By Crystal Oculee
Baby boomers are the fastest growing segment of entrepreneurs. Nowadays, the average 65- year old can look forward to about 21 more years of a healthy life and they’re taking full advantage of this time – applying their wisdom and experience towards new ventures and ideas. With approximately 28.5 percent of new ventures created by Americans aged 55 to 64, they represent the latest startup growth – an 11 percent increase over the last 20 years.
Evidently the typical retirement life of leisure has changed, along with the idea that start-up founders aren’t just Silicon Valley millennials. While in appearances millennials and retirees couldn’t be further apart in age, interests and experience, they both share one significant commonality – student loan debt.
This may come as a surprise to many and it isn’t because boomers are going back to school.
With inflation, costs of living and tuition increasing, they have been more than generous in financing their children’s education. Approximately 3.5 million seniors hold $77.8 billion in debt instruments under Parent PLUS, a federal loan program for parents with students enrolled in college. This presents an alarming problem if older adults default on these loans – with the consequences of garnished Social Security checks, wages and tax returns. The Government Accountability Office reported that over $171M in student loan debt was collected on defaults in 2015.
Basic financial advice to seniors suggests that risky investments should be minimized – and yet a new business carries plenty of liability. Already burdened with the financial challenges of a lifetime of consumer debt, likely little savings and now student loans, these ambitious and entrepreneurial boomers risk going bust with their new ventures.
Even the most well-intentioned individuals with solid financial plans who expect to leverage a mortgage or deposits from their 401(k) and savings for their business startup or expansion risk financial disaster without first considering the following strategies: basic business structure, sheltering your existing nest-egg, starting small and scaling up, debt consolidation, and seeking outside investment.
Basic Corporate Structure
With the enthusiasm of a new enterprise, founders are consumed with their “idea”. They are encouraged to get their product to market, achieve their first sales and reach positive cash-flow. Often overlooked is the concept of business incorporation – which may be considered too costly, require too much legal advice or that it doesn’t apply to a “mom-and-pop” operation.
Not realized, however, is that this basic foundation will separate the business from personal finances and investments, as well as shelter any loss of income or legal liability from a failed venture.
Putting all your financial means into one investment – in this case your new business – is not advisable. With 6 out of 10 Americans projected to fall short of their standard of living by retirement, it’s more urgent than ever to save. Personal investments of owners and founders can be held in traditional safe and conservative instruments such as Bonds or CD’s. This will allow you to focus your capital on your retirement needs, hedging your bets should your business fail.
Starting Small and Scaling Up
With cost-effective technology available to the small business entrepreneur, gone are the expensive overhead costs of a “brick-and-mortar” storefront, long-distance phone bills and travel expenses to meet with customers, clients, vendors and associates. A successful enterprise can be run right from your own home.
Sales tools such as Shopify allow a digital marketplace between you and your customers, handling payment gateways and clearing funds. Skype and FaceTime offer means to connect with voice and video worldwide at little expense.
These strategies aren’t just for your average small business. Major banks are also moving to more online interfaces – keeping costs down and passing the savings along to their customers. Ally, for example offers their savings account holders a 1.00% APY interest rate, and surpassing Bank of America, whose storefronts and buildings dominate the landscape with expensive real estate.
Debt consolidation is another means to lower your debt load and your payments on the principal and interest. By taking the student loan debt and combining it with your other outstanding consumer debt – Credit Cards, Mortgages, Lines of Credit and Loans – you have the ability to negotiate or take advantage of a lower interest rate, all while streamlining your payments to one lender and one payment per month.
Another form of consolidation is an Income Contingent Repayment (ICR) plan administered by the federal government. This is slightly more difficult, as the Parent PLUS loan must be consolidated by first applying to StudentAid.gov. Approval of the ICR however presents lucrative benefits, where your payments will drop to either 20 percent of your discretionary income, or what you would pay on a fixed, 12-year repayment plan once adjustments to your income are made. Loans will be forgiven after 25 years of on-time payments.
While a Parent PLUS loan can’t be transferred into your child’s name, you can always refinance this into a private student loan carried by them as they become financially independent and are able to service the debt.
Private Equity “The Shark Tank”
Entrepreneurs are captivated by the appeal of a wealthy financier taking a stake in the company, leveraging their capital and connections for the business to succeed. This may take more time, require a more nuanced business plan, supporting evidence of existing profits and cash flow, as well as a sizeable market opportunity.
If successful, the venture can be financed without using or losing your nest-egg. It’s also a manner in which to test the viability of your business, with seasoned investors offering feedback and advice before signing the cheque. In doing so, changes and adjustments can be made, perhaps even finding unforeseen opportunities and partnerships which can all benefit your outcomes.
The Bottom Line
Business is all about the bottom line. After all, you’ve worked hard for your future and that of your children. Don’t forget to encourage them to take some responsibility in financing their own education. Saving for tuition by delaying graduation, applying for grants and scholarships, choosing a less expensive college and working part-time are all ways that they can be held accountable for the debt you are accruing on their behalf.
With this in mind, the final and most important advice when starting a new venture is to remember to PAY YOURSELF FIRST.
Often, business owners and founders fail to realize the importance of paying yourself first. It’s all too easy to pay vendors, lawyers, administrators and employees or contractors while you carry the burden and sacrifice of growing your business.
If your business fails, you’re likely to be left with little profit or personal earnings. This too will impact your ability to recover your losses as you get older and have less time on your side.
Your business counts on you to thrive.
Crystal Oculee is an experienced, licensed retirement income strategist, national financial motivational speaker, CNN contributor, Personal Money Trainer™ and radio personality appearing on CBS, FOX, ABC, Entrepreneur, Redbook, Daily Worth, KFI, KTLK, KRLA, KDAR and KKLA. She has been featured at many events such as the California Women’s Conference, Los Angeles Women’s Expo, Mary Kay, NARFE, Screen Actor’s Guild, An Empowered Woman and more.