Should You Save For Retirement Or Invest In Your Business?

The article was written by Tom Ewer, a regular contributor for MyWifeQuitHerJob.com!

Most of you have probably heard about the four hour workweek and are familiar with the general concept of lifestyle design The idea of creating a luxury lifestyle through reduced working hours and increased mobility is pretty attractive and calls into question all that conventional wisdom has to say about life and career.

investingMy thoughts on the matter were brought to the surface back in November 2012 when I was confronted (in the nicest way possible) by a commenter in a post on my blog.

In this post I want to reveal my unconventional thinking behind the whole issue of income and retirement and explain the thinking behind it.

Savings and Retirement Goals

I am very income-focused — my general thinking is that the more you earn, the less risk you are exposed to. This of course assumes that you are responsible with your money and don’t simply fritter it all away, but that is certainly not my intention.

At 27 years of age I am not particularly interested in either savings or retirement, which is why I caught the attention of Sam from Financial Samurai in my October 2012 Income Report. In the comments section Sam asked what most would consider an obvious and sensible question:

Do you have any savings and retirement goals in mind?

My response probably wasn’t what he was expecting:

No savings or retirement plan at this stage — at 27 years of age my focus is purely on reinvestment.

Sam was clearly taken aback by this and immediately advised me to start saving at least 10-20% of my after-tax profits for retirement. At the time I ignored the advice (respectfully) and will continue to do so for the foreseeable future.

Why I’m Not Saving for Retirement

Here’s my one sentence position on retirement: if you take care of your business, your business will take care of you.

Let me expand upon that. I am currently 27 years of age. I own an online business which incorporates freelance blogging, affiliate marketing and information product and eBook sales. I’ve grown the entire business from the ground up in the past 20 months or so.

I am extremely focused on income diversification as I see it as a means of reducing exposure to risk drastically. At this stage in my life I perceive it as being far more important to grow my business than save for retirement.

The simple reason why is because if I grow a business that is big and diverse enough to support multiple income streams, my retirement will essentially be taken care of.

In an ideal world, at the age of 35 I see myself with a diverse online business complemented by secure and low-risk property portfolio. Whilst I *could* save for retirement in the meantime, doing so would reduce my available capital and by extension hamstring the growth of my business. Saving for retirement simply doesn’t make sense to me at this age — far better to reinvest the money.

The conventional notion of retirement planning is best reserved for those who are in full time jobs — for business owners I believe that the considerations are completely different. If you can build a business that can either (a) produce or (b) be sold for more than enough money to support you through retirement, why would you *also* save?

Having a backup to your business should the worst happen is one argument, but if your business is suitably diversified then it becomes a case of how risk-averse you want to be (and I simply don’t feel the need to be that risk-averse).

The Alternative to Saving for Retirement

Although growing your business to a level where it will be capable of supporting you in later years is one way of cancelling out the need for a retirement fund in the short term (i.e. when you are still relatively young), I actually have a proposal that I consider to be the solution regardless of your age.

That solution is very simple: live below your means. Or to put it more directly, spend less than you earn. Ideally, quite a lot less.

This is something that many (most?) westerners seems to struggle with. We are addicted to debt and ignorant of the consequences. Credit cards and loans make us feel like we have more money then we truly do — a slippery slope. It’s like an obese person who bemoans their weight gain while still gobbling down junk food and soda — the end result is tragically predictable.

When you live below your means one magical thing happens: at the end of every month you have money left over. You can then put that money towards rainy day savings (which I *strongly* advocate — three months as a bare minimum) *or* reinvest it into the business so that your monthly income stream continues to increase. Either way you’re golden.

Unless you are already in financial dire straits then living below your means is probably possible right now — even if you’re ready to tell me that it is not. Consider your expensive car loan, cable bill, and any other number of luxuries, then ask yourself how much you value your material possessions over peace of mind and future prosperity.

