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A significant portion of my clients are retirees or are approaching retirement, but with a depleted nest egg. Many supplement their cash flow by starting a business, so here are some tips to guide them.
Indeed, one of the most striking things I noticed following the financial crisis was the number of folks who retired from one career only to launch a new business.
I shouldn’t be surprised. According to a recent survey of small business owners conducted by Guidant Financial, an overwhelming percentage of new and ongoing businesses are owned by people in their 50s, 60s, and 70s. In fact, more than half of small business owners in the U.S. are 50+. Seventeen percent are 60–69, and 4% are 70+.
You might think that these “graying entrepreneurs” were forced into startup mode because of job losses in the Great Recession or some similar reason. But to the contrary, a mere 15% of older business owners reported starting their businesses because of being laid off. Instead, the majority of older and retired entrepreneurs are starting and running their own businesses because they love it. In fact, 76% report that on a “happiness scale” of 1–10 (with 10 as the best rating), they rate themselves at 8 or above.
Perhaps not surprisingly for a generation that, by and large, spent their careers in a corporate setting, over 70% of older business owners said their businesses employ five or fewer people; nearly a third are “solopreneurs.” The vast majority (86%) launched or purchased independent businesses (in other words, only 14% went the franchise route).
How can advisers prepare for the rising tide of startups by post-retirement clients? What specific guidance do they need about financing, business plans, marketing, and all the other elements essential to building a solid foundation for their new enterprises? Finally, what are the implications of all this for the portfolios that they’ve asked us to manage?
For startup financing, most of those surveyed said they used cash, and many reported utilizing a rollover for business startups (ROBS) arrangement to tap their 401(k)s for startup funds. This can pose a risk to core retirement funds, but for retirees who still have the entrepreneurial urge and who carefully weigh the risks and the requirements, these plans can make sense. If your client is considering ROBS, be sure to pull in the CPA. Review the client’s principal goals and lifestyle assumptions to ensure that the new business doesn’t endanger funds required for basic needs.
The most important things to keep in mind with clients who are considering the post-retirement entrepreneurial leap are the same cautions you would issue to any prospective startup:
- Does the business meet a legitimate marketplace need? Your client’s homemade cookies may have won every award at the county fair for the last 10 years, but is their baking operation scalable? Do enough consumers want their cookies (or can enough be made to want them) to present a viable customer and revenue base?
- Is the necessary financing within the client’s means, and how will meeting that need impact their desired lifestyle? If their idea doesn’t work out, will they still be able to live comfortably with the resources they’ll have left?
- Can they afford the time commitment? If the idea of working 60 or more hours a week to get the business off the ground doesn’t fit with their post-retirement plans, counsel them to consider a different route.
Especially now, as the worldwide economy faces a coronavirus-induced recession, we need to help our clients carefully assess the current business landscape and the hurdles a new enterprise will need to clear. Here are some questions your client should consider for the time when the quarantines are all lifted and it’s safe for people to go out and shop again:
- What is the likelihood that a viable market will exist – especially in the short term – for the product?
- Can your client’s business idea be adapted to an online-only environment? If it can, does your client have access to the technical expertise to get an e-business up and running?
- Is the idea so time-sensitive that it has to happen now, or could it be put on hold for the next 12 months or so to see how – or if – the economy recovers?
- If it’s now or never, how deep are your client’s financing pockets? Does your client have the resources to allow for a longer-than-usual lag between launch and self-sustaining revenue levels?
Don’t assume that a recession is always a bad time to launch a new business. In some cases, a business downturn provides opportunities for innovative enterprises, especially those that solve a problem that is being caused or worsened by recessionary conditions. Examples might include:
- Offering a needed product or service at a significantly lower price than currently available;
- Enabling consumers to make money by selling unneeded items or providing a service;and
- Making it easy for business owners to outsource needed services.
The 2008 financial crisis, for example, provided the launching pad for businesses such as Ballet Bodies, a low-cost alternative to other gym and workout classes; Pawntique, an online pawn shop; DeepSky, an online financial service outsourcing alternative; and Pine Hollow Lodging, an innovative solution that helps strapped homeowners generate revenue from their properties.
With life expectancies stretching longer and longer, post-retirement careers are becoming more and more common. Our clients must understand the risks that go along with the rewards. As a professional, credentialed financial advisor, help them look down the road and anticipate some of the curves and bumps they will face.
Kimberly Foss, CFP®, CPWA®, CFT-I™, is president and founder of Empyrion Wealth Management, an RIA with offices in Roseville, CA, and New York City. Her book, Wealthy By Design, is a New York Times bestseller. She has been a commentator for NBC, ABC, Fox News and The Wall Street Journal. You can reach her at [email protected]
Read more articles by Kimberly Foss
Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
