Starting a business in retirement may sound counterintuitive – isn’t the goal of retirement to leave your working life behind? Nevertheless, it’s becoming more and more common for many reasons.
In fact, statistics show that being self-employed actually increases with age. According to the National Bureau of Economic Research, 46 percent of individuals aged 65 to 69, and 68 percent of those aged 75 to 79, are self-employed. These stats indicate that running a business in retirement can offer a number of benefits beyond just finances.
One of the more common reasons for starting a business in retirement is autonomy. Having input and control over the important facets of your job is said to be a crucial part of an enjoyable career, and running your business puts you in the driver’s seat.
With control comes flexibility. Though you’ll serve the needs of your future customers as a business owner, you ultimately can decide your schedule and workload as you see fit, an option not everyone has in their working life. This newly found flexibility is a game-changer for many retirees: Your business on your terms.
Running a business in retirement can also keep you busy and productive when your lifestyle changes. (Read our recent blog post: What Does Retirement Look Like For You? Golfing and Rocking Chairs Can Get Old Fast.)
Retirement can be an escape from the daily grind. But the free time may lose its luster in the long-run. In some cases, boredom is worse than a packed schedule. Retirees are 40 percent more likely to experience clinical depression than full-time employees, which can be remedied by staying productive. Running your own business in retirement can keep you busy and your mind sharp. Your own business will require a broad set of skills, ranging from sales to strategy. Plus, you have the added flexibility of being able to control your schedule to your liking. These activities can add meaning and healthy stress to your life during retirement.
For many Global View clients, running a business in retirement has always been the dream. Some endeavors can be difficult to pursue during your working years. The natural hustle and bustle of working life, plus the added pressure of staying “realistic” in your career goals, can make exploratory career choices less appealing. On top of that, it can be difficult to dramatically change career direction without necessarily knowing what’s on the other side of the switch. Your retirement years can be the perfect time to work on a passion project or pursue a would-be dream position.
However, it’s important to check, first, to see if the dream of starting a business in retirement is really is a possibility. Do you have the savings to fund your project? Will doing so create too much financial risk? What will the decision do to your retirement benefits? Discuss your plans with a financial advisor you trust and make sure you fully understand your options.
How Starting a Business Affects Your Retirement
Your business ownership aspirations will ultimately reach an intersection point with your retirement savings. Of course, your spending and risk tolerance can be adjusted, but starting a business can directly or indirectly affect your retirement plan. With this in mind, there are important considerations on how starting a business affects your retirement.
Your retirement nest egg can look very appealing when finding a way to fund your business. But be careful – 30 percent of businesses fail in the first two years, which can severely deplete your precious retirement savings. The most prudent way to effectively use your retirement assets in the spirit of starting your business is to work closely with your financial advisor to properly plan your business’ funding. Before your business generates income, perhaps you can earmark some or all of your Social Security income, for example, while leaving your retirement accounts untouched.
An Important Shift in Your Benefits
Healthcare
As your own boss, how you approach benefits will completely change. Previously, your employee made it easy to select your healthcare benefits, but now you’ll need to find a new arrangement as an individual, unless you are forming your own corporation.
Signing up and paying for benefits on an individual level may be more expensive and will affect your monthly budget going forward. The average retired couple pays $285,000 for healthcare during retirement. Doublecheck your monthly spending to make sure the costs can be supported by your mix of income and savings.
Social Security Benefits
Social Security payments are affected primarily by two factors: Age and income. If you are under your full retirement age, $1 is deducted from your Social Security payments for every $2 you earn above the yearly limit. That limit is $18,240 for 2020.
During the year you hit your full retirement age, $1 is deducted in benefits for every $3 you earn above a different limit ($48,600 is the limit for 2020). Only earnings up to the month before you reach your full retirement age are included, not the entire year.
Taking Social Security benefits at the right time can be a very complex, yet important, decision. At Global View, our team includes two Registered Social Security Analysts who have the proper training and information to help you make the right decision based on your situation. Making the wrong decision on how and when to take Social Security benefits can cost a person thousands of dollars, so it’s extremely important to have an experienced financial advisor walk you through your Social Security decisions.
Tax Impact
Business ownership offers control that working as an employee doesn’t always offer. But with added control comes more responsibility. While an employer normally manages your regular tax deductions and creates proper documentation at the end of the calendar year, proper recordkeeping and management is in the hands of the business owner.
There are many solutions to choose from to manage your taxes, like tax software or hiring a bookkeeper, but you must address the cost and effort needed.
You’ll also want to make sure you take advantage of any write-offs you qualify for.
One of the benefits of owning a business is the number of write-offs that go beyond a traditional W-2 arrangement. As a business owner, many of your business-related expenses can be written off or deferred. You can also deduct business expenses and still claim the self-employed standard deduction if you are self-employed. Be sure to consult your tax advisor so you properly manage your taxes and utilize your tax advantages properly! The Global View team includes an in-house accountant, which helps our clients plan their entire plans under one roof. (For more of what this looks like, click here.)
The Takeaway
If you take just one piece of advice when it comes to starting a business in retirement, it is to discuss your plans with a financial advisor you trust! Though starting a business in retirement is a very personal decision, your financial advisor can help you make a plan that can support your retirement and business together. Keep in mind that your retirement nest egg took years to save and grow, and it may not have time to recover if lost.
What’s most important is knowing the risks you face and making sure you’ve accounted for all the important what-ifs. Managing all the aforementioned financial impacts, like taxes, healthcare and Social Security, will be difficult on your own. A fiduciary financial advisor is equipped to help.
