The Farm CPA: The Three Legs of Financial Planning

February 5, 2012 10:25 PM

Financial planning can be compared with building a three-legged stool. After several years of farming, successful farmers have more than 90% of their net worth tied up in farmland and equipment. Their business assets create one strong leg for their financial stool; however, the other two legs are just as important and will be weak if not fully developed. In that case, if you tried to sit on the stool, you’d either fall off or break the two weak legs.

The other two legs of the financial stool are retirement assets and nonretirement financial assets. These two assets should be addressed on an annual basis. It’s also a good idea to set a financial goal for each of the three types of assets every year.

Again, addressing the business leg of the stool comes more naturally to farmers and they typically have no problem creating financial goals for their business assets. These goals can include achieving a 15% return on equity and increasing net worth for the year by $250,000. But farmers often stop after creating financial goals for their business, leaving no target for retirement assets and nonretirement financial assets.

Saving for Retirement. After determining a farm financial plan for the year, farmers should set their retirement goal. They might make a goal of setting aside $40,000 in their retirement plan, for example, and having $100,000 of overall growth for the year.

With proper planning and execution, it is possible for farmers to create a retirement plan that will allow them to put aside $40,000 to $100,000 per year for them and their spouse. If a farmer has a couple of full-time employees, he might offer a retirement plan, which can cost a few thousand dollars per year per employee. If they’re good employees, a retirement plan is a nice benefit perk to offer.

By making consistent contributions to a retirement plan throughout the course of a 25- to 50-year career, a farmer can easily have $2 million to $5 million set aside in his plan (in today’s dollars).

Liquid Assets. To secure the stability of the stool, farmers should then decide a goal for nonretirement financial assets for the year. Many of my conversations with clients involve their business and retirement plan goals, but it’s easy to forget to address liquidity goals for farmers who are not tied to a farm or pension plan.

For example, a farmer might have a mortgage on his home of $250,000 and a goal of paying off the mortgage in the next five years. Without setting this goal, the farmer might reach retirement age with substantial assets in farmland and an IRA but no easy way to pay off the home loan.

Go With the Flow. The development of each of these legs will vary during the career of a farmer. In the early years of farming, most of the effort will be put into the business assets leg; however, all farmers should at least fund an IRA for themselves and their spouses. Once the farm is more stable, more assets should be placed into the retirement plan, with additional assets put into
savings and investments. During the last 10 or so years before retirement, farmers should aggressively fund both retirement and savings to make it much easier to pass the farm leg on to the next generation so they can start their own "financial stool."

The goals you set for business, retirement and non-retirement assets will ebb and flow each year based on the income generated by your business. Sometimes, the business will be able to distribute enough cash to meet several years of nonbusiness asset goals; however, there will be lean years too. By taking the time each year to work on each leg of your stool, you can make sure that all three legs will help support you throughout your financial life.

Paul Neiffer is a tax accountant with CliftonLarsonAllen and author of the blog The Farm CPA. He grew up on a wheat farm in Washington and owns a corn and soybean farm in Missouri. Contact him at

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