The One Key Factor

The key assumption behind all of this is that you build a passive (or semi-passive) business that is capable of supporting you through retirement — either through its sale or passive income generation capabilities. For instance, one might argue that any online business I nurture over the next few decades would require my involvement at retirement.

But if I spend that time funneling the earnings from my business into a low-risk property portfolio that could easily be managed for a fee, my retirement plan is looking pretty rosy.

I guess it all comes down to this — putting money into a retirement fund isn’t going to make you much. If instead you take a holistic approach to your business and remind yourself that your aims are to support yourself now *and* in the future, your business can be your retirement plan. And at the end of the day, because you reinvested that money rather than saving it, you’re far better off.

photo credit: photosteve101

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13 thoughts on “Should You Save For Retirement Or Invest In Your Business?”

  1. Best wishes to you and your goals. You clearly have done some thinking and know exactly what you want in life.

  2. Tom, you are embarking on what I call in my latest post, The Self Belief Framework for net worth allocation. Not a bad thing at all, especially when you are young and can afford to recover from any set backs.

    It’s really important to understand that what you keep is more important than what you generate. Feeling invincible is a great feeling. Unfortunately not everyone is Superman.

    1. Hi Sam,

      I don’t think anyone is Superman — I certainly know that I’m not!

      Cheers,

      Tom

      1. Sam says:

        It’s OK if you so feel invincible Tom. We’ve got great big governments to catch as if we fall. Now is the golden age for us to do anything we want because the risk has never been lower.

  3. Wow! You have no idea how this post was right on time! I left my corporate job almost two years ago. I have 3 separate 401K plans that are just sitting there and my husband and I were talking about how we can invest that back into my business. I completely agree with you in the sense that I definitely look at my business from a holistic approach and know for a fact that I am doing what I can now to ensure that it will take care of me and my family in the future. Thanks so much for sharing!

  4. Hey Tom, you make some great points. People tend think of retirement savings with a future goal in mind, like once I reach $XXX I’ll be able to retire. But rather than saving with a flat dollar amount as a goal, I think it makes more sense to develop income streams to support yourself in retirement. If the money you have coming in through things like business income, rental properties, or dividend stocks is enough to support you, you don’t really need a specific amount in the bank. Plus, if you can live off the income without eating away principal you’ll be able to support yourself indefinitely with no fear of outliving your assets.

    That said, I do save for my retirement as well but with an eye toward income-producing assets like dividend stocks.

  5. Hey Tom, Great post and a very unconventional line of thought. I agree with your analysis, though personally I like to diversify with some retirement savings in addition to reinvesting in the business.

    Another interesting point is that any money you reinvest in the business is a tax deduction as well which has a big long term impact!

    -Geoff

  6. Turns the traditional thinking about retirement on its head. You’ve certainly given me something to think about.

  7. Tom says:

    That’s an interesting way to think about it. I’m used to saving for retirement as well as building my business at the same time. Of course I have a day job but one day I will focus only on my business.

  8. I agree with you that at the very least to live within your means. I also have a retirement fund, that I started very late in life and it has grown 7% in a very short amount of time without me adding any additional funds, it will be more of a cushion than a income. I also agree property investments when done wisely is good. As far as online businesses in the future, I just hope it doesn’t go the way of free TV of the past. There are no guarantees on the future of the internet.

  9. You are to be commended for being an independent thinker. Look, general statements and rules of thumb are just that. As a tax and business attorney, my experience shows that each client is different with different needs and goals. As a young businessman you know what your business plan should be for you. This is huge and not many are that clear minded.
    What you are really talking about here is opportunity cost. If you tie your money up in savings and investments they can not be employed in your businesses.
    Since you are young, now is the time to take risk; but calculated and well conceived risk. It is always good to have some money put away as cushion so you do not get blown out by an unforeseen event. But living below your means is the way to go even though our society is not built that way.
    From my perspective, you are on the right path. One final point: make sure you have good professionals surrounding you. Having good corporate/tax counsel and a good CPA are essential to a successful businessman. Having objective feedback and reality testing from these professionals is very important.

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