With inheritances and retirement, the decision matrix is the same.
A reader writes asking for advice. I am not an advice columnist as I noted before. Advice is very personal and depends on facts presented. And often, people seeking advice present selected facts - pushing the advice-giver toward a preordained conclusion. So I don't give advice. But here are some things to think about, nevertheless.
The reader wants to start a winery, which he has some experience with. However, he also is near or at early retirement age and has enough money to retire. Should he risk that by starting a business? Tough call, and not mine to make.
But I have seen this scenario before and how it can play out. Years ago I wrote about the decision matrix with inherited money. I had a lot of friends, growing up in wealthy suburbs, who had trust funds or inherited wealth. For them, the decision matrix was as shown above - they could either spend the money carefully and live a happy life, or double-down on their bet and start a business and make even more money.
There are two possible choices, and for each choice a potential outcome. As the decision matrix above shows, the "safest" bet is just to spend the money as you "win" either way. As we get older, of course, we become more risk-averse, so we tend to want to gamble less. We cannot recover from a large loss, so we shy away from risk-taking. At age 63, the idea of starting (or re-starting) a business sounds nice, but the risks involved scare me to death, so I am content to spend the money.
Let's look at some real-world examples of this decision matrix, based on people I know as well as famous people known to all.
1. Jim Jones was one of 11 adopted children of an Industrial Magnate. Back in the 1800s and early 1900s, his Dad owned the coal business in his town, which was like owning the local utility company, as everyone burned coal for heat and hot water. His Dad made millions back when millions were millions.
His Dad was also sterile, so he adopted 11 children from orphanages and set them up with trust funds. The children did not inherit their Father's keen business acumen, and most ended up living comfortably on their trust fund monies. But Jim wanted to show his Father he had business sense, too! So he started a number of businesses using his inherited wealth, usually acquiring a business partner, and usually going bankrupt in a matter of months. Often the "business partners" sought him out and then stole from the "business."
Finally, Jim realized he was burning through his inheritance (and that of his kids as well!) and decided to "retire" at age 50 and just live happily on the pile o loot his wealthy Dad left him.
2. John Jones was one of four children Jim Jones had. Of the four kids, two became successful in business (working for companies) and one died by suicide (yea, being rich is all fun-and-games, kids!) and the youngest, John, was sort of shattered by that. John also saw what happened to his Dad when he tried to "go into business" for himself, so John decided to just enjoy life, spend his share of Grandpa's money and not risk it all by gambling on starting a business. He worked occasional jobs and when his parents passed away, he inherited a sum from them and lived happily ever after. Of course, he left no inheritance when he died - from dynastic wealth to zero, in three generations.
3. Sarah was heir to a small fortune. Her Grandmother was the sole heir to a major food corporation. Sarah's Dad has the good business sense to marry Grandma's daughter. That is one sure way to succeed in business - marry into money! Sarah had a generation-skipping trust (a "Crummey" trust, that was anything but crummy!) and she inherited more than enough money to live on the rest of her life.
Her fiance also came from the same social set - members of the country club and all that. He wasn't nearly as wealthy but had a good job with a good company and good prospects. When they got married, he found out how much was in the trust his wife had and, as he put it, "I quit my job the next day - screw that!" There was really no point to making a salary when the weekly interest on his wife's trust was greater than his paycheck. Besides, managing that kind of wealth is a full-time job.
They lived happily ever after.
4. Tom and Jill worked for the utility company. During a downsizing, they offered Tom a "lump sum payout" and Tom took it, figuring he could use the money to start a business and "be his own boss" and make money. Problem is, working for a big company teaching us nothing about how a business is actually run. In fact, it is the worst place to learn - as an employee. I noted before how employees tend to believe nonsense - that massive losses are a "tax write-off" or some such nonsense.
I'll give you a contemporary example. Fox News recently had to pay nearly 3/4 of a Billion dollars to Dominion voting systems for slandering their company. This is a business loss and they can deduct that from their income - saving themselves $200M in taxes. A Democratic legislator has introduced a go-nowhere grandstanding bill to deprive Fox of this tax deduction (it will never leave committee, and as a Democrat, these kinds of grandstanding stunts on both sides of the aisle sicken me).
Like clockwork, people chime in, "Fox shouldn't be making money on the Dominion slander!" But they are not making money. You don't "make money" losing $750M in a settlement. On the other hand, you don't have to pay taxes on it, either. But that sort of thing is lost on "the workers" who have no idea how basic tax law and accounting procedures work. Spoiler alert: Neither did I. More on that later. But I digress.
Like Jim above, Tom attracted a "business partner" who ripped him off. After a few drinks, Tom will tell you all about it - whether you want to hear it or now. He tried a couple of other businesses before he realized that the "lump sum" he took was barely enough to retire on to begin with. Fortunately, his wife got a full pension and they retired happily ever after. I think he suggested another business venture to his wife but she put her foot down.
5. The Koch brothers inherited hundreds of millions of dollars from their father. Two of the brothers decided to just spend the money. One became an artist, the other a philanthropist. Of course, they had to fight their other two brothers for the money, but eventually they reached a settlement. Meanwhile, the other two brothers decided to double-down their bet and reinvest the millions Daddy left them, in the oil business. The rest is history.
Whether you admire their business acumen or consider them the biggest scoundrels since Rockefeller, Carnegie, and Joseph Kennedy, the point is, four brothers faced the same decision matrix above, and made their choices. Granted, starting out with hundreds of millions makes success that much easier - or even inevitable. Ask Elon Musk about that.
6. Bob was a Patent Attorney. He worked for a couple of law firms and made a good salary. But he realized very quickly two things. First, it was "up or out" at most firms, where you either made Partner after 5-10 years or left. And only 1 in 10 make partner, and Bob didn't like those odds. He also realized he was making shitloads of money - for other people. So he decided to start his own business.
