“Should I start a business after retiring?” It’s a question many of us ask… and with good reason.
After achieving financial independence, it’s common to want to continue doing meaningful work. A retirement business can create a way to provide value for others and meaning and purpose for ourselves.
There’s a certain appeal to being your own boss. A retirement business can provide the opportunity to work on your own terms.
Others are driven by financial benefits. Even a relatively small extra income stream in retirement can take stress off a traditional investment portfolio and provide a feeling of abundance.
Should you try your hand at entrepreneurship after retirement? What are the benefits of starting a business after you retire? What are the risks you need to be aware of before going down this path? We’ll explore these questions and more…
If you start a business in retirement… are you really retired?
There is a school of thought that retirement means doing no work, earning no income and living solely off of passive sources of income (stocks, bonds, pensions, Social Security, etc.). Doing anything else means you “aren’t really retired.”
If that is your belief, more power to you. I have no desire to have that argument.
I view retirement as a time after achieving financial independence when you can do whatever you want. As noted in the introduction, starting a business is attractive to many people.
For the purpose of this analysis, it is important to distinguish between pursuing entrepreneurship after retirement and simply starting a business. There are key differences.
A popular article on this site is Darrow’s Retirement Flexibility Scale for Choosing Your Safe Withdrawal Rate. For the purpose of this discussion, we’ll use the criteria he outlines to determine if you’re financially independent.
If you have enough investment assets that you can have a starting withdrawal rate of 3-5% of your investments with some flexibility in spending and/or earning, you’re in the ballpark of being financially independent and able to retire.
This will differentiate starting a retirement business vs. a business you need to sustain your lifestyle.
Why should you start a business in retirement?
There are multiple reasons to start a business in retirement. They include:
- The income a business produces,
- Sharing valuable experience and contributing to society,
- Creating purpose and meaning for yourself,
- Making and maintaining social connections, and
- Trying your hand at entrepreneurship without the financial risks and pressures typically associated with owning a business.
Income Feels Good
Saving enough to retire early requires being a good saver. I’ve written about the challenges of shifting from saver while accumulating investments to spending from them in retirement.
This is a common sentiment among readers I’ve spoken to. It’s one I relate to. Having some income can lessen the stress and anxiety many of us feel as we make the transition away from our careers.
You certainly don’t have to start a business to create a retirement income stream. Other options include cutting back to part-time work or doing some consulting in your field. Alternatively, without the need for a lot of income you could always try a different or lower paying job.
In any event, many people find it easier to spend incoming cash than taking money from investment accounts. Entrepreneurship is one viable option to produce this cash flow.
Sharing Experience/ Giving Back
After a lifetime of developing a skill set and knowledge base, it can be hard to walk away from that completely. Starting your own business can give you an opportunity to use your skills and knowledge while doing work on your own terms.
Other business opportunities could revolve around developing new skills or knowledge. This is what I’ve been doing, using my writing projects to explore topics of interest to me.
In either event, starting a business in retirement creates an opportunity to help and serve others.
Even if you don’t need the money a business creates, you can always use profits to pay others, creating meaningful work for those who do need the money. You’re also free to donate profits, producing even more positive impact beyond the products and services the business creates.
Create Purpose and Meaning
Serving and helping others is noble. However, your work can also be important to create purpose and meaning in your own life. Lack of purpose and meaning is a common challenge for retirees.
Many people view volunteering as more noble than doing paid work. However, just like having a job, volunteering can come with limited autonomy and opportunity to make your desired impact. Creating your own work gives you more control over what you do and the impact of your efforts.
Another common issue amongst retirees is a loss of social connection after leaving the workforce.
The Health Resources & Services Administration describes a “Loneliness Epidemic” in America. They report, “loneliness and social isolation can be as damaging to health as smoking 15 cigarettes a day.” Loneliness and isolation tend to get worse as we age and leave the workforce.
Starting a business in retirement creates opportunities for social interactions. It also gives a great deal of control over the people you want to interact with.
Entrepreneurship Upsides Without the Usual Risks
Common themes that make entrepreneurship appealing to many are the financial benefits and ability to have autonomy and control in your work. However, many people hesitate to start a business because they feel it is risky.
Starting a business after achieving financial independence provides many of the perks and benefits of any other business. However, without needing a business to create enough income to support your lifestyle, starting a business in retirement is less demanding and risky.
We’ll discuss methods to control your risk in more detail below.
