Entrepreneurship and the New Retiree
For an increasing number of people, retirement does not signal the end of a career, but the beginning of a new phase—entrepreneurship. Many Baby Boomers see retirement as an opportunity to start a new chapter in life, and plan to use their hard-earned knowledge and skills to create their own independent businesses.
With increased longevity, retirement often comprises 25—30% of a person's life. According to the 2013 Retirement Confidence Survey conducted by the Employee Benefit Research Institute (EBRI), 69% of the workers surveyed planned to work in retirement. Certainly, financial reasons, such as paying bills and keeping health insurance or other benefits, are primary considerations in the decision, but retirees who work most often say they do so because they want to stay active and involved (92%) or enjoy working (86%).
Regardless of motivation, retired workers have many advantages when starting their own business ventures. By retirement, mortgages have often been paid and children have graduated from college. With fewer financial obligations—and perhaps a cushion from a lifetime of saving—retirees may have the opportunity and time to develop a strong business plan and concept. They also have the benefit of tapping into a seasoned network of business contacts and skills acquired throughout their working years to enhance product development, marketing, and sales.
Many Boomers may find the opportunity of their dreams during their golden years. For example, prior to retirement, David and Janet had thriving careers in accounting and travel services, respectively. After retiring, the couple quickly discovered that they were not content to stay at home and thought that combining their skills would serve them well in their own business endeavor. Drawing upon David's bookkeeping expertise and Janet's years in customer service, the couple opened a Bed and Breakfast, which has allowed them to use their many talents in a new and challenging way.
If you want to use your years of experience and wisdom to create your own company, here are some questions to consider:
There are many advantages to entrepreneurship, and many retirees are embracing the challenge. The chance to be your own boss and reap the rewards of your own hard work can make business ownership an exciting and educational adventure. Because a lack of experience can often account for many small business failures, decades of your work experience may put you ahead of the game—before it even begins.
- Are you personally motivated? Building a business requires intense dedication. You will need to develop your own ideas, set your own schedule, and manage a variety of responsibilities.
- Are you a "people" person? Running your own business will likely involve interaction with various professionals and personalities. If you can harness the interpersonal skills you gained from four decades in the working world, you will be better prepared to handle difficult clients or professionals.
- Do you have the ability to think quickly? Owning your own company may mean that you will have to provide answers and make decisions quickly, and sometimes under pressure.
- Do you have passion and stamina? It is often said that you must love what you do. Realize at the start of the enterprise that a good deal of time and effort will be required.
- Are you organized? Organizational and planning skills can lead to continued business success. Finances, invoices, and schedules are just a few of the tasks at which you must be or become proficient.
- Is your energy level high? A business requires a lot of work, and it can be physically and emotionally stressful. Those who are energetic often do well because they are propelled by their desire to succeed and have the energy to follow through.
- Will your family be supportive? A new business can consume a lot of your time, mental energy, and sometimes, capital. Make sure to tell your family what they can realistically expect from your business venture, and gain their support and trust.
Countdown to Retirement: Strategies for Saving in Your 50s
The Baby Boom generation is about to enter another era: retirement. Never known for accepting the status quo, Baby Boomers are ready to redefine the "golden years." Forget about endless days of leisure. This generation seeks adventure, travel, and new business pursuits. While these changes may redefine retirement, will Boomers be able to finance their plans? Today, many people age 50 and older have not begun to save for retirement or have yet to accumulate sufficient funds.
If you're in this age group and find yourself facing an underfunded retirement, it's not too late to take charge. There are actions you can take today to get on the right track. Here are some ideas:
What's it going to take? First, estimate how much money you will need in retirement. Once you have an idea of the amount, you can work toward meeting that goal. A good rule of thumb is that you may need 60—80% of your current annual income in retirement. Your financial professional can help you assess the best amount for your situation.
Maximize your contributions. If your employer offers a retirement plan, contribute as much as the law will allow. In 2013, those age 50 and over can contribute up to $23,000 to an employer-sponsored 401(k) plan ($17,500 + $5,500 "catch-up" contribution). Many employers also offer a company match, so be sure you contribute enough to claim this "free" money, which can add up over time.
Create a spending plan. In other words, make a budget. Many people think a budget is restrictive, but look at it this way: You can spend now, or you can have the money to afford your dream adventures later. To start, it is important that you pay down debt and avoid accruing new debt. Next, examine your spending habits and replace some of your discretionary spending with saving. Saving even $20 more per week is a step in the right direction.
Take initiative. Besides contributing to your employer's plan, you can save more by opening your own Roth IRA. Contributions are made after taxes, but earnings and distributions are tax free, provided the account is at least five years old and you have reached age 59½. Those age 50 and over can contribute up to $6,500 a year in 2013. Eligibility for these plans begins to phase out with adjusted gross incomes of $112,000—$127,000 for single filers and $178,000—$188,000 for married joint filers in 2013.
