Cashing in Your 401K for Your Second Act? Think Again.

According to the Kauffman Index of Entrepreneurial Activity: In 2012, almost a quarter of new businesses were started by entrepreneurs 55 and older, a spike from 14 percent in 1996.

Why this spike?

Many of us grew up with our parent’s view of the American Dream: attending college and graduating with a secure job at a top corporation. We were to be the envy of the neighborhood and the pride of the family. However, that vision was tough to realize. We could give the appearance of success and contentment on the outside, but inside was a different story:

  • The job was too stressful
  • The job was stagnant
  • Competition was fierce
  • There was no room for growth
  • We were restless

Similarly, the 2008/2009 recession left many older employees laid off and unable to find new employment. After a year or two of failed job searches, most pursued their own business ventures.

However, desperation played heavily into the need for employment. On the heels of that desire, was the need for capital to fund our entrepreneurial pursuit—and the new American Dream.

But another question emerged: should we take on a small business loan? Many 50+ entrepreneurs already had debt—mortgage, automobile, student loans (most likely their children’s student loans)—and were hesitant to take on more debt.

Understandable. Especially when retirement was 5 to 10 years away and we still wanted to live that dream.

Another big issue: impatience! We’re over 50! We still have visions of some sort of retirement dream and we’re spinning our wheels on what that will be. We want it now and because of that, we are tempted to make hasty decisions…

…like cashing in the 401K, IRA, or other savings plan. As the Entrepreneur in Action blog writer for Missouri SourceLink, 7 of the 9 second act entrepreneurs I interviewed in the last 2 years have turned to their savings to fund their business.

The appeal:

  • Readily available
  • Involved a large, tempting sum
  • No debt
  • The potential to earn it back

Sounds ideal, right? BUT—consider these points first:

  • Do you have other streams of income to balance the risk?
  • How will this decision influence your financial goals?
  • What will be your revised financial growth plans for the future?
  • What will you do if the business fails?
  • Penalties can account for 30% of the funds available if this option is taken.
  • Are you willing to accept these risks?
  • Are you prepared to work as hard, if not harder, than when you worked in a corporate setting?

I don’t want to rain on your parade, but it’s critical to break through the emotional fog. On the plus side of your vision:

  • You have identified a product or service need
  • The potential to build something to call your own is real
  • You have the chance to live life your own way: stay at home with family, no more commute, flexible work hours, etc.

Do the PROS outweigh the risks?

When in the throes of new business excitement and the emotion kicks into high gear, step back and consider your options.

Unlike during the recession, banks are now willing to work with new and small business. Talk with lending officers. Lots of them. Get the facts and seek the options.

Before cashing in your savings, speak with a financial advisor. There are alternatives available that could be applied to your business that don’t carry as much risk or penalties.

Consult others who have cashed in their savings. Listen to their stories, ask their advice. Make an informed decision.

It’s tempting to dip into that magical money pot, taunting us to spend now, but step back, take a breath and weigh all the options. There are several available to help pursue your new American Dream.

 

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