How Early Should an Entrepreneur Plan for Retirement?
Depending on where you are in your career, retirement may seem like a distant dream, or an imminent concern. If you’re just launching a business you hope to expand indefinitely, retirement may be at the bottom of your list of priorities.
Still, if you want to secure a stable future for yourself, it’s a good idea to start thinking about retirement—and planning for it—soon. But is there such a thing as “too soon?” If not, what should you be doing right now?
The Vision of Retirement
First, you should know what “retirement” might look like for an entrepreneur. The conventional vision is to continue working for your current employer for a few decades, and ultimately cash in your Social Security benefits or enjoy the rewards of a pension program you’ve been investing in for years.
But for entrepreneurs, retirement can arrive earlier than usual, and rely on funds outside of a traditional pension program. For example, you might:
- Collect profits from the business. You could step down from the leadership role but stay within the organization, and go on collecting profits from it as a partial or total owner (assuming it continues to prosper).
- Sell the business. If someone makes you an attractive offer, you might be willing to sell the outfit to someone else. If the offer is great enough, you might be able to live off that indefinitely.
- Invest in other assets. You could also use a collection of other investments, such as rental properties or dividend-paying stocks, to fund your retirement. This could also be applied in combination with one of the preceding two strategies.
The Entrepreneur’s Dilemma
Planning for retirement when you’re an entrepreneur presents certain unique hurdles to overcome:
- Endgame strategies. Every entrepreneur needs to have an endgame, but that process might change, depending on how your business develops. Because your retirement strategy might depend on how your business grows and transforms, it can become more difficult to plan appropriately for retirement. For example, you might imagine retirement will entail collecting the profits from your fully developed business, but there’s no guarantee your business will be profitable for decades to come.
- Investment choices. Your investment choices may also present a challenge. An ordinary consumer who saves for retirement might take any extra income and put it into an IRA (or revenue-yielding assets). But an entrepreneur may be more inclined to put that money back into the business, in an effort to achieve further growth. Balancing this push and pull requires diligence, and won’t necessarily pay off the way you anticipate.
- Passion and motivation. Entrepreneurs often choose to launch and foster a company because they’re passionate about it. Accordingly, the typical “retired life” may not be as satisfying as they hoped. Owners need to think carefully about not just how they’ll fund their retirement, but how they’ll live it. Otherwise, boredom may become a serious issue.
The Benefits of Starting Early
Whatever you decide to do, significant benefits can start to kick in early. Here are some possibilities:
- Compound interest. First, you have to consider the power of compound interest over time. As your principal collects interest, you’ll start to earn interest on the interest as well, which results in exponential growth. In the early years of investing, this may not be much, but over the course of decades, the growth can add up. The sooner you get started, the faster you’ll see this growth accelerate.
- Mistake tolerance. No matter what type of investments you pursue, you’ll probably end up making mistakes. But mistakes committed when you’re young give you plenty of time to compensate, and learn from them so you have plenty of experience to ride out your retirement properly.
- Career hedging. No matter how optimistic you are about your company’s future, you need to be aware that nearly 50 percent of businesses fail after just 5 years. If you spend time investing in multiple retirement paths early, that will give you an easy way to hedge against the potential for unexpected dips in your business.
There’s no disadvantage to starting “too soon.” For the most part, any investments you make can eventually be reallocated, so long as you invest wisely. If you can start in your 20s or 30s, you’ll have decades of compound interest to earn—regardless of how your business turns out.
What to Do Now
So if you own a business, what steps should you take right now to ensure your retirement will be successful?
- Start taking action. The worst thing you can do is nothing.
- Diversify your investments. Spread your investments across multiple sources to lower your risk of loss.
- Learn what you can. Learn as much as you can from other entrepreneurs and investors.
Even if you don’t know exactly where you want to be, these steps can help you build a strong financial foundation. The sooner you get started, the better.