‘I’m exhausted from full-time work,” my friend said to me the other day. “I wish I could retire, but I just can’t afford to.”
The harsh realities of today’s economic environment are forcing more people, like my friend, into working full-time well into their late 60s, early 70s, and sometimes right into the grave.
The in-between years from the age a person first becomes eligible for Social Security benefits and the age at which they reach “full retirement” are particularly challenging. There are income restrictions while collecting Social Security and the cost of health insurance prior to the Medicare age of 65 is very high.
So what happens if you are burned out like my friend? You are tired; you want to scale back; you want to start collecting Social Security at age 62; you want to supplement your benefits with work that is more flexible and less intense
One idea is to look at post-retirement small business ownership. It’s a great way to go, but this takes several years of advance planning. It should be part of an overall portfolio and retirement strategy.
There are many perks to self-employment that can really help out during those years between 62 and full retirement age where income restrictions apply. In other words, these are the years when you can only earn so much money before your Social Security benefits are reduced.
Let’s take a look at a hypothetical scenario that demonstrates the powerful perks of small business ownership as part of a retirement strategy.
At age 60, while she was still employed full time, “Jan” set up a part-time business. The first years of a new business are often called the “loss” years where start-up expenses are greater than income. This loss was used to Jan’s advantage. She was able to claim a Schedule C loss on her income tax for two years that helped to offset her peak earning years as an employee.
Then, as the business began to generate income, Jan worked with her accountant and financial advisors to determine that age 62 was an OK time to leave employment and begin drawing social security. Here’s where all the legitimate business deductions that are available helped Jan keep her business income below the income restriction level.
Jan ran her business out of her house, so the numerous home-based business deductions helped to offset her housing expenses. Her business income was high enough for her to deduct the cost of her health insurance premiums until she reached Medicare age. Depreciation expenses on equipment and other depreciable business assets really helped to lower the year-end bottom line. Every mile she drove for business purposes was deducted at the current rate of 65.5 cents per mile. This really added up and helped to reduce taxable income.
The bottom line in this scenario is that a part-time business income stream can bring revenue into your personal financial picture, but when income tax time comes around, the taxable part of your income might easily fall under the 2023 ceiling of $21,240, which will go up to $22,320 for 2024.
Now, admittedly, these were lean years for Jan, so she had to draw upon some of the non-taxable investments in her portfolio, such as Roth IRA’s. But the freedom from full-time work-related expenses — such as driving to the office, business attire, lunches, convenience foods, etc. — made the entire picture quite doable. She loved the new flexibility of being her own boss. This made it all worthwhile.
When a person reaches full retirement age (generally around 66 depending upon your birthdate), there are no income restrictions. In the scenario of Jan, this was about the time her business was nicely established and was generating a higher income stream.
When Jan wanted to retire completely and start enjoying 100% free time, she sold the business and received a handsome pay out for all the years she lived frugally and invested in growing the business.
In this hypothetical story, Jan came out a winner. If you would like to dream a little about being a winner like Jan, your SCORE mentors are happy to walk through the steps needed to launch a part-time retirement business.