positive cash flow," he added. "During this time, you should understand how much expenses will be and how they will be paid. It's critical to know your personal expenses first than to layer your business expenses on top."
"Be careful when borrowing funds for business purposes," added Payne. "If you obtain personal loans, use your personal line of credit, and/or personally guarantee business debt, it is vital to know that you are personally on the hook for repayment of that business debt. If you voluntarily close the business, or things don't go as planned and the business fails, you are still personally liable."
Have an exit strategy
Payne stated that you should plan your business down to the exit strategy. Figure out what would happen when you want to stop working for good, i.e. selling the business, passing it along to someone else, shutting it down permanently, etc.
"Once you become a business owner, it is extremely important to have a written succession plan," she said. "This is especially true for aging business owners."
You can settle this from the start by choosing an ownership structure that compliments your intentions. Because you're starting your business later in life, you might want to choose a structure that allows you to involve family, like your children, Garcia said. That way, if you plan to eventually pass down ownership, you can consider co-owning with that person to ease the process.