Retirement is a time to kick back, slow down, and do all of the things you didn’t have time to do during your “clock-punching” years. But for an increasing number of retirees, becoming an entrepreneur is the new thing to do after leaving the workforce.
In fact, the Bureau of Labor Statistics reported in 2015 that the self-employment rate among retirement-aged workers (65 and older) was the highest of any age group, at just over 15 percent.
However, before diving headfirst into the pool of startups, here are a few questions you need to ask yourself before starting a small business in retirement.
1. What do you have to lose?
Unfortunately, in business, failure is a very real option. According to the Bureau of Labor Statistics, 50 percent of new businesses don’t survive past five years. And if your business fails, you need to be able to survive. You must count the costs before you begin.
Answering the question, “What do I have to lose?” will help you assess and determine your risk tolerance and accurately scale your business. It will help you develop a business model that works for your lifestyle, interests, financial status, and physical health.
If you retired and are looking forward to leaving the world of nine-to-five, it makes no sense to start a business that operates primarily during these hours. If your health is beginning to deteriorate, doing work that is physically demanding with lots of heavy lifting or repetitive motions may not be the way to go. Be sure you keep your needs and limitations in mind before you begin. (See also: 8 Common Myths About Starting a Small Business)
2. How will you finance the business?
The adage, “It takes money to make money” is the truth when it comes to starting a business. You must understand that you may have to shell out — depending on the industry — large sums of money up front. Taking on huge amounts of debt, or any debt for that matter, during retirement is a tremendous risk and should be avoided if possible.
If your business requires a large amount of upfront capital, you need a plan for getting your hands on funds. Dipping into your retirement stash to pay business expenses is not recommended by most financial advisers. You may need to scale back your business plan, take on a partner, or allow others to become investors. You may even need to delay starting the business for a year or two and reduce your living expenses to help set aside funds to get the business going.
Another financial surprise that comes with new ventures is the hidden costs associated with starting a business. Again, these costs are contingent on the business type, size, and the area in which you live. Things like insurance, professional fees, permits, licenses, attorneys — and everyone’s worse nightmare, taxes — can derail the business before it gets off the ground, and significantly impact your retirement nest egg. Do your homework to see which fees apply to your business in your area and plan accordingly.
3. How much time and energy will it take?
Nurturing a business in its infancy requires, time, energy, and a ton of diligence. Starting a single proprietorship with no staff, no outside financing, no products, and no facility will take a couple of months. If you factor in hiring staff, securing a bank loan, and purchasing product, the time it takes for your business to be up and running could be six months or more. And while you do have more time now that you are retired, you must understand that time affects your bottom line.
Counting the cost of becoming an entrepreneur doesn’t just mean finances, it also includes sweat equity. Retirement is a different season of life and, depending on your particular circumstances and the industry you enter, you could be making a bigger time commitment than you expected.
Be sure you understand the marketplace and all of the “small” jobs that go into running a business — especially if you are doing it alone or with minimal staff. What will you do if your computer crashes or your printer breaks down right before an important meeting? Figure out what can you afford to outsource and what you can you do yourself. And most importantly, be sure you can commit the time and energy it takes to make your business successful.
4. What can you do before you retire?
If starting a business is something you know you want to do before you retire, you should do as much ground work as possible before giving up your income. It’s even advisable to launch the business before you retire.
Starting a business while working a full-time job is tough (speaking from experience here), but it does have its advantages. It makes you budget your time and start small. You have to go at a slower pace, which is a good thing. You are able to learn the intricacies of the business, establish relationships, and make mistakes within a controlled environment.
If starting a business while working your regular gig is too much, see if you can shadow, intern, volunteer, or work part-time for a similar business. You can also establish your small business framework — write your business plan, become an LLC, and get any necessary licenses, permits, or certifications — so you are ready to go as soon as you retire. It is also advisable that you save, save, save to help offset startup costs, minimize debt, and to keep from disturbing your retirement funds. (See also: 6 Ways You Can Cut Costs Right Before You Retire)
5. What am I giving up?
Becoming an entrepreneur in retirement is a great way to indulge in your passion, spend your time and energy meaningfully, and earn some extra cash. But being your own boss comes at a cost. The biggest expense that comes with starting a business in your sunset years is opportunity cost.
Opportunity cost is the cost of what you’re giving up while choosing to do something else. Things like spending time with the grandkids, taking tropical vacations, or even establishing a college fund for the grands or giving your kids the down payment on their dream home are all things you may have to forgo, at least for a time. (See also: How to Find Your New Identity After Retirement)
Before you make your decision, be sure you thoroughly count all of the costs. Pay a visit to your financial adviser, and discuss your options and sketch out a solid financial plan. Hold yourself accountable, know when to scale back, and know when to walk away.