What are the challenges and drawbacks to starting a business in retirement?
Entrepreneurship is often sold as being superior to working for someone else. That’s an oversimplification.
I started by highlighting some benefits of starting a business in retirement. However, the decision to start a business, like most every decision, comes with trade-offs.
When you are an entrepreneur, you have to figure out what needs done to make a business successful. There is no one to tell you what to do.
You then have to figure out how to get these tasks done. This may include doing things you don’t want to do, or hiring someone to do them.
Having a business also adds complexity to your financial life. These things need to be considered before leaping into entrepreneurship in retirement.
The biggest challenge, in my experience, to having a business after retirement is finding the motivation to do things I don’t want to do. This was surprising to me.
I have always been a hard worker and have never struggled with motivation. I worked while earning my bachelor’s degree and throughout graduate school.
While working full-time as a physical therapist, I earned a specialist certification in my area of practice and a doctorate degree, did additional community sports medicine work, started my original blog, and did some freelance writing.
I assumed I would find little challenge getting everything done to create and maintain a successful retirement business. I was wrong.
Having achieved financial independence, I often find it challenging to find motivation to work on the blog. It’s especially easy to avoid tasks I don’t like, but which need done to achieve my goals.
This led me to the realization that I need to start outsourcing things I don’t want to do. But that comes with challenges of its own.
Hiring someone to do things you don’t want sounds great at first glance. But it’s rare to have the exact person you need to do required tasks fall into your lap.
You have to first know what needs to be done. Then you have to find someone qualified to complete those tasks and make sure they do the job to your standard. And of course you have to pay them for their services.
You also have to consider legal protections and tax consequences of being a business owner. I found Mike Piper’s books LLC vs. S-Corp vs. C-Corp and Independent Contractor, Sole Proprietor and and LLC taxes helpful to create a foundation from which I could make informed decisions.
Still, these are topics on which I’m not and don’t care to become an expert. So I’ve complicated our financial life and now outsource our taxes to an accountant.
How is a retirement business different from traditional stock and bond investments?
Starting a business after retirement is more work than traditional stock and bond investments. These paper/digital investments are passive.
There are two other major differences that shouldn’t be overlooked: income and risk.
So a $1 million portfolio of any combination of stocks and bonds kicks off about $13,000 per year in passive income. Of course you can also sell shares to get income. But with stock valuations so high and interest rates so low this increases your sequence of returns risk.
In contrast, a retirement business can create “a lot of income” relative to these passive investments. It’s important to define what “a lot of income” means with regards to a retirement business.
Consider this scenario. A retiree has annual spending of $50,000 per year in retirement. Using a 4% safe withdrawal rate, that retiree would need a starting portfolio balance of $1.25 million to support this spending.
If a retirement business can create $2,000 of monthly profit (spendable cash flow) for a retiree, that would represent half of their retirement expenses. That would cut their withdrawal rate from 4% to 2% and drastically reduce the risk of their portfolio being depleted.
So for someone needing income to support their household spending needs and save for retirement, a business producing $2,000 per month, or $500 per week, would not be sufficient in almost any circumstance. But that same income from a retirement business for a relatively frugal retiree, especially in the early years of their retirement, is significant.
You may assume that investing in a personal business is riskier than investing in stocks and bonds. I would argue that you have a superior ability to control risk with a personal business.
A $1 million stock portfolio should be expected to be able to lose 50%, or $500,000 in any given year. With valuations near all time highs, the risk of a substantial market correction is elevated. Simultaneously, dividend yield and expected future returns are lower than under more typical circumstances.
A relatively safe core bond holding would have far less drawdown risk. However, interest rate risk and inflationary risk are higher than usual in the current environment.
Holding bonds requires you to accept these risks for virtually no potential for upside price appreciation. You get compensated with pathetically little income in the current interest rate environment.
Conversely, a personal business allows you to make small bets with potentially asymmetric returns.
In my case, I’ve invested a total of about $10,000 out of my pocket into my writing ventures. I’ve combined that with sweat equity and creatively structuring deals on my book and this blog.
The result is a variable monthly cash flow from combined book royalties and blog profits that cover about half of our household’s expenses in our early retirement. Simultaneously, I’ve created an asset I could sell in the future.
This came with virtually no financial risk, since I took very little from my personal savings and never used any debt.
Should you use your retirement savings or take on debt to start a business in retirement?
