Building your own business is a common American dream, but not an easy one. According to the U.S. Small Business Administration, about half of small businesses fail within the first five years. That hard truth gives you even more good reasons not to start your business with money you've borrowed from your retirement savings.
Granted, your 401(k) may be your best source of funds. But borrowing during tough times has its own dangers.
If your business doesn't work out, you could lose all those savings altogether. Even if it does pay off, you may have been able to earn more by leaving that money alone.
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; some people are able to avoid them.) 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! And in return for that lost growth, you get the very real risk of ending up with absolutely nothing.
Starting a successful business could change your life -- but your retirement money is even more vital to your future. Learn to make the most of your 401(k).
This article originally ran in February 2009. It has been updated by Dayana Yochim. The Motley Fool has a disclosure policy.