Hang out your shingle. Many Boomers hope to start their own businesses in retirement. Why wait? If you begin your entrepreneurial efforts now, your business has the potential to be in full swing by the time you retire, and any profits between now and then can be added to your savings.
Move it or lose it. Your home may have significantly increased in value since you first bought it, and you may have already paid off the mortgage. With children at or near adulthood, do you really need all that space? Selling now and moving to a smaller, more affordable location may allow you to transfer some of the equity in your home into a savings vehicle.
Reconsider your retirement age. If you want to cushion your retirement savings, consider staying on the job longer. Some people actually leave retirement to re-enter the workforce because they feel more fulfilled while working. Others seek part-time work, consulting, or entrepreneurial endeavors. Such options may enable you to earn more money to save, which may help to postpone spending down your savings.
Regardless of which options you choose, you can benefit from time and compounding interest. Every year that your savings remain untouched allows more time for growth. It is never too late to start preparing for your future. So, take action now to get on track to saving for your retirement.
SEC Alert: The Pitfalls of 401(k) Debit Cards
According to the U.S. Securities and Exchange Commission (SEC), 401(k) plan participants may want to exercise caution if offered a 401(k) debit card by their employers. A 401(k) debit card typically allows
retirement plan participants to borrow up to $50,000 or 50% of the value of their retirement plan, whichever
is less, through use of a debit card. But, a 401(k) debit card is not like a debit card that deducts money from a checking or savings account. Instead, early withdrawals from 401(k) accounts are loans that employees make to themselves out of their own retirement savings.
Just as with traditional credit cards, you must repay the money you withdraw using the 401(k) debit card, along with fees and interest, or you may incur substantial penalties. The SEC recommends that plan participants consider a number of factors before using a 401(k) debit card, including possibly having to pay interest and fees on amounts they borrow from their 401(k) accounts. While noting that some of the interest paid by borrowers goes back into their 401(k) accounts, a so-called "margin" may generally be paid to the vendor of the card. A number of additional fees may also be applied, including an annual fee, a set-up fee, a cash advance fee, and fees for other services, such as express delivery.
If borrowers fail to pay the money back in the time period required by the plan, there may be significant
penalties and tax consequences. Under IRS rules, 401(k) plan participants who borrow from their accounts
are typically required to repay the amount of the loan in five years or less, and cannot fail to make payments for three consecutive months. Borrowers who don't meet those conditions may owe taxes on their loan balance, and borrowers under age 59½ may also have to pay a 10% income tax penalty.
The SEC warns employees that the amounts set aside to borrow may earn a lower rate of return than the rest of their 401(k) assets. This is because funds the participant may wish to borrow are often placed in a money market fund, which usually produces lower returns than other 401(k) plan investment options, such as mutual funds or stocks.
In addition, the SEC cautions employees that, unlike 401(k) contributions, repayments of 401(k) debit card loans are not automatically deducted directly from payroll. Instead, borrowers need to take action to repay the balance.
Withdrawing money from your retirement account under any circumstances, including with a 401(k) debit card, should be carefully considered. Remember to weigh all the pros and cons, so you can make an informed decision.
Divorce and Retirement Plan Proceeds
Because divorce usually involves the division of assets, including some that may have tax implications, it is important to be aware of potential "tax traps," such as vested account balances, when you begin your retirement planning strategies.
In the past, with traditional defined benefit plans, such as company pension plans, participants generally received a retirement benefit, but they had no vested balance in an individual retirement account. In other words, employees had no rights to the employer's contributions to the retirement plan. However, with the popular shift toward workplace defined contribution plans, such as the 401(k), contributions made by employees to their retirement plan are always vested, and employer contributions vest over time, according to the schedule set forth in the plan document. Consequently, dividing vested retirement plan assets in divorce proceedings has become a complex financial issue.
Protect Yourself with a QDRO
A qualified domestic relations order (QDRO) is a judgment or order that involves child support, alimony, and property rights pertaining to a spouse, former spouse, child, or other dependent. A QDRO can be used to establish one spouse's right to part or all of the other spouse's retirement plan(s) and ensure that the recipient spouse pays the tax.
To be protected through a QDRO, it must specify the following:
- The name and address of the plan participant and the "alternate payee" (typically, the participant's
- The name and account number of each retirement account involved.
- The percentage (or dollar amount) of each plan that is to be paid to the alternate payee.
- The period of time or the number of payments covered by the QDRO.
The QDRO must be a part of a divorce decree or a court-approved property settlement document. The decree must also specify that a QDRO is being established under Section 414(p) of the Internal Revenue Code (IRC) and the particular state's domestic relations laws. Intent to establish a QDRO is insufficient; it must be documented in the divorce papers.
Getting divorced can be "taxing" enough, so be sure that you understand the process of dividing retirement plan assets. Through a QDRO, an individual can provide retirement funds for a former spouse, child, or other dependent, and ensure that those assets are taxed appropriately. Consult your qualified tax and legal advisors for guidance on your unique situation.