One Way Out of the Credit Crunch: Retirement Savings?

Some entrepreneurs are using retirement money to fund their start-up

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Elderly people make up a surprising number of entrepreneurs. I've written about how some retirees are looking at starting businesses as a fun thing to do with their time. It's also timely because, in an economy where credit is scarcer, retirement savings are one hassle-free resource to tap to get financing. But only if you know what you're doing.

The New York Times today reports on an even riskier phenomenon—people well before retirement age tapping into their 401(k)s (through a complicated but innovative profit-sharing scheme) as a way to finance a start-up.

The story only looks at two entrepreneurs doing this, and one company that designs the plan. I doubt this will become much of a trend simply because after reading scary headlines about the economy, people are likely to become more conservative about their money and less likely to risk it on a business venture.

That being said, for the right person, this strategy could pay off. Considering the high percentage of first-time entrepreneurs who fail, only somebody who has had experience starting businesses before should even think about going down this road. Failure is fine—experimentation is the key to success. But your retirement savings are not something you want to "experiment" with.

So if you have extreme confidence in your ability and your business idea, and you have trouble getting other types of financing, now would be the time to divert money from a 401(k) to a start-up, considering the beating 401(k)s are taking in the market right now (along with everything else). If your business succeeds (and that's a big if), that money could actually be a smart investment for retirement.

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