Turning Savings into a Start-Up

By Dan Kadlec

Money experts warn that it's a bad idea. But a steady flow of people past the age of 50 are funding new businesses and nonprofits with their retirement savings anyway--and having enough success (or fun) to brag about it. About a third of self-employed people over 50 didn't strike out on their own until after the big five-oh. These people say they'd rather be in business than in Boca, and they view their pensions and home equity as a lifeline to remaining productive and engaged after retiring.

Like many other late-in-life entrepreneurs, Richard Steckel, 65, waited a long time for a shot at running his own show and doing something good for the world. A few years ago, he sold his house and slashed his living expenses to buy some cameras and travel the world to shoot pictures of children in common settings: a first haircut, a lost tooth. A former museum director, Steckel hoped to show that all people share the same basic life experiences. He and his wife Michele, his partner in the Milestones Project in Littleton, Colo., say they have found their purpose. "People thought we were out of our minds," says Steckel. "I guess we live with a different checklist of values."

It's a risky approach. Over at AARP, Deborah Russell, director of workforce issues, says her organization enthusiastically supports an active, fulfilling retirement. But, she cautions, "we do not advocate spending your nest egg" on start-up costs. According to the Small Business Administration, two-thirds of new businesses fail within four years.

Still, even a start-up that blows up can be rewarding, so long as the risks are appropriate. Martin Lehman was 61 when he finally opened the doors to his first women's-apparel store in 1984, realizing a lifelong dream. After a long career as a retail executive ended when he lost his job in a merger, Lehman invested a quarter of his $1 million nest egg in his new venture. His business did fine, growing to six stores in six years. Then, he says, a nasty falling out with his partner forced them to sell at a loss. "Damn right, it hurt," says Lehman, who lost $150,000. "But I didn't risk so much that we couldn't eat. All my life I wanted to own my own stores. Yes, it was worth it."

Sometimes the payoff is extraordinary. Four years ago, Adele Douglass, 60, cashed out her $60,000 401(k) to launch a nonprofit that certifies meat from humanely treated farm animals. She wasn't in it to earn a good return; she wanted to make a difference. Last year more than 14 million farm animals were raised under her guidelines--up from 143,000 in her first year. Now her Humane Farm Animal Care in Herndon, Va., is attracting enough support for her to take a better salary than she earned at her last job, with the American Humane Association. "It was kind of impulsive," she says of investing all her assets in the venture. "I wouldn't suggest that everyone do it. But the stock market had just taken away half of my savings, and I began to wonder how I might use what I had left to do some good."

Should you tap your nest egg to chase your dream? Here are a few guidelines:

Do your homework. It's not enough to love what you do. There has to be a market for your product or service, which must be different, better or cheaper than what's out there. Are you willing to put in the time? Are you passionate about your idea?

Take a calculated risk. Figure out how much you can lose without losing sleep, and don't spend a penny more unless you have hard evidence of success. Lehman, who is now a counselor for SCORE, a group that advises small businesses, began with just $10,000. He invested more as sales took off and he could justify opening new stores.

Consider buying a franchise. You'll still have to put up a lot of capital and put in a lot of time. But you'll have a support network and a track record to analyze.

Look at all financing options. Before raiding your 401(k), ask friends and family to invest or lend money. They'll give you the best rate in town and won't break your legs if things go bad. See if you qualify for a Small Business Administration loan. If you tap your home equity, you'll risk losing the house. Better to draw down your retirement savings--after all, it's your money, so you won't owe anyone interest and can use any cash flow to grow the business.

If you overdo things, you'll risk your financial security. So be careful. But remember there are other risks in play too, like the risk of losing your sense of purpose and missing the chance to do something that excites you.