When farmers discuss retirement, there is often a hesitation in their voice, says Kevin Spafford, Farm Journal succession planning expert and Legacy by Design founder. "I'm never sure if that's due to a love for their occupation or if it's because they've neglected to plan for ‘the day,'” he says.
Retirement planning takes time and contemplation. It's about more than simply stopping the daily work of farming. Paul Neiffer, a CPA with Hansen NvO PS who writes a blog at farmCPAtoday.com
, likens retirement planning to making a three-legged stool.
"If you put two legs on a stool, you can balance, but you will wear yourself out quickly. Only when the third leg is attached will the stool be stable, and then you can sit on it forever. That's how your retirement plan should be set up,” Neiffer says.
The following are brief descriptions of three areas of retirement planning that farmers need to adequately address.
Every farmer who is considering retirement needs to complete an income and expense budget, one that takes into account the inflation factor.
"About one-third of retirees return to work in 18 months. That's not usually by choice; it's a necessity based on poor planning,” Spafford says. "This number is even more startling when you consider that most retirees come from a corporate world with pensions, paid benefits and 401(k) plans.”
Farmers need to determine what their after-tax cash flow will be during retirement, Neiffer says. If land is retained, they should estimate cash flows from rent and consider all other sources of cash inflow, including Social Security, interest and dividends and any IRA, annuity or pension distributions.
After calculating the cash flow, determine the estimated amount of federal and state income taxes owed on this income, Neiffer says. The net result is the amount of cash flow available to support your retirement needs.
As an adviser, Neiffer reviews the structure of the current farm operation to make sure it is properly set up for retirement.
Many times, he will split the farm operation into (1) a passive structure (normally an LLC) to own the land that will typically be retained by the farmer for retirement income and (2) an operational entity, which is normally a corporation that will be transferred to the children to continue the farming operation.
"We always ask the question: Can the pre-retiree walk away and trust that the operation is in capable hands?” Spafford says. "Once retired, the retiree shouldn't meddle in operational management and make armchair quarterback business decisions.”
Farmers at the retirement stage are typically independent and have enjoyed farming for up to 60 years or more, Neiffer says. To suddenly stop farming, in many cases, can be such a stress that they either do not enjoy retirement or, in the worst case, simply give up on leading a productive life after farming. It is not unusual for retirees in the latter situation to pass away soon afterward.
"It's important to understand that retirement is a one-way trip and that it's very difficult to start over again if you change your mind,” Spafford says. When planning for retirement, therefore, farmers should take the time to make sure that it's really what they want.
Some advisers suggest a respite from the work environment or even an extended vacation—planning for retirement may not be the ultimate goal, but rather a response to burnout. "We always suggest a retirement option, where we establish a time line for transition and then build a succession plan based on the chosen date,” Spafford says. "If the farm owner gets to that point and wants to retire, we're ready.
If not, we're better prepared financially, vocationally and leadership-wise to aggressively grow the operation instead.”
To begin the conversation about whether you are ready for retirement, visit www.farmjournallegacyproject.com
and click on Ready For Retirement.
Top Producer, February 2010