A retirement researcher on the risks older wannabe entrepreneurs minimize
There’s something romantic about the term entrepreneurship, especially when you’re considering starting a second act. The chance to be your own boss and spend your time doing work you love may seem enticing.
But it can also be reckless.
“For those who choose to jump into the game when they’re 50 years old or older without a financial safety net to fall back on, this is a problem,” said Cal J. Halvorsen, an assistant professor at the Boston College School of Social Work and an inaugural member of the Encore Public Voices Fellowship.
Halvorsen, who specializes in self-employment and entrepreneurship among older adults, told me that at the Gerontological Society of America conference in Boston last month. Since entrepreneurship for people 50+ is something I write about frequently, I wanted to learn more. So I followed up with a phone call for a deeper dive and to hear Halvorsen’s advice for people considering starting a business for retirement income.
The Risk of Starting a Business in Retirement
“I am not here to argue that entrepreneurship is inherently bad. New businesses do contribute to economic growth, and in turn, job creation,” he told me. “But what we see is about half of new small businesses end up closing within five years. If you’re retired, or close to that stage, there is less time to make up for losses.”
Essentially, there are two basic motivations for turning to entrepreneurship at older ages, according to Halvorsen.
“Scholars call it ‘the push and the pull,’” he said.
“There are those who are pulled into entrepreneurship because it is something they’ve wanted to do their entire life. This is finally the chance you can do it.” Others, Halvorsen added, are people who are “pushed into it because they might be out of a job. And we know that over 50, it’s much harder to get reemployed. They might have to start something on their own as a way to keep earning an income.”
Follow Your Passion? Maybe Not
Halvorsen is not a fan of the “follow your passion” advice frequently given to men and women considering launching businesses in midlife or later.
People are “too often encouraged to start new business and pursue their passion,” he said, adding that doing so can “be fraught with peril.”
One of his worries: that moving into entrepreneurship might keep some people from being ready for the financial realities of retirement, including health care costs and coverage before hitting 65 and qualifying for Medicare.
Advice for Prospective Second Act Entrepreneurs
His advice: “You have to figure out how you are going to pay for health care coverage which can be expensive — and it’s a time when you may be experiencing more health care needs.”
Halvorsen’s biggest worry, though, is where the older entrepreneurs will find the capital to start their dream businesses.
“In light of the fact that so few people have enough saved for retirement, I’m fearful that people will tap into what little they might have in retirement savings,” he said. “Some of them are going to be wildly successful, but my fear is many of them won’t, which can lead to higher rates of poverty for them down the road.”
I agree wholeheartedly. I always caution prospective entrepreneurs over 50 to avoid tapping retirement accounts to fund their start-up. It can be pretty risky for their future financial security.
The Joys of Being an Older Entrepreneur
Halvorsen doesn’t want people to think he’s all gloom and doom about second act entrepreneurship, though. “It can be so exciting,” he noted.
Older entrepreneurs, Halvorsen said, “gain a whole lot of flexibility in their work, and that’s a major motivating driver for a lot of people. That does become more important the older you are. And they gain autonomy; they get to become their own boss.”
The people who are best prepared to become entrepreneurs, Halvorsen said, are those who have “higher levels of human capital, social capital and financial capital.”
I asked him to explain. “Human capital might be, for example, education and work experience. Social capital would be their social network. Financial capital would be their financial assets and wealth. If you have higher levels of these, it has been shown that you can be more successful in entrepreneurship.”
Fortunately, these forms of capital tend to increase with age, because you have had more time to cultivate them. As a result, older people in general would likely be more successful at entrepreneurship than younger ones, Halvorsen said.
Most Successful Entrepreneurs: Middle Age and Older
In fact, most successful entrepreneurs are middle age and beyond, as I wrote in this Next Avenue post.
“Successful entrepreneurs are middle-aged, not young,” according to Age and High-Growth Entrepreneurship, a paper by Pierre Azoulay and J. Daniel Kim of the Massachusetts Institute of Technology Sloan School of Management, Benjamin Jones of Northwestern University’s Kellogg School of Management and Javier Miranda of the Census Bureau’s Center for Administrative Records Research.
The study’s researchers calculated a mean age of 45 among the 1,700 founders of the fastest-growing new ventures. And they found the “batting average” for creating successful firms rises dramatically with age.
“A 50-year-old founder is 1.8 times more likely to achieve upper-tail growth than a 30-year-old founder,” they wrote.
Research from The Kauffman Foundation, a nonpartisan group supporting entrepreneurship, backs this analysis. In its 2018 State of Entrepreneurship survey of 2,165 business owners, older entrepreneurs reported having less difficulty starting their companies than younger ones, in a variety of ways.
Why Older Business Owners Have an Advantage
The authors of Age and High-Growth Entrepreneurship theorize that there are few reasons an older entrepreneur may reap the benefits of start-up success over a younger one. These include: greater experience in management, marketing and finance, as well as a richer, deeper knowledge of an industry.
Even though my conversation with Halvorsen was triggered by his “let’s be honest about the stark reality of starting a business later in life” view, it wrapped up on a more positive note, especially for people in their late 60s and beyond.
“Some of the inherent risks of self-employment and entrepreneurship decline when people begin to take Social Security retirement benefits and become Medicare eligible,” Halvorsen said. “So, people who create new businesses with monthly Social Security checks as a base of support will continue to receive Social Security whether or not their businesses succeed; that monthly income would help them to weather the ups and downs. Further, for those who become entrepreneurs at 65 and after joining Medicare, the concerns about health care costs will be greatly reduced.”
Even so, Halvorsen — still careful to keep the yellow light flashing — advised: “One should still be cautious about investing their own retirement savings into a business unless they have enough of a financial cushion should that business fail.”
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