Side Businesses: The Best Way to Prepare for Retirement?

December 13, 2013

retirementWe often think of starting or having a side business as either an opportunity to earn more money, or as a bridge into full-time self-employment. Both of those possibilities are certainly there, but a side business can also be the best way to prepare for retirement.

Consider what you can accomplish by having a side business . . . .

1. Have an extra income stream to fund your retirement portfolio.

Sure, a side business can generate extra income that can be used to pay off debt, to purchase major assets – like a new car – or even to fund travel and vacations. But you could also create it as a dedicated cash flow specifically for the purpose of providing funding for your retirement portfolio.

The combination of stagnant wages and rising prices has made it very difficult for many households to save money for retirement. A side business could become the primary source of funding for retirement, while your regular job provides for all of your other living expenses. The ability to generate $10,000 or so per year from a side business could mean the difference between a comfortable retirement, and living on Social Security alone.

Also think about how income from a side business could supplement any retirement provisions you are already making. If you already participate in a 401(k) plan at work, you can use income from your side business to fund either a traditional or Roth IRA. The extra income may also enable you to make larger contributions to your company plan. For example, as a result of having the extra income, you may be able increase your contributions to your employer 401(k) plan from 10% of your salary to 20%.

That may not only help you create a better retirement, but it could also open up the possibility of early retirement.

2. Set up retirement accounts based on your side business.

A side business also opens up the possibility of creating additional retirement accounts that are tied to the business itself. Even if you have a 401(k) plan on your regular job, you can set up a solo 401(k) for your side business as well. This will enable you to be funding two separate 401(k) plans at the same time.

And though your employer 401(k) may limit your contributions to a certain percentage of your income, a solo 401(k) for your side business will allow you to make dollar-for-dollar contributions into the plan up to $17,500 per year, or $23,000 if you’re age 50 or older.

Under this scenario, you could conceivably use your entire income from your side business to contribute to your solo 401(k) plan. Adding that to your contributions to your employer plan could cause the value of your combined retirement portfolios to explode in just a few years.

3. Raise retirement capital by selling the business before retirement.

Some business owners are able to retire as a result of selling their businesses for a very large amount of money. That isn’t possible with all businesses, but if you have one that has substantial assets, including intangible assets like copyrights, trademarks or market recognition, you may be able sell your business at a substantial profit.

Selling the business could provide a substantial boost to any retirement savings that you already have. And the return on investment of that capital could provide additional income in retirement.

4. Have an extra source of income in retirement.

Even if you don’t sell your side business before retiring, it can still make a substantial contribution to your retirement plans.

Statistically, few people will have sufficient money at retirement to be able to afford the traditional “full-time” version of retirement. Most will have to supplement their Social Security and investment income with some form of earned income activity. If you already have a side business up and running by the time you retire, you will have the earned income question covered.

You can keep your side business going for as long as you feel able to do so. This can cover the first few years of your retirement, which will not only enable you to continue increasing your retirement portfolio, but it will also help you to avoid withdrawing money for living expenses.

Simply avoiding tapping your retirement portfolio for five years could improve your chances for the comfortable full-on version of retirement. A side business will help you do that.

If you are looking for some sort of angle that will either help you to get your retirement planning going, or supplement the plans you already have, give serious consideration to starting your own side business. It’s one of the best retirement steps you could possibly take.

What are some side business ideas you’ve been thinking of starting? Leave a comment!


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Kevin Mercadante is professional personal finance blogger, and the owner of his own personal finance blog, He has backgrounds in both accounting and the mortgage industry. He lives in Atlanta with his wife and two teenage kids and can be followed on Twitter at @OutOfYourRut.

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