Retirement may be long down the road, but a plan should be in place now
For young farmers, retirement is likely 20 or even 40 years away. But budgeting for that career change should start now, while you have the grand advantage of time.
"If you wait for a good time to start saving for retirement, you’ll never start," says Brigitte Franzen, legacy adviser with Water Street Solutions. "The farm always needs something."
Franzen, who specializes in financial planning, says that for many major costs in life, such as equipment purchases or your children’s college tuition, you can qualify for a loan. For retirement, there is no loan.
"Even though commodity and farmland prices are up, they will likely not continue upward for the next 40 years. We don’t know what the farming economy will be like when you want to retire."
You can ensure that your retirement will be funded and achievable by building it into your overall business plan, says Dave Sharpnack, vice president of credit for Farm Credit Services of Mid-America. "A strong business plan is the best retirement plan you can have."
Start Saving Now. Franzen encourages young farmers to use a savings or investment vehicle—such as a Roth Individual Retirement Account (IRA)—now, to allow it to appreciate over the next few decades, tax-free. "That little nest egg has a lot of time to grow, and you can really let time work for you," he says.
Diversify Your Retirement Portfolio. Sharpnack says careers in agriculture are unique because assets usually appreciate over time. As a result, many farmers sell their equipment and rent their ground in their golden years. That option is not always viable when several generations are involved.
Take advantage of a spouse’s off-farm job’s retirement program and work with a financial planner to find the best investment options for your retirement funds, Sharpnack adds.
Don’t Be Afraid to Pay Taxes. Farmers are good at deferring taxes, Franzen says. "They manage their income and expenses so their tax bill is as small as possible." But when they are ready to retire, they have the last year’s crop to sell and have no expenses to offset the income, which equals a massive tax bill. The better option is to work with a tax adviser to stay in a reasonable tax bracket.
Involve All Generations. Sharpnack says the biggest mistake he sees in farm business planning is
a lack of communication. "It’s important for all those involved to understand each other’s objectives and have a common goal for the operation so the farm can sustain multiple generations."
He suggests developing a retirement plan for the entire farm. "Don’t go to your accountant or attorney without first determining what your family’s vision for the farm and your retirement plan. Then they can help you get there."
Seek Expert Advice. Since every operation is unique, expert advice is vital. Sharpnack suggests visiting with financial planners as well as peers, since they can also provide real-world advice.