While it’s never too late to start planning, the key is to start in your early years.
By Gary Sipiorski, Vita Plus Corporation
You will not find a group of people more dedicated to their careers than dairy producers. Dairy producers surround themselves with people, living creatures and crops that must be attended to 365¼ days a year. They often get so wound up in what they do that they forget time passes by and one day they will not be able to do the physical and mental work required to run the business.
So, are you preparing for that time down the road? I do not have a Series 7 (stockbroker’s) license, so I cannot give specifics of what to invest in, but I can suggest choices of directions you have. The key is your dairy will have to be passed on to someone. That may be a family member(s) or the next buyer.
Many dairy producers say, "My dairy is my investment choice and my retirement. So I plow everything I have back into my farm!" Others say, "I am never going to leave, they will have to bury me here!" One way or another, you are going to have to build up enough equity to give you choices when that day comes to turn you over or the farm over to someone else. You cannot have two bankers on the farm. You can be the banker or a lender will be borrowing money to the next owner. So, back to our question at hand, where does that leave you for your retirement?
1. If you have dairy that supports a single family, you will need to have most of the debt satisfied when you decide to retire. Most of these types of farms have stuck every dollar right back into the farm for machinery, cattle, land, buildings or other things the farm needs. Many times there is a spouse that works off of the farm. That income will be used for family living or buying farm items that are needed. A lot of times the off-farm income will have some type of a retirement plan tied to it, like a teacher’s retirement or other investment opportunities. That can be used in a retirement plan as well. I have also known dairy producers who do manage to squirrel money away in investments off of the dairy so they actually do have a nest egg put away.
The key to any off farm investment is to start early. Find a trusted investment person who can help you set up a retirement savings and earnings account with monthly deposits for the future. Now, when time comes to pass on the farm, the relative or new buyer can borrow money from a bank to pay off the retiring couple. The retiring couple may be in a position to offer a land contact and get paid back over a period of time, basically turning the farm asset into an annuity that pays back monthly. Here again, the farm has to be mostly debt-free so the first couple is not also having to make bank payments. The cash flow of the farm is a key factor here as well. So make sure you have a productive herd of cows that can generate enough income to support the next generation’s payments.
2. If you have a larger multi-family dairy, you may have some additional options. With an adequate cash flow, invest money can be set aside off of the dairy for a future retirement. Here again, it is important to start early. Therefore, when retirement comes, there are off-the-farm investments to fund a new lifestyle. This farm as well needs to be in a strong financial equity position. There is nothing wrong with these farms carrying debt. It just has to be able to manage the payments. Borrowed money must be able to generate at least twice the return that it is borrowed at.
Many times the owner(s) of a larger dairy are managing people and making management decisions. They are doing a lot of mental work. They can continue this style for many years. The key is to train the next generation to make decisions so they can slowly phase themselves out as retirement nears. Stock or ownership transfers can occur with the next generation, assuming the business debt and responsibilities. The first generation can be paid out over time with a monthly income or all at once if lender borrowing can be arranged. Tax planning is critical and any time a farm transfer is being considered on any size farm.
It is never too late to start planning for retirement. It really should start in the early years, because some day you will not be able to do what you are doing today.
Gary Sipiorski has a long career in the banking industry, doing business primarily with dairy producers. He has been associated with the Citizens State Bank of Loyal, the Graduate School of Banking in Austin, Texas, the Independent Community Bankers of America, the Governor’s Task Force on Growing Agriculture in Wisconsin, and the Advisory Council on Agriculture, Industry and Labor for the Federal Reserve Bank of Chicago. In 2008, he joined the Wisconsin-based nutrition firm, Vita Plus Corporation, where he is dairy development manager. Contact him at 608-250-4267 or GSipiorski@vitaplus.com.