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Startup Guidelines for the “Boomer-prenuer”

Financially Sound Steps to Starting a Business in Retirement

You’ve been looking forward to retirement—but not for the reasons people would expect. For years, you’ve wanted to start your own business, and it seems that the most opportune time is finally approaching.

Launching a startup in retirement may run counter to the image of the twentysomething execs in Silicon Valley but there’s no mistaking that the “boomer-preneur” is a growing trend. In fact, individuals between the ages of 55 and 64 make up more than a quarter of all new entrepreneurs (25.5%), up from 14.8% in 1996, according to the 2017 Kauffman Index on Startup Activity.

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But would-be entrepreneurs on the cusp of retirement face a different set of financial concerns than their younger peers. Not only must they ensure a strong foundation for their new enterprise, they must do so without jeopardizing their long-term financial plan. So if you’re thinking about embarking on the adventure of entrepreneurship, here are a few things to consider.

Make sure your retirement plan is on track

New businesses are most commonly self-financed, but committing your own money carries greater risks in retirement. It’s easy to underestimate the costs of starting a business. And once you’ve invested money in your dream venture, it can be tempting to continue investing more than you planned, regardless of how the business is performing.

That’s why it’s wise to keep retirement accounts such as 401(k)s and IRAs for your retirement living expenses separate from your business accounts. Hopefully you’ve saved specifically for your new business. If there’s a gap, you’ll want to pursue alternative methods of funding that won’t compromise your retirement accounts or personal cash flow.

Develop a solid business plan

Whether you intend to buy an existing business or start a new one, a detailed business plan is essential. The write-up process will help you think through various aspects of your idea, demanding that you define your market, decide on pricing and sketch out your advertising strategy.

Spend extra time on the all-important financial projections. Startup calculators can help you estimate how much capital you’ll need to get your business off the ground and sustain it until it’s profitable.

There are also many resources specifically designed to help older entrepreneurs at the startup stage—such as the Encore Entrepreneur section of the Small Business Administration (SBA) website.

The last thing you want in retirement is new debt.

Weigh the tax implications

Of course, there are many tax issues to consider when starting a new business. According to Robert Aruldoss, senior research analyst in financial planning at the Schwab Center for Financial Research, there are some that apply particularly in or near retirement.

“One thing to consider, for example, is how additional income may impact taxation of Social Security benefits or the amount you pay for Medicare B and D premiums.,” he says. As your income rises, more of your Social Security check is subject to taxation and extra income could increase the premiums you pay for Medicare.

On the flip side, having your own business could allow you to set up a qualified retirement plan for yourself and your employees (if you have any), and thus increase your savings and your future income potential. You may also be able to deduct certain health care expenses, including health insurance and long-term care insurance premiums. 

“Partnering with a tax professional who can guide you through the tax consequences of your new venture can save you time and money,” Robert says.

Consider a co-pilot

Going into business with others can mean having additional sources of cash flow and a sounding board for business decisions. Whether you choose a business partner you know well or not, consult a professional to set up the contractual agreements necessary to protect both parties. Make sure to establish clear partner roles and expectations, as well as company rules.

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Explore various funding sources

Studies show that the majority of new businesses start with funding from four or five different sources. While you may be tempted to borrow against your home (with a home equity loan or line of credit), a cash-value life insurance policy, investments, or another personal source of funding, Robert says you should explore other funding resources first, borrowing only what you need. And be mindful of the consequences if things don’t go according to plan before you borrow.

Here are some other funding options to consider:

  • Loans from family or friends. If you borrow money from friends or family, you’ll need a written loan agreement to prove to the IRS that you have an “arm’s length transaction” and that the money is not a gift. Consider hiring a professional to draft the loan agreement.
  • Small Business Administration. The SBA doesn’t make direct loans; instead, it provides loan guarantees—promises to the participating bank or lending institution that the SBA will pay back a certain percentage of your loan if you can’t. Women should also check with the Office of Women’s Business Ownership, a part of the SBA that coordinates federal efforts to support female entrepreneurs.  Special SBA programs also exist for veterans and socially or economically disadvantaged persons.
  • Crowdfunding. Also known as the “pennies from many” approach, this method involves aggregating small sums from many people via the Internet. Crowdfunding has its champions, but bear in mind that setting up your fundraising campaign can be time-consuming, and it’s crucial to understand the terms and fees involved.

Keep funding your (ultimate) retirement

Even though you’ve “retired” from your previous career, you likely still have the ability to save for your future by setting up a retirement plan for yourself (and your employees, if any). “Setting up a company retirement plan can add opportunities to boost your existing retirement savings—and it may also provide tax advantages for you and your business,” Robert says.

Depending on your particular circumstances, there are a number of choices worth considering. Options include an individual 401(k) (for small businesses with no employees other than a spouse), a SIMPLE IRA, or a SEP-IRA. A personal defined benefit pension plan might even be right for some self-employed small business owners who are older than their average employee and have high annual income ($250,000 or more).  With a defined benefit pension plan, an owner should be able to contribute $80,000 per year for a minimum of five years, if over the age of 50.  Be mindful, though, that there is a cost to establishing a defined benefit pension plan, and your business should have enough steady cash flow to fund contributions. In defined benefit pension plans, you must fund the plan each year. You don’t have the option to decrease or change the contribution.

What you can do next

Make sure to balance your long-term financial health with the needs of your new venture.

  • Contact a Schwab Financial Consultant to discuss ways to help keep your retirement goals on track while you’re building your business.
  • Talk to a tax professional to help ensure that you understand the tax implications of becoming a boomer-preneur.

Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

This information does not constitute and is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner, or investment manager.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

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