Q: I'm retired and have my savings in a traditional IRA. I'm concerned that the stock market has gotten just too dangerous, while bonds are hardly paying anything and savings accounts even less. I'd like to go back to work so I can earn a little extra that way, but I'm having trouble finding a company that will hire someone my age. I'm thinking of taking my savings and going into business myself. I'm over 59 1/2, so I can take out the money without a tax penalty, and I'm healthy enough to keep working for the foreseeable future. It seems better than sitting by and watching my money do nothing. Any thoughts?
A: Well, your frustration with the lack of viable options in the current investment environment is understandable, but don't let that frustration prod you into doing something dangerous.
Here are some reasons why plowing your retirement savings into your own business might not be a good idea:
- You would give up some tax benefit by not keeping the money in your IRA longer. You correctly point out that because you are over 59 1/2, you would not incur the 10 percent penalty for early withdrawals. However, you would pay ordinary taxes on the amount withdrawn, and doing it all at once could kick you into a higher tax bracket. Also, your earnings on this money would no longer be able to compound on a tax-deferred basis.
- New businesses tend to be a drain on cash flow. You are concerned that your IRA investments are not producing enough income, but you need to think long and hard about how long it might be before a new business could do better. Start-ups tend to have negative rather than positive cash flow, so you could effectively go from low income to negative income.
- You would be putting all your nest eggs in one basket. Putting all your money in one venture would essentially leave you with a risky and non-diversified investment portfolio.
- There is no telling if you would be able to cash out when you are ready to retire for good. You say you are healthy enough to keep working, but eventually you are going to want or need to retire permanently. Private companies cannot just be cashed in on demand, the way publicly traded securities or savings accounts can.
Remember, while savings accounts and other insured deposits like CDs and money market accounts don't offer much in the way of interest these days, they do offer two things that are very important to retirees: security and liquidity. Keep that in mind before you opt for a riskier alternative.
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