— December 12, 2018
Starting and operating a business isn’t the easiest path to take to success. It’s one that’s fraught with risk, particularly for the long-term financial health of the entrepreneur. For the young, it’s usually a risk worth taking. For older entrepreneurs, however, the realities that come with age and outside responsibilities make starting a new venture much more of a gamble.
Despite the risks, though, members of the baby boomer generation are still twice as likely to take the plunge into a new business venture than their younger peers. Some of that comes from the confidence born from years of success in previous ventures, and a desire to finally exercise some control over their professional lives. In either case, jumping into a new business with both feet at an advanced age takes some skillful planning to ensure a successful path to retirement. If you’re in that position, here are the three biggest mistakes that entrepreneurs make when planning for retirement, so you’ll know what to avoid.
Mistake #1 – Not Having a Savings Plan
As obvious as it may sound, the most common mistake that older entrepreneurs make when starting a new business is having no savings plan whatsoever to deal with their eventual retirement. At last count, some 34% of entrepreneurs don’t have one, so it’s a much bigger problem than you might think. When you consider that the average American household led by a retiree pulls in about $ 48,000 in pre-tax income annually (with about half coming from Social Security), it’s clear that saving early and with regularity is an absolute must. That’s why creating a business-sponsored retirement plan is a great idea for any small business owner. In such a situation, the owner themselves can start making contributions to their retirement fund (with tax advantages, to boot), alongside their employees, leading to a win-win for both.
Mistake #2 – Overspending and Over-Capitalizing the Business
If there’s one trait that almost every entrepreneur displays, it’s a commitment to success. While that’s good news for your business prospects, it also leads to a make-it-work mentality that focuses on today to the exclusion of every other concern. That’s why business owners frequently re-invest whatever profits they make into the business, prioritizing long-term business growth over long-term financial stability.
Even when that’s not the case, the owners that do take reasonable salaries from their businesses tend to be less careful with that money, believing it to be an evergreen resource.
Mistake #3 – Having no Exit Strategy
News flash – nobody wants to grow old – especially not entrepreneurs. That’s one of the reasons that so many of them get into new businesses with no thought put towards how they’ll get out when the time comes. Worse still, some believe their exit strategy is a retirement plan in and of itself, as though the value of the business at the time of sale will fund their retirement with ease. That’s a lovely thought, but it doesn’t really square with reality. The first problem is that owner-operators often overvalue their businesses due to the years of hard work they’ve invested, and others underestimate how difficult it will be to actually sell their business when the time comes.
Either situation can be disastrous come retirement time. The amount of work you’ve put into the business can work against you as well if a prospective buyer realizes that the entrepreneur themselves is the key to the business’ value. To make sure you don’t get an unwelcome surprise when the time comes, invest in obtaining periodic, 3rd-party business valuations (each year to start, and then every quarter as you approach retirement). That way, you’ll have a realistic idea of what you can expect when you decide to leave the business and can make any anticipatory changes as necessary.
Work Hard to Retire Easy
If you decide to start a new business later on in life, you’ll draw on the experience you’ve built over a lifetime. That puts you in a great position to succeed. Making any of the above mistakes, though, can rob you of enjoying the fruits of all of your labor when the inevitable day comes that you’re ready to retire. The good news is that avoiding these pitfalls doesn’t take all that much effort. With a little forethought and strategic planning, you’ll be able to devote all of your effort to build a successful business, without fear for your future. That’s the true measure of success for the older entrepreneur, and it’s one that you can live up to with ease if you approach it the right way from the start.