In 1952, at the age of 65, Harland “Colonel” Sanders took a $105 social security check and an old family fried chicken recipe, and launched the multi-million dollar Kentucky Fried Chicken fast food business. Sanders was a rarity half-a-century ago, but times have changed. While starting a business after retirement hasn't yet become the norm, it's much more prevalent today.
Indeed, if you don't currently have many small-business owners as clients, the odds are good that you will in the near future. Nearly 80 percent of baby boomers want to work in retirement at least part time, and many of them intend to go into business for themselves, according to the Public Policy Institute of AARP.
Some retiring boomers view entrepreneurship as a means to fuel their desire for mental stimulation, physical activity or social interaction; others see it simply as an opportunity to continue generating income, or a necessity to pay for potentially exorbitant health-care costs. Regardless of their motives, these small-business newbies need solid financial advice so they don't jeopardize the nest eggs they have worked so hard to build.
Peter Miralles, CFP, president of Atlanta Wealth Consultants, frequently counsels retirees with the urge for entrepreneurship. “Surprisingly, it comes up pretty often,” he says. One client cashed in his entire 401(k) at 55, invested about $500,000 in starting a business, turned it into a $30-million enterprise, and sold it about 12 years later. “On the other hand, I've seen some pretty big blow-ups,” he says. Unfortunately, older entrepreneurs don't have time on their side: They can't wait too long for profitability or rebound from a financial fiasco.
One of the keys to success for these “seniorpreneurs” is advance planning. A simple conversation with clients long before retirement can reveal their entrepreneurial interests and get the process started. For many retirees, the dream of opening a business is emotional and idealistic, says Wilder. “What they really need is an advisor who is going to be there to play devil's advocate and take the emotion out of the decisions they are making.”
Making sure the personal financial house is tidy should be the first order of business, especially for those who opt for early retirement. Unless they are laid off, individuals should probably be fully vested in any pension plan, and have reached their maximum Social Security earning potential, before they walk away from their current employer. Like any pre-retiree, these individuals need solid retirement income and cash flow projections to make sure they are financially fit to leave the workforce.
Capital Is King
Lack of capital is one of the largest contributors to business failure. The natural inclination for many is to dig through their own pockets before turning to outside sources. Of course being proactive, building up liquidity and having personal funds to finance the new venture is preferable, says David Leber, president of Allentown, Pa.-based Leber Financial Group.
Those who are financially fit and are adamant about tapping retirement funds need to follow specific steps to avoid costly tax penalties. Under IRS tax code 72T, individuals can begin withdrawing money from their IRAs prior to age 59½ to start a business without traditional penalties, but they must adhere to numerous stipulations.
Franchise operators in particular are enticing seniorpreneurs by encouraging them to utilize tax code sections from The Employee Retirement Income Security Act of 1974 (ERISA), which enables individuals to redirect up to 100 percent of their retirement savings into a retirement plan that invests directly into the new business — without taking a taxable distribution or incurring penalties. The funds can then be used to purchase a franchise or existing business. It can also be used for start-up expenses, such as purchasing property or equipment or put toward working capital, including paying salaries or franchise fees. Alternatively, it could serve as equity toward Small Business Administration or other loans.
It's prudent to bring in an accountant to work through many of these financial issues. Lawyers should be part of the team, too. They can help the client determine the best way to structure the business. Incorporating or forming a limited liability company protects the owner's personal assets from a claim against the company. Sole proprietors need to understand the risk to their personal wealth if they go bankrupt, or face a lawsuit or another claim involving the business. Obtaining liability insurance is also important.
Think Low Risk, Low Cost
If your client dreams of opening a vineyard or renovating a dilapidated Victorian house and turning it into a labor-intensive bed and breakfast, you should try steering them toward a low-cost start-up that doesn't pose a great investment in terms of time and capital. This can be a great way to transition into self-employment and test the waters.
A number of Leber's clients have successfully started consulting businesses. “They were corporate execs, and they had expertise in one or more areas and they were in demand.” In fact, about 25 percent of new retired boomer start-ups are consultancies, and there's good reason. A former exec who has a Rolodex rich with professional contacts, some business cards and a computer can often get up and running quickly with minimal expenses. In fact, former employers are frequently the first clients they land. Consultants can typically control their workflow, and shouldn't have to struggle to balance work and leisure pursuits.
Individuals need to be diligent to maintain independent contractor status in the eyes of the IRS, however, or risk being re-classified as an employee, which could create additional tax burdens. To ensure this doesn't happen, they need to be sure to register a business name, obtain all necessary licenses and permits, establishing a separate bank account, purchase business insurance, pay estimated taxes, and demonstrate recurring business expenses such as rent or equipment.