Retiring to Entrepreneurism: How to protect wealth while building your startup - Santander
Retiring to Entrepreneurism: How to protect wealth while building your startup
Tactics to Keep Your Wealth Safe in Retirement While Launching a New Business
While many may have dreams of sandy beaches or golf courses in retirement, for you the thought of slowing down after a successful career holds little appeal. Instead, you might imagine retirement as a chance to keep doing big things, just in new ways. In fact, you might see entrepreneurialism or starting a non-profit as the ultimate retirement goal.
If you have such ambitions, then you’re not alone. Those aged 55 to 64 account for roughly one-fourth (26%) of new entrepreneurs.[i] In many ways, those of you that have had a successful and lucrative career elsewhere make for ideal leaders. You have the knowledge base to know where the market will go in your specific area of expertise. You have the financial support to commit to the project. And your career success indicates that you’ll stick with the business and work through hurdles that may arise (since hurdles will most certainly will). Now, after years of working for others, it's time to take on that passion project or launch your dream business. It's not solely a job, but a part of you that you want to build and share with others, now that you have time.
But while pursuing the entrepreneurial dream is the long-deserved fruit of your hard work, also make sure to take the right steps to protect you and your family’s finances. This allows you to retain the safety net you need, the lifestyle you’re used to and the freedom to follow through on your passion.
To ensure this protection, don’t forget these three important considerations to prepare as you start your new business while also planning retirement.
Plan for the entrepreneurial retirement lifestyle
When launching a business, it could take some time before you begin receiving paychecks. It often takes three to four years before a startup becomes profitable. This can differ greatly though, depending on the line of work you choose — those launching consultancy firms may earn paychecks within months.
As you begin working on the startup, the type of business will determine how much income you need right away. You’ll want to make sure you have the income available to pull from your investments, depending on your specific needs and length of time before you reach profitability.
In the years before stepping away from the day-job and launching your company, develop a plan with your financial team so you have enough income through your retirement accounts to support your lifestyle, even if it takes time for the business profits to kick in. Within this, also plan for other stuff beyond the startup, like building in more time with family or going on vacations to recoup from the grind of the business.
Standard retirement benchmarks say you need between a minimum of $1 million and $2 million to retire safely. Others suggest saving enough to cover 80% to 90% of your pre-retirement income for every year you live in retirement. Don’t worry about those benchmarks. Instead, have conversations with your advisors about what your non-work goals in retirement are, how long you think you’ll continue as an entrepreneur in retirement, how much you spend, what protections you have for unexpected surprises, medical concerns and ambitions for passing down wealth to family. All these variables will play a significant role in determining your retirement number.
You’ve reached the point in your life where you deserve to enjoy your success. Don’t deprive yourself, even if you decide your work hasn’t ended.
Have a tax-advantaged, investing strategy
While you may want to launch the business in retirement, you may not want to rely solely on the income from the business — in other words, don’t put all your eggs in one basket, especially when you’re of traditional retirement age. This allows you flexibility and provides you with more funds to ensure you can enjoy your startup experience or take a much needed reprieve when needed. It’s important to retain a tax advantaged, diversified investing strategy, especially for someone with your level of assets.
You’ll want to consider traditional diversification, like looking towards various managed funds, real estate, and alternative assets in your portfolio construction. By launching your business, you can also invest in tax advantaged tools through entrepreneurial-focused 401(k) plans. You’ll want to iron out details of the different types of plans, since they vary based on how many employees your new business will have and whether the business will match a certain percentage of their contributions to the plan.
If instead your ambitions lie in the non-profit space, you have a great opportunity to fund your idea tax-free. With an individual retirement account (IRA), if you're over 70½, you can rollover up to $100,000 a year from the portfolio directly to the charity. This satisfies a portion of a required minimum distribution (RMD), while also ensuring you avoid taxes on the RMD. Meanwhile, your charity gets an annual funding boost.[ii]
Manage the entrepreneurial risk in retirement
You must manage multiple risks when launching a business in retirement, in order to live the life you want whether you're working or going on a much-needed vacation. There are ways, however, to protect your sizable assets from that of your business activities. Having the right set up to your organization, whether you select a limited liability corporation (LLC), C-Corp, S-Corp or another design will go a long ways to sheltering your assets from the company’s comings-and-goings. Which corporate design you choose will depend on the number of employees you have, the amount of funding and the size of the firm, among other considerations.
Another risk that's common for someone like you who wants to launch a business as you retire is that you don't want the business's success to determine your retirement lifestyle, especially as you age. If the company doesn't work out, you don't want it to harm your retirement. To achieve this, determine how much you need for retirement, if no more income comes in. You also must have a plan to take RMDs, how much income to pull out each year, and what level can get you into trouble. This will also help you determine how much of your own money you can safely place in the business, without putting your retirement at risk. Working with your adviser can help you balance your personal needs with your business’s needs.
The purpose of your retirement planning is to protect against the unknown. That’s what Santander Private Client provides: strategies to allow you to have the safe retirement you want, whether that involves a beach or starting that dream business. It’s your retirement, spend it doing what makes you most happy.
[i] "Indicators provide early-stage entrepreneurship data,” Kauffman Foundation, https://www.kauffman.org/currents/indicators-provides-early-stage-entrepreneurship-data/
[ii] “Publication 590-B (2020), Distributions from Individual Retirement Arrangements (IRAs),” IRS,https://www.irs.gov/publications/p590b
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