In the decision matrix, the consequences were not as dire. As a 30-something, the worst possible scenario would be that if he failed, he would go back to working for someone else, become an in-house counsel, or even go back to work at the Patent Office. When you are in your 30's you can afford to "start over" if it goes horribly wrong.
But Bob learned very quickly that there was a helluva lot more to running a Patent practice than merely writing and filing the applications. Running a business requires you understand tax law and have at least a passing understanding of accounting practices. As a "college bound" high school student, he never took "business math" classes offered to the "C" students. And as an Engineering major, they never told him the nuts and bolts of operating a business. There were a lot of hard lessons to learn along the way.
But as a "self-employed" person, he had more control over his life and was able to take a lot of time off and enjoy himself more than the "salary slaves" he left behind - who were making three times what he was.
But eventually he got tired of doing it and realized he had enough money to retire if he just cut back on spending and lived a contented life. And so he did and lived happily ever after - or so we hope.
All these stories have one thing in common: The decision matrix. While starting a business when you are fairly young isn't as much of a risk, when you get older, the chances of a "do over" get harder and harder. When you realize you have but a few scant decades left - and even fewer scant decades of mobility, clear thinking, and good health, well, stability sounds a lot better than opportunity.
Mark worked for a small winery in the Finger Lakes. There are a LOT of wineries in the Finger Lakes and in California, Chile, Argentina, France, Spain, New Zealand, etc. We live in a wonderful era of great an inexpensive wines! You can buy a decent bottle of table wine today for under or around ten bucks, inflation willing. In the Finger Lakes, many of the wineries charged $20 and up for a bottle, as their production costs were much higher. Some were great wines, others were, well, table wine - and there is nothing wrong with table wine - at $10 a bottle!
The couple he worked for made a living at it, although her husband had a "day job" as an event planner for.... another winery. I am not sure they ever got rich from it, but they were in their 40s and could afford to "start over" at that age, if it went wrong. It didn't.
I suggested to our reader that he sit down and talk to another vintner and ask pointed questions about the business-end of things. Most will tell you stories! And they will always tell you the worst parts, too. Maybe even go to work for a winery - and see how the business-end is done. In many places, (such as the Finger Lakes or the "wine trail" in Virginia) the tasting business and wedding events make more money for the winery than selling wine does.
Our favorite winery, across the lake, seemed uninterested when we bought their wine by the case. As one of the employees explained to me, they make more money per bottle selling "tastings" than they do selling a case of wine to the likes of me. It is a fascinating business and my limited experience in visiting Napa valley seems to indicate the business is similar there - money is made by selling wine, but also in tours, on-site restaurants, wedding venues, tastings, etc.
Then there is the sad story of Charles Shaw - once the darling of Napa valley, now the butt of "Two-Buck-Chuck" jokes. Poor guy!
That is not to say our reader shouldn't open a winery - that is his decision to make, and he knows more about his own abilities, the scene "on the ground" and the future of the wine business. While wine seems to be selling well (and cheap!) the beer business is in decline, as the younger generation embraces "cocktails" (and I put that in quotes as flavored-vodka-and-red-bull is not a cocktail!) and beer consumption has declined. Personally, I had a long love affair with beer - I dropped out of college because of it! But today, I find it makes me feel bloated and lethargic - some side-effect of CoVid perhaps?
Our reader asks whether it is worthwhile to have a business for the deductions, and as I have noted before, you can't deduct your way to wealth. Deductions are tricky and can raise the ire of the IRS. You have to show a profit every few yeas or the IRS may claim you are running a "hobby business" just to use the losses and deductions to offset your other income. But yea, no one is going to say that a paper-clip you bought for your office that finds its way to your kitchen drawer is an illegal deduction. You run a catering business, odds are, you are eating a lot of "leftovers" from time to time (or all the time). Consult an accountant, though, as making extreme deductions can be audit-bait.
Myself, the point is moot - my income is, by design, so low right now that my taxes are a few hundred dollars a year. All that is about to change, though, as inflation has meant that I have to take more money from my IRA (which may foil my retirement plans!) and the income levels for our progressive tax system haven't adjusted accordingly. I may have to pay taxes this year!
We love to travel in our RV which can be cheap, particularly if you are over 62 and staying in Army Corps parks ($11 a night! And no, you don't have to be in the Army. The corps builds dams). Sometimes we think, "Wouldn't it be cool to run our own RV park?" and then we sit down and talk to the owners and listen to them bitch, bitch, bitch about what a shitty deal they got. Running an RV park is not RVing, and you see the best and worst in people.
The happiest ones we've met are people who have a campground "up North" which is open for 4-6 months of the year. They winterize the place in October, load up their motorhome and drive to Florida or Arizona for the winter. It is still a lot of work.
We see many campgrounds where the owners are "aging out" and have not prepared for this inevitability (denial!). At one campground, it is almost comical (but tragic) as one of the owners is in dementia and when you call, he always say "we're all full!" when they aren't. You make a reservation and confirm it and show up the next day and he says there is no reservation and "we're all full!" We realized by looking over his shoulder that when he "checks" a reservation, he clicks on the "delete" button of every reservation he looks at. We saw him delete 20 reservations in a matter of minutes this way. Very sad, but they have no alternative plan other than to offer the place for sale for a scandalous amount of money. And yea, the place needs work - millions of dollars' worth.
No one likes to think about their declining years, but they do happen, and starting a business late in life (or indeed, getting a puppy or kitten!) is setting up a responsibility that may outlive you. Just something to think about.
There is no yes or no answer - just things to consider!
