From the point of view of farm estate planners, financial retirement planning requires a concrete strategic and savings plan. In more traditional businesses employees and owners often use an IRA, 401K or other type of investment. When it comes to farmers and agribusiness owners the answer to the questions, how much do you need to save and where will it come from, brings different answers.
For employees of traditional businesses the options often include stocks. bonds, mutual funds etc. that are in no way connected to the farm business itself.
When it comes to farmers facing the financial retirement planning issue their historical perspective results in quite different actions – because their assets are almost all tied up directly or indirectly in the farm. Sure, they need a team of professionals to assist them, but they must be a team that understands the reality that there really is no savings outside the farm business itself.
And if you have made good investments over the years or your farm business has grown in value and have a large net worth, you may also need to plan for trusts and estates for your children, grandchildren or other beneficiaries. Professional financial planners can help. A lawyer is necessary for drawing up trusts and estates. Accountants can provide some information. Basically, you need a team. These are some of the things they will help you figure out.
First, you need to identify who relies on your income, besides yourself. Then, you need to look at how much money it will take to continue to enjoy the lifestyle to which you and your dependents have become accustomed. Unless you want to cut back on your expenses, your goal should be to save enough to allow for annual withdrawals equivalent to or greater than your current earnings.
One of the challenges for financial retirement planning is that no one really knows what will happen in the future. We must assume that the cost of living will increase, as time goes by. The average inflation rate that we normally accept is 3% – what if it’s more, a lot more, or less?
Because of that, we want to make investments that return more than whatever the persistent rate of inflation is – or we are just standing still or falling backwards. Our dollars will have less buying power in the future. So, we will need more of them.
Historically business owners and farmers have believed, and in most instances rightly so – that their organization would grow at a rate of at least that of inflation, so they invested in the business instead of elsewhere. Additionally the tax code encouraged them to invest in the business with such things as depreciation – which allows the gradual or accelerated “write off” of the business assets against their income tax obligation.
The tax code, even though the IRS wants to monkey around with it all the time and the politicians keep their fingers in – has been a tool to achieve government ends, by encouraging or discouraging one sort of behavior or another – has resulted in business owners and farmers investing in themselves rather than in outside investments.
Farm estate planners argue that a balance is needed. In the good years farmers should invest for their financial retirement planning purposes in investments not tied to the business. And these investments, by their nature, should be more liquid than another piece of land or more livestock.
These liquid assets and the traditional illiquid ones become part and parcel to the creation of their trusts and make up the value of their estates.
When it comes to setting up trusts and estates, you need to consider how much money a dependent will need annually and for how many years. If it is a young child, there are college and other education costs to consider. An older child or a spouse may not need as much.
Taxes must always be considered for trusts and estates, regardless that they seem low today – hey, you never know what the government will have put in place by the time there is a death in your family business. Large inheritances, whose definition changes with every administration, are subject to heavy taxes. And farm estate planners can show you how to make annual tax-free gifts can help your beneficiaries avoid those problems as well as sending some of the appreciation in your business – which on its own can trigger taxes at death, along to the next generation.
Taxes are also a consideration for financial retirement planning. It is assumed that your taxes will be lower after you retire, because your income will be lower. But, if you have made good investments, your income might be the same or higher.
And lets face it, no body actually plans to have less money to live on when they retire – that’s when you want to really live!
Financial retirement planning requires a team of professionals who understand you and who have “been there, done that” when it comes to setting up and actually seeing in real life the results of the trusts and estates planning they or their firm has done.
And while a team of professionals is vital – the key information you seek is most likely to come from your peers. These are people who are experiencing what you are experiencing and they have nothing to sell and no advice to protect.
You peer group also provides one of the most important thing any of us can have when trying to make the right decisions. They are your sounding board. From now on you can say, “I’ve got to discuss this with my board” and actually mean it!