After several months of retirement, it isn’t uncommon for retirees to become restless and start a business.
Trey Peterson, retirement planning specialist with investment firm Guardian Wealth Strategies in Burnsville, Minnesota, estimates that 40% to 50% of his retired clients start businesses or consult.
However, before making the leap to business ownership, you should understand the key factors that lead to long-term success. Here’s what you need to know about running a business in retirement:
— Your vision might not match reality.
— A business mentor can provide tried-and-true advice.
— You shouldn’t deplete your savings to start a business.
— Employees add layers of complexity.
— You should have clear guidelines for measuring success.
— Tax laws can vary by location and business type.
— You need an exit plan.
Your Vision Might Not Match Reality
It can be a mistake to jump into business ownership in a field unrelated to your previous work experience.
“I recommend working part time or alongside someone who is already doing what you want to do,” Peterson says.
Doing so can help you avoid sinking money into an endeavor that isn’t what you anticipated. Peterson recalls one client who thought a business in the wellness industry would be a perfect fit for her, but after three months in a related part-time job, she realized it wasn’t what she wanted to do in retirement.
Retirees may discover they need to adjust the business model or the industry they plan to pursue. Or they may even give up their dream of owning a business once they learn more about what is involved in running a company.
[READ: 8 Ways to Make Extra Income in Retirement]
A Business Mentor Can Provide Tried-and-True Advice
Enlisting the help of an experienced business professional can help you avoid costly mistakes.
“You need to know what you’re getting into,” says Dawn-Marie Joseph, president of Estate Planning & Preservation in Williamston, Michigan.
Mentors may be able to answer questions about starting a new business, buying an existing one and managing daily operations. Free mentoring is available through SCORE, a nonprofit partner of the U.S. Small Business Administration.
You Shouldn’t Deplete Your Savings to Start a Business
Retirees may be tempted to raid their 401(k) plan, IRA or other savings accounts to cover startup costs, but that may be a mistake. Only about a third of businesses will reach the 10-year mark, according to 2024 data from the Bureau of Labor Statistics, and many fail much earlier than that.
Limit how much you pull from savings to avoid losing your nest egg if your business folds.
“You do not want to pull more than 5% of your retirement assets,” recommends Bryan Bibbo, president and chief financial officer for the JL Smith Group in Avon, Ohio. Those who need more money may want to consider a business loan or line of credit.
Employees Add Layers of Complexity
Restaurants, retail shops and other businesses requiring employees can be subject to a myriad of state and federal rules.
“Along with employees comes paperwork,” Joseph says.
Business owners must collect W-4 forms with employee Social Security numbers, withhold taxes and process payroll. Plus, there may be requirements such as workers’ compensation insurance, unemployment taxes and workplace benefits to manage. An experienced accountant can assist with these and other financial matters.
[See: 10 Strategies to Maximize Social Security.]
You Should Have Clear Guidelines for Measuring Success
Many people go into business ownership without a clear idea of how they’ll define success.
Peterson suggests that business owners create three benchmarks that define great, good and poor business performance. These benchmarks may be related to income, profit or another metric. Defining poor business performance in advance can help you decide when to abandon a failing venture.
“A lot of people make the mistake of trying to keep a dead business alive,” Peterson says.
Tax Laws Can Vary by Location and Business Type
There is no simple answer as to what taxes and laws apply to your company.
“Before you start the business, talk to an accountant or lawyer about how businesses can be set up and taxed,” Bibbo says.
For instance, the corporate tax rate and filing requirements are significantly different than what is required of sole proprietors who can use a Schedule C on their personal income tax forms. Eligibility for tax cuts, such as the qualified business income tax deduction, can also depend on how you structure your firm.
What’s more, businesses selling goods in stores and online may need to collect sales tax. Some cities and states require businesses to obtain permits and meet specific zoning requirements.
[READ: The Most Tax-Friendly States for Retirees]
You Need an Exit Plan
When you start or buy a business, you also need to know how to end or sell it.
Bibbo says every business owner must be able to answer the following: “When are you going to get out, and what does that look like?” That may mean selling the business when revenues hit a certain level, passing it on to children at a specific age or folding up shop when it becomes too time-consuming.
More from U.S. News
What Every 40-Year-Old Should Know About Social Security
What Is the Best Age to Retire?
How to Protect Your Social Security Number
What You Need to Know About Running a Business in Retirement originally appeared on usnews.com
Update 11/22/24: This story was published at an earlier date and has been updated with new information.
