If you knew you might be starting a business after age 45, how would it affect your saving and retirement planning decisions?
To read the headline-grabbing business success stories, you might conclude that entrepreneurial activity in the United States is spearheaded by under-30 technology geeks founding social-media companies. But the truth about business formation is a bit different from popular media narratives. Research consistently shows the highest rate of entrepreneurship activity in the United States is found among those over 45. And this is not a new development.
“Even before the Great Recession, older entrepreneurs led the way in new business formations,” writes Phillip Moeller in an August 28, 2012, USNews.com article. A 2009 report from the Ewing Marion Kauffman Foundation found that “over the past decade or so, the highest rate of entrepreneurship activity belongs to the 55–64 age group,” and subsequent updates from the foundation have confirmed this condition.
The Kauffman Foundation maintains an “Entrepreneurial Activity Index” that estimates the number of new businesses started each month, and provides matching demographic data. The Index divides the new business owners into four age bands: 25–34, 35–44, 45–54 and 55–64. Although the numbers have varied slightly for the last three years, the majority of new businesses come from the two oldest cohorts (45–54 and 55–64). And not only do older people start more businesses, they are more likely to succeed. Although only half of new businesses are still operational after five years, older entrepreneurs are more likely to be among the survivors.
Observers point to three factors as drivers for increased entrepreneurial activity after age 45.
1. Longevity. As lifespans have increased, many individuals find they are still healthy and capable, and want to continue working. In what were once considered “retirement years,” these individuals are fashioning second careers, both for personal fulfillment and economic profit.
2. Economic necessity. During the recent recession, the loss of a job spurred many people to start new businesses. This has been particularly true for older people, who tended to have a harder time finding new employment, but were more likely to have the financial resources to consider a start-up venture.
3. Experience. Even as companies attempt to replace older, highly compensated employees with younger workers at lower salaries, there remains a high demand for industry-specific knowledge and experience. For older individuals, this may create opportunities for work as an independent consultant for one or more employers in the marketplace.
In light of these factors, the 2009 Kauffman report concluded, “The United States might be on the cusp of an entrepreneurship boom—not in spite of an aging population but because of it.”
The Reality of the Older Entrepreneur
The phrase “entrepreneurship boom” sounds optimistic, as if a vast array of economic opportunities awaits these intrepid new business owners. But the real “boom” driving older workers to start new businesses is more likely the Baby Boom.
Look again at the three drivers for entrepreneurial activity. As a generalization, Boomers have under-saved and are ill-prepared for retirement. Compelled to keep working, and being healthy enough to do so, Boomers aren’t making way for the next generation. In fact, competition for “mature employment” is increasing. Combined with a lagging economy, it can be tough on workers over 45 to maintain an upward career path. In addition, increasing benefit costs (caused in part by the aging Boomer demographic) may lead many employers to see a financial advantage in keeping full-time employment depressed while engaging more highly-skilled contract and part-time workers. There’s no hard data to support it, but older workers may not be pursuing entrepreneurship, but rather are being forced into it.
For some, starting a new business may open a wonderful chapter of success and prosperity in the story of their working life. For others, starting a business or changing to self-employment is the only alternative to unemployment.
And either way, statistics say more than half of new entrepreneurs will be out of business in five years. Opportunities? Yes. Challenges? Most definitely.
This information should prompt employees (especially those over 45), to consider how a “necessary” period of entrepreneurship might impact their financial well-being. How would it affect your…
Retirement Plan?
Insurance Benefits?
Credit Score?
Current Lifestyle?
In this unsettled economic climate, committing all of one’s long-term savings to an employer’s qualified plan and obtaining life and disability insurance through the company’s group policies may not be the wisest choices. Better to find ways to integrate personally owned assets and benefits with employer offerings. Being prepared for a necessary period of entrepreneurship offers the best opportunity to profit from it.
Elozor Preil, RICP®, CLTC is Managing Director at Wealth Advisory Group and Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). He can be reached at [email protected]. See www.wagroupllc.com/epreil for full disclosures and disclaimers. Guardian, its subsidiaries, agents, or employees do not give tax or legal advice. You should consult your tax or legal advisor regarding your individual situation.
By Elozor Preil
