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Don't Use 401(k) Money to Start a Business

The Motley Fool

By Selena Maranjian

It's a common American dream, to build your own business and watch it grow and thrive.

Those who have embarked on building up a business on their own know that it�s not easy. According to the U.S. Small Business Administration, about half of small businesses fail within the first five years. And as we all know from the past few years� events, even big, established businesses can fail.

That doesn't mean you shouldn't try to start a small business -- but do so with your eyes open, and do a lot of research into why so many businesses fail. (Some key reasons: poor locations, financing difficulties, inexperienced owners.) And don't take risks you don't need to.

Keep retirement money for retirement

For instance, many people these days are using 401(k) money to start a business, and it's very risky. Granted, it may be your best source of funds, but borrowing during tough times has its own dangers.

If your business doesn't work out, you can end up losing all those savings altogether. Even if it does work out, you may have been able to earn more simply by leaving that money where it was.

Here's what I mean. Let's say that in your 401(k), you grew a $10,000 nest egg into about $26,000 from age 40 to 50, at an average of 10% per year. Then, at age 50, you took that $26,000 and invested it in your business. (We'll assume no penalties paid in this example, as some people are able to avoid penalties.) After five years, the business is off the ground and you get back $26,000 in cash. Then you reinvest it, and it resumes its 10% growth until age 65.

Under those assumptions, you'll end up with about $67,000. If you'd left that money alone, though, giving it five more years to grow, you'd have ended up with $108,000, fully $41,000 more! Meanwhile, you're taking a very real risk of ending up with absolutely nothing.

Your retirement money is vital to your future.

This article has been updated by Dayana Yochim. The Fool has a disclosure policy.