I read an article recently that detailed the story of a retired Florida couple who used their personal savings to start their own business. In their case, it was worth the risk, since they’re now preparing to open their third location and are earning full salaries.
This type of move might seem unsafe, especially for those who live on fixed incomes or only have savings in the form of their 401K or IRA. But despite all the financial red flags, studies show that about 35% of new businesses in 2013 were launched by people over the age of 50.
Since these people aren’t in their prime, and may not be able to recoup their losses as easily, this sounds like a risky venture. So, why are so many retirees choosing to start businesses?
A lack of other options
With recessions and sluggish markets, your retirement accounts might be struggling. If you’re not quite retirement age, you might be out of work and collecting unemployment. It’s no secret that it can be hard to land a job when you’re competing with a younger, more energetic, more adaptable workforce.
Or, after working your whole life, only to find that you now have nothing better to do than read the morning paper and watch the birds, you might desire a new purpose in life. Maybe starting your own business is something you’ve always wanted to do, but never had the time (or money) for.
How to fund your business venture
That sounds great, but where do you get the money?
You can’t withdraw from your retirement accounts without early withdrawal penalties — not to mention that doing this puts your future income at risk. Unfortunately, there aren’t many ways to get around this. There is a way for retirees to use retirement funds for business expenses, but it’s extremely complicated and easy to get penalized by the IRS if you don’t do it right.
Instead, many retirees are using one of the following ways to fund their new business ventures:
- Personal savings
- Small business loans
- Loans from family or friends
- Partnerships with established businesses
- Crowdfunding or crowdlending
Using personal savings to fund a new business is a personal risk, though at least you wouldn’t be ruining your credit or risking bankruptcy. But, in the event the business fails, you won’t have an emergency fund.
Small business loans can be hard to get when you’re retirement age, because you’re considered more of a risk. Getting approved is possible, but you’d have to provide more than just a business idea; you’d have to prove your business can make money, and fast.
Loans from family and friends would take away some of the pressure that comes with a formal loan, but you’d still have to pay them back eventually, or risk ruining your most important relationships.
Partnering with established businesses seems like it would be a wise option, although you’d probably have to be willing to share ownership or certain rights, at least for a while. The other business would absorb some of the financial risk and help build your business’ credibility.
A new, interesting way to raise money, and not just if you’re a retiree looking to start a new business, is crowdfunding. It’s basically the concept of using social media to advertise your business idea, then ask for donations to fund it. If you reach your set goal, you pay the site a percentage of your profit; if you don’t, none of the donations go through. This is a very low-risk (and fun) way to put yourself out there, with only the risk of looking or feeling like a charity case.
Now that I’ve shared some ways for you to fund your business idea, how would you answer the question: “Are you ‘too old’ to start a business?”
- E*TRADE IRA - Official Site