Building a Happy Retirement — Part 1
It takes careful planning, time and off-farm investments.

By Norm Coe, farm business consultant, First Pioneer Farm Credit, Claverack, N.Y

NOTE: This is the first of a two-part series. Click here for part two.

You and your spouse deserve a comfortable, happy, financially secure retirement as reward for all your years of hard work. Don’t you agree?

A long-term financial plan with nonfarm investments and farm investments will help get you there. And it has never been easier to invest for retirement, with all the choices available to you — and lower transaction costs to boot!

You need a personal financial plan, one that goes beyond your farm business plan. Here are some ideas to get you started.

Your retirement savings plan.
A retirement savings plan looks at income sources for funding your retirement:

• Social Security benefits
• The farm as a source of retirement income
• Off-farm investments

Social Security retirement benefits.
Think of Social Security retirement benefits as a supplement to your retirement income, not the total income that will support you in your golden years. For a statement of your personal Social Security retirement benefits, you can call Social Security at 800.772.1213, your local office or sign on to www.SSA.gov

Can the farm provide retirement income?
You probably have a large investment in machinery, equipment, inventory, real estate and perhaps even livestock. You have two options for these investments in your farm. You can:
• sell the farm to fund your retirement
• transfer it to the next generation

Either way, you need to think through your choice.

Selling the farm.
Partial or complete farm liquidation is an important part of financial security in retirement. If you plan to sell the farm to fund your retirement, consider the following first:

• Taxes. You need a sharp pencil to accurately estimate your net worth after you pay taxes on the sale of your farm and after you pay your debts. Your net worth will shrink after the sale, so you will not have your present net worth to fund your retirement. The deferred income tax liability on a complete liquidation ranges from 25 to 50 percent. That means, you could lose up to 50 percent of your sale price to Uncle Sam. In short, base your retirement income on the amount that is left after you pay income tax and debt.
• Market timing. It is always better to sell at the right time in the market cycle, which means you need staying power. Selling a farm is very difficult, but selling in a down cycle makes a difficult situation worse. A retirement fund independent of the farm can provide "staying power" so you can choose when you want to sell rather than being forced to sell at the wrong time in the cycle.

Transferring the farm.
If you plan to transfer the farm to the next generation, consider two important questions about the affordability of your choice:

• What can the younger generation afford to pay? The amount is typically less than the net worth of the business.
• Can you afford to sell the business at a reduced price without compromising your financial security in retirement? If you plan to finance the sale, you may be forced to rely on a business that you have little or no control over for your income.

Remember the following very important factors as you develop your plan:

• Your financial security must come first. And Social Security retirement benefits are not enough to fund your retirement.
• You must be able to afford the plan.
• The younger generation must also be able to afford the plan.

In most cases, the farm cannot afford to buy the market value net worth to fund your retirement, support the next generation and reinvest in the business.

Statistically you will live longer
Here is the bottom line. You will probably live longer than earlier generations, which means you will need more income to support your retirement — a lot more income — than you may realize. But with more years to live, you also have more time to accumulate wealth. Here is a chart of life expectancies from the United States Center for Health Statistics:

Investing: It’s time, not timing.
The key to a comfortable retirement is very simple: You cannot rely on just Social Security and the farm to fund your golden years. You also need personal savings and investments not tied to your business.

Keep two points in mind for investing and saving your money. First, time is on your side so start investing your money NOW. If you invest $10,000 today, and receive a 7 percent return, you will double your money to nearly $20,000 in 10 years. In 10 more years, your money will double again to $39,000. That’s the advantage of time. Your money can grow significantly — but it needs time to grow.

Second, your return also makes a difference. The same $10,000 at a 10 percent return for 10 years will grow to $26,000. If you leave your investment alone for another 10 years, your original $10,000 investment will grow to $67,000. That additional 3 percent return means $28,000 more in your pocket in 20 years.

How can I shelter my investments from income tax?
An Individual Retirement Account (IRA) has been one of the tax-advantaged retirement savings alternatives available to people who meet certain eligibility requirements.

In short, traditional IRAs can reduce your income tax bite. Before you contribute to an IRA, however, first consider your current tax bracket, and if you need a deduction now or if it makes more sense to wait until retirement for tax-free income. Your decision to make a deductible or nondeductible contribution to an IRA needs to be made as part of your long-term plan.

• Traditional IRAs are right for you if you are in a high tax bracket today, because your contributions are tax deductible now. The income and growth on the investment in traditional IRAs are not taxable until you withdraw your money. To be eligible for an IRA, you need to have earned income from employment (a W-2), a partnership or LLC. You can contribute up to $2,000, and so can your spouse, as long as you have at least $4,000 of earned income. It’s easy to make a case for having a deductible IRA if you are in the 40 percent marginal income tax bracket, and you are looking for every tax deduction in the current year.
• Roth IRA is a good choice if you are in a lower tax bracket now. Your contributions are not deductible in the tax year that they are made. You and your spouse can each make annual contributions of up to $2,000 with after-tax dollars, but all your withdrawals, including your accumulated earnings, may be tax free.
• Savings Incentive Match Plan for Employees (SIMPLE) IRA is a relatively new IRA that allows you to contribute up to $6,000 plus 3 percent of your earned income. Employees are also eligible if they earned more than $5,000 in the previous two years and expect to earn $5,000 or more in the current year. Employers must also contribute up to 3 percent of wages for eligible employees who elect to contribute part of their pay to the plan. The plan must initially be established by October 1. It requires no extra reporting or paperwork.
• Pension plans are good if you want to make larger contributions. See your tax adviser for pension plans that allow you to contribute more. You also need to check for requirements for employees and for annual reporting.

Check with your tax adviser before making any decision on whether deductible or nondeductible contributions are best for you.

NOTE: This is the first of a two-part series. Click here for part two.

Call your local First Pioneer office for help with your savings plan for retirement. We are happy to help you develop a retirement savings plan, analyze the best choices for your retirement or help you develop estate or business plans. You can also contact us at info@firstpioneer.com for more information.

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