It might be hard to believe, but you’re not going farm forever. Are you ready for retirement? There are steps you should take to ensure you’re able to live the life you desire once it’s time to pass the management reins to the next generation.
On average, men age 65 today will live 84.3 years, according to the U.S. Department of Social Security. That’s almost 20 years of retirement bliss or blunder, depending on how well-prepared you are. The average monthly income for a couple drawing Social Security benefits is $2,176—roughly $26,000 per year.
That should trigger concern among producers, says David Marrison, Ohio State University Extension specialist.
“If $2,176 is an average benefit, it’s safe to say farm couples will receive less than that,” he explains. “Farmers are really good at avoiding tax payments, so [many] probably haven’t even paid in average contributions.”
Even if they do receive the average payment, Marrison says, farmers should think through where the remainder of their living expenses will come from. “The average household lives on $60,000 per year,” he says. “If only $26,120 will come from Social Security, where will the rest come from?”
In many cases, the difference directly affects the farm business, Marrison says. The following tips can help you plan while limiting negative consequences for your operation.
1. Decide when the time is right. Many people default to retiring at 65, but they should let finances dictate when the time is right, says Joshua Mellberg, president and founder of J.D. Mellberg Financial in Tucson, Ariz. “With that approach, you are more likely to have the savings necessary to sustain you for the rest of your life,” Mellberg says.
2. Determine your budget. Next, figure out how much money you’ll actually need to cover your living expenses once you retire, says Tim Eggers of Iowa State University Extension. Also think through family living expenses, such as fuel and utilities, that might have been co-mingled with farm expenses, Marrison adds. Farm families should envision post-retirement life while realizing that can get tricky. “Farmers say they plan to live on less, but want to travel. To do those trips, you’re going to have to live daily life as you have been, but also have money” to fund the travel, Marrison says. “You may actually need more money to live on once you’re retired than before.”
3. Figure out inflation. Then identify your target savings goal, accounting for inflation. Marrison suggests using the Rule of 72. Take the number 72 and divide it by an interest-rate factor. Marrison uses 4%, which is the average inflation rate over the past 50 years. In this example, that would mean in 18 years, your living expenses will be double what they are today because of higher inflation.
4. Determine a savings plan. Meet with your financial adviser to develop a series of next steps, Mellberg advises. View retirement as a way to reduce tax liability, Marrison adds. “In times of good grain prices—in 2010, 2011 and 2012—farmers were doing a lot of tax mitigation by buying equipment, when in hindsight maybe what we should have been doing is putting that money into a 401(k) for the older generation,” he says.
5. Start saving today. Even investing 10% of your income today can add up to a nice retirement savings if you start soon enough, Marrison says. Be aware that if you plan to retire soon, low interest rates could act as a stumbling block, Mellberg says. Low interest rates incentivize corporations to borrow for higher potential earnings, while those with bonds or savings accounts receive less in interest payments. “They can’t generate much of a return on their savings, and they may not be in a position to risk their money in the markets where a higher yield is possible,” he points out. Interest rates are about to get a boost, but Mellberg says it won’t be a “miracle fix.”
You can even begin mapping out your retirement with Purdue University’s interactive Planning for a Secure Retirement tool.
Top Producer Associate Editor Ben Potter contributed to this story