Why (and How) You Should Run a Business When You Retire

The concept of retirement is relatively new.

In your great-grandparents time, only those who had accumulated great wealth could afford to stop working as they aged. Everyone else worked until they were no longer physically able to.

Germany was the first country to enact a Social Security type of system in 1889. Like modern Social Security, contributions were taken from both employees and employers, with payments guaranteed by the government.

Unfortunately, Social Security systems have a fundamental flaw. They’re “pay-as-you-go” systems, referred to in less polite company as Ponzi schemes. Benefits aren't banked for payment to the persons who earned them. Rather, like a Ponzi scheme, early "investors" have first access to the funds.

Ponzi schemes work as long as the number of persons paying into the system (contributors) and those receiving payouts (beneficiaries) stay in the same approximate proportion. In most countries, that’s no longer the case. In the US, the ratio of contributors to beneficiaries is now at a historic low. In 1960, the worker-to-beneficiary ratio was 5.1:1. In 2005, it was 3.3:1. In 2020, it will be about 2.6:1. It is projected to be 2:1 by 2035 when all surviving baby boomers are at least 70 years old.

It’s no wonder that the trustees for the Social Security Trust Funds project that the funds will be insolvent by 2034. The Congressional Budget Office, a non-partisan federal agency is even more pessimistic. It estimates an insolvency date of 2029.

Medicare is even worse off than Social Security. The Medicare trust fund will be depleted in 2026. That’s only eight years from now.

Once Social Security and Medicare become insolvent, benefit payments will be sharply reduced, although they won’t end altogether.

What’s more, even these projections could be over-optimistic because new technologies are destroying jobs at an unprecedented rate. Researchers at Oxford University estimate that a stunning 47% of US jobs could be eliminated in the next two decades. In my own retirement planning, I’ve assumed that even in a best-case scenario, Social Security will pay half as much as I’ve been promised and that Medicare benefits will be much lower than what I’ve been promised.

Don’t fool yourself into believing that Social Security will be able to pay anything more than a modest stipend when you retire. You need to create alternative income streams to help bridge the gap.

One of the best ways to create revenue is to run a small business when you retire. Not only will the income help make your nest egg last, working may also be good for your health, minimizing the need to tap what I project will be sharply reduced Medicare benefits. It’s true: doing nothing after retirement can literally kill you.

What type of business should you create? It should involve work you enjoy doing, that you're good at, and that you're convinced can supplement – or replace – your existing income.

In my career, I’ve operated several businesses. I’ve discovered businesses that involve selling products or services online are the easiest and most flexible to set up. You create a website with a shopping cart and then drive browsers to it. This is easier said than done, but a variety of tools are available to help. A good place to start is here.

The best online businesses leverage your existing skills and (ideally) your current circle of friends and business associates. For instance, if you’re an accountant, you could create a website and sell books or reports on tax-saving strategies. If you’re a chef, your website might offer free recipes combined with a “premium” option to subscribe to a newsletter with professional cooking tips or paid in-person gourmet cooking lessons.

While the classic dream of the entrepreneur is to turn a small business into a big one, there are advantages to staying small, even if your business becomes a roaring success. Small businesses maintain a much lower profile than large ones. In an era of frivolous litigation and constant­ly expanding gov­ernment, staying small will help you avoid the limelight.

Try not to hire employees. Employers must comply with many federal, state, and local laws, regulations, and ordi­nances that don't apply to businesses without employees. If you fire an employee, you may have to make severance payments or even face a lawsuit for "wrongful discharge" or discrimina­tion. Employers must also make payroll deductions to the IRS, and to state and possibly local tax authori­ties.

Instead, use independent contractors if you need extra help to run your business. Without a contractual obligation, you can end a business relation­ship anytime at your sole discretion, without due process or right of appeal. Independent contractors also are responsible for paying their own taxes and fringe benefits. Have the independent contractor sign a notarized "Declaration of Independent Contractor Status" agreement in whatever form your state recognizes.

If you must hire employees, use an employment agency like Manpower. The agency will assume responsibility for complying with federal and state unemployment, tax, immigration, and disability laws.

You also should try to protect your personal assets from business creditors. One of the best ways is to form an entity separate from "you" to own and operate it. Think of it as "You, Ltd."

Your personal assets should be protected from liabilities created inside You, Ltd. ("inside liabilities") and "inside creditors" so long as you:

• Don't personally guarantee You, Ltd. debts

• Segregate You, Ltd. assets from your own assets

• Keep enough capital in You, Ltd. to service existing obligations

• Don't use You, Ltd. to commit a fraud

While a corporation is the traditional choice used for this purpose, a corporation doesn't limit liability as effectively as a limited liability company. LLCs aren’t bulletproof, but they’re far more protective than doing business under your own name and thus risking 100% of your assets if a customer wins a lawsuit against you.

The reality is that thanks to longer lifespans and demographics, you can no longer count on Social Security to pay for your retirement needs. A successful small business can help you bridge the gap.