by Gary Foreman

You don’t want to risk a comfortable retirement starting a business that might fail. We explore options for funding an encore career without risking your retirement savings.

Do you want to create a second career in retirement? You won’t be alone if you do. With 10,000 baby boomers reaching retirement each day and average lifespans running into the 80s, many of us don’t want to sit around for the next 15 to 20 years. We have lots of life left in us and want to do something with those remaining years.

Many choose to start a 2nd (or 3rd) career. Quite often, it’s not one where we’d work a certain number of hours for a guaranteed check. We look for ways to strike out independently and scratch an entrepreneurial itch.

One thing that holds some back from scratching that itch is the cost to start a business (even small) and the risk to retirement funds. It’s smart not to risk money you’ve saved over 50 years in a start-up business that might not work out.

So, how can you create that small/micro business without putting your savings at risk? Let’s explore some of the ways.

Cost Challenges of Starting a Small Business

A start-up business (even a tiny home-based business) has two money challenges: covering the initial costs to get started and then the ongoing costs of day-to-day operations.

The initial costs can include operating space, equipment, utilities, deposits, etc. Depending on your business, you may be fine working out of a spare bedroom or garage. Or you might need to rent office, manufacturing, or warehouse space. That decision will have a major impact on how much money you’ll need for your business.

The day-to-day costs may include things like the cost of materials, payroll, rent, utilities, insurance, memberships, subscriptions, etc.

It’s important to estimate all of these costs before you start. There will be unexpected surprise costs. So anticipate some unbudgeted costs, especially if you want to avoid dipping into your retirement savings.

Technology has made it easier and less expensive to start a business. Tasks that once required a full-time in-house employee can often be handled now by a part-time employee working at home. Some tasks, like bookkeeping, no longer require a professional. Software makes it a matter of simple data entry. Other tasks can be performed by someone that you hire for that one purpose.

The need for retail or office space has also changed. A storefront doesn’t always need to be physical. And office workers don’t necessarily need to be in the same building. Online stores and virtual offices can meet many needs.

Options for Funding Your Start-Up Without Putting Your Savings at Risk

So now that you’ve estimated your costs and kept them to a minimum, how can you finance your needs without risking your retirement savings?

1. Self Funding

If your needs are small, you may be able to fund a small business yourself. More than one business has been started out of a bedroom or trunk of a car. Others began on a laptop and a cheap cell phone plan.

Your first source would be non-retirement savings. Has retirement reduced your expenses? Are there other monthly bills that can be trimmed temporarily? If so, those savings can be diverted to your new business.

If your retirement account is large, you may choose to use a small portion of it for your new business. But only if you have more than enough for a comfortable retirement. And remember to take into consideration any tax consequences of withdrawals.

There will be a temptation to use credit cards. Remember that your personal credit cards must be repaid even if your business fails.

2. Product Presales

If you’re producing a product, you may be able to find some customers who will pay for it before it’s produced. They may expect a discount from the eventual price or just want to be the first to get something new.

3. Crowdfunding

Crowdfunding is a 21st-century invention, but it harkens back to a time when friends and family helped get a small business off the ground.

Crowdfunding uses the internet to attract relatively small amounts from many people. They’re not investors and generally don’t own any of the businesses that they’re supporting. All they expect is the product that will be produced or an acknowledgment of their support.

It’s low risk for the business owner. Unlike a loan, it doesn’t need to be paid back. And there are no investors to tell you how to run your business.

4. Small Business Loan

A small business loan is often used to get a new venture off the ground. You’ll need to have a business plan, expense sheet, and financial projections for the next five years.

Loans are available both through your bank and the Small Business Administration.

There are drawbacks to a loan. Payments may begin before your business is financially ready. Failure to make payments could throw your company into bankruptcy.

5. Venture Capital

“Venture capital differs from traditional financing in a number of important ways. Venture capital typically:

• Focuses on high-growth companies
• Invests capital in return for equity rather than debt (it’s not a loan)
• Takes higher risks in exchange for potentially higher returns
• Has a longer investment horizon than traditional financing”

(source: SBA.gov)

Obtaining venture capital is not a simple task. And it’s only appropriate for the biggest of small businesses. You’ll go through a 5-step process.

1. Find an investor.
2. Share your business plan.
3. Go through due diligence review.
4. Work out the terms.
5. Finalize the investment.

Many of us dream of starting a small or home-based business in retirement. And often, the deciding factor is whether we can afford to risk it financially. Whether your dream is practical or not, it’s wise to finance it without risking your retirement savings.

• Expert Interview: Launching a Successful Part-Time Business in Retirement Without Jeopardizing Your Savings
• 7 Steps to Starting Your Own Business After Age 50
• Reinventing Your Career in Your 50s or 60s
• A Realistic Second Career for Retirees

Reviewed January 2024

About the Author

Gary Foreman is the former owner and editor of the After50Finances.com website and newsletters in 1996. He's the author of How to Conquer Debt No Matter How Much You Have and he's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money, Credit.com and CreditCards.com.