In my last column, I wrote about how in my 34 years of advising retirees and those transitioning into retirement, stock market drops have not caused anyone with a properly managed diversified portfolio and reasonable spending levels to go broke or significantly impair their retirement. I promised my next few submissions for FLORIDA TODAY would discuss some of the things that cause people to have a retirement far less comfortable than they wanted.
Today’s cause of a retirement failure is starting a business.
America was built on entrepreneurship, and our country has been successful at so many things over the years because it is relatively easy for any citizen to start a business if they have enough money to launch. What isn’t easy is getting a business to be profitable, running it, and sustaining its success.
For many new retirees, the idea of starting a new endeavor for this next chapter of their lives can bring excitement and have a strong appeal. This makes a lot of sense and there is nothing inherently wrong with this sentiment. However, I see far more people underestimate the amount of work it takes to succeed than I do people who have a realistic view of all that is involved or their ability to do the work required.
Add to that the reality that as we age, we tend to have less stamina, less energy, and more “senior moments” and you can see why many who want to start a business in retirement may not be as successful as they hoped. Yes, some retirees pull this off but regardless of the founder’s age or the type of business, being a boss can be stressful. Most retirees don’t need that.
In most cases, starting a business requires considerable amounts of money. Financially, a failed business can be damaging, even devastating.
If you maintain a properly diversified portfolio and have reasonable spending levels, removing funds to start a business means not just risking the capital needed to start the business. It also means you are opening yourself up to the risk that you will pour more money into keeping the enterprise going if the business struggles.
“If we can just hang on a little longer, we’ll get this turned around,” is a common line of thinking for small business owners. Often that does not work.
According to the Bureau of Labor Statistics, across all industries and founder ages and experience levels, 1 in 5 new businesses shut down in 12 months or less. Almost half have closed their doors within five years of launch.
When a business fails, not only is the money one put into the business gone, the earnings those funds could have made are also lost forever. Even if a business failure doesn’t fully wipe one out, it could result in a permanently diminished income.
In a properly diversified portfolio, a retiree owns a piece of many companies around the world and eliminates the risk that the failure of any one business will affect their life significantly. In addition, properly diversified retirees own a substantial amount of stable assets not subject to business risk, making the ups and downs of their asset values much less dramatic.
Starting a business can be a great thing to do in retirement but like any investment, there are pros and cons. People tend to get into trouble when they overweigh the pros or are unrealistic about their ability to handle the cons. They bet too much of their life savings on the success of a single business. Unlike investments in a diversified portfolio, starting a business can result in a total loss of one’s investment in the business.
Dan Moisand, CFP® has been featured as one of America’s top independent fee-only financial planners by at least 10 financial planning publications and practices at one of America’s most decorated independent firms. For more info, e-mail him dan@moisandfitzgerald.com, visit moisandfitzgerald.com or call Dan at 321-253-5400, ext. 101.
Originally published on FloridaToday. Read the original article here.