This is a personal decision. Throwing money at a problem, possibly taking on debt to do so, can be a winning formula to grow a business faster. It also can add a tremendous amount of risk if things go south.
Using retirement savings or taking on debt should be avoided unless you are fully aware of and comfortable with the idea of losing the financial independence you have worked so hard to achieve. This is rarely, if ever, a good idea in my opinion.
If you struggle to see how to start a business without utilizing debt or putting your capital at risk, I would recommend a few resources.
Starting a Business for Free
The Rebel Business School and associated Rebel Entrepreneur podcast teach how to start a business with little to no money. Founder Alan Donegan identified the two key roadblocks that stop many people from trying entrepreneurship.
First, they don’t have the money to do it. Second, they don’t have the confidence to try.
He teaches creative ways to start a business without debt and with little or none of your own money. This directly addresses the first problem and indirectly solves the second by lowering the consequences of failure.
Using Leverage Safely
Todd Tresidder’s book The Leverage Equation teaches how to use leverage to grow wealth quickly with an emphasis on managing risk. He creates a framework consisting of nine principles and six different types of leverage that are useful in creating asymmetric risk/reward scenarios in your business.
In the book, Tresidder explains that debt, which many people use synonymously with leverage, is only one type of leverage. He acknowledges that it can indeed be risky. So he emphasizes the other types of leverage which can be incorporated into a business with little to no financial risk.
Putting the Pieces Together
In the Choose FI book, I combined principles taught by Donegan and Tresidder with stories of a number of other people from the financial independence community.
A full chapter was dedicated to using a personal business to accelerate your path to financial independence or starting a business after retirement. We emphasize doing so while utilizing strategies to minimize financial risk.
What is a good business to start in retirement?
It is best to begin with the ultimate goal in mind when starting a retirement business. This will help you to find the best means to those ends.
First determine are you optimizing for financial rewards of a retirement business or the non-financial benefits.
While there are many options for a retirement business, there are two key principles to consider universally:
- Limit the financial risks you take so you don’t jeopardize your financial independence.
- Make sure that your work is enjoyable and flexible. Don’t create a job for yourself in retirement that recreates the aspects of work that you didn’t like in your original career.
Optimizing for Financial Rewards
If you are unsure of your financial independence and ability to retire and want the most income with the least amount of effort, it is probably best to focus on skills you already have.
- Could you do consulting work?
- Could you become an independent contractor?
- How else can you create your own work in a way that is interesting and fits into your desired retirement lifestyle?
This was my original plan as a physical therapist (PT). I considered becoming an independent contractor. One option I considered was doing one or two six-weeks rotations as a travel PT. I also considered offering my services periodically to cover vacations, maternity or disability leaves, recurring part-time work to cover periods of peak demand, etc.
Only after having a combination of excellent investment returns, Kim deciding to continue working, and seeing some financial success with my writing projects in my first few years of early retirement did I decide to completely retire my physical therapist credentials.
Related: Not Going Back to Work
Optimizing for Non-Financial Benefits
Once you are confident in your financial independence and ability to retire, irrespective of any further earned income, you can optimize an early retirement business for impact, relationships, physical and mental health, the ability to learn new skills or take on new challenges, or anything else you desire.
Do you like physical work and are you looking to make some money while staying in shape? Consider a landscaping, gardening, handyman, or dog walking business.
Do you enjoy cooking or baking? Consider a catering business, bake wedding cakes and cookies, or get a food cart or truck to take to festivals and events.
Are you a tech and gadget junkie? Use your drone to do aerial photography or videos or offer computer support services.
Are you a creative type? Make and sell art or woodworking projects.
Does a particular topic fascinate you? Start a blog, podcast, or YouTube channel and take your audience along with you as you learn.
You are limited only by your imagination.
Will you start a business after retirement?
I’m curious to hear what others in this audience are doing or contemplating for retirement businesses. Share your stories and ideas in the comments below.
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[Chris Mamula used principles of traditional retirement planning, combined with creative lifestyle design, to retire from a career as a physical therapist at age 41. After poor experiences with the financial industry early in his professional life, he educated himself on investing and tax planning. Now he draws on his experience to write about wealth building, DIY investing, financial planning, early retirement, and lifestyle design at Can I Retire Yet? Chris has been featured on MarketWatch, Morningstar, U.S. News & World Report, and Business Insider. He is also the primary author of the book Choose FI: Your Blueprint to Financial Independence. You can reach him at firstname.lastname@example.org.]
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