On many farms and ranches, long-term planning is given low priority, if any priority at all. Tending to the crops and livestock easily rank higher on the day’s to-do list. Thus, transition planning and even the mere subject of retirement gets put off. In fact, when asked about retirement, several producers objected to a plan saying they hope to farm until the end of their days. Not surprisingly, the same question posed to a producer’s spouse or life partner often meets raised eyebrows. Yet, the role of spouse and partner is crucial in the process of retirement planning.
The first step in considering retirement is an assessment of the available financial resources for the golden years. One financial resource on which millions of people have come to count on is Social Security. Many producers find payments are less than expected. When minimizing reported income year after year to decrease taxes owed, the contribution to Social Security is also decreased. It should come as no surprise the payout is also minimized.
Another consideration with Social Security is the amount the spouse is eligible to collect. In general, the spouse is eligible for up to one-half the payment of the partner. However, if the spouse worked off-farm, the collection amount from that work may be higher than one-half of the spouse’s payment. In that case the spouse receives the greater amount. For example, if a farmer received a $3,000 monthly payment, the spouse is eligible for $1,500 per month without off-farm work.
There is also the question of when to start collecting payments – as early as 62 through 70 years of age. For each year of delay, the payment amount increases approximately eight percent. Of course, life expectancy and the status of the program are both important factors to consider.
Many times, farm businesses develop an estate plan that focuses on distribution of equity and assets at death. However, the more important question is, “How much income will be required to sustain you until that point?” In discussing this issue with the younger farm generation, I often say that mom and dad or grandpa and grandma represent a $1 million annuity. That is, the required revenue stream over the years will be a seven-figure amount or more.
Businesses must consider where the needed income will be generated. Social Security is one source, but options such as off-farm investments, a retirement account, and the possible sale of the farm or assets need to be considered. In general, I recommend at least one-half of retirement funding be generated outside the farm. This provides diversification of income streams and more flexibility for the next generation. This also allows for more room in negotiations over the sale of the farm or farm assets. Since couples rarely die together, it is also important to include a surviving spouse in the family living budget for a longer period of time.
Another good strategy, especially for younger farm spouses is to place five to 10 percent of net income into a retirement account such as a simplified employee pension plan (SEP), 401(k), 403(b), or individual retirement account (IRA). Again, this diversifies the sources needed to fund retirement. There are some that insist any investment from the spouse or otherwise must go into the farm business or land. While this is historically a good investment, the old adage of don’t put all your eggs in one basket highlights the risk and potential losses of this strategy. Keep in mind, retirement accounts are often exempt from legal action or bankruptcy, which makes a good argument for some investment outside the business.
As I talk with younger couples in the process of long-term planning, they often ask, “How should we invest our money?” The simple rule is to save five to 10 percent of net income, and invest it according to the old strategy of subtracting your age from 100 or 120. This calculation provides the percentage of money that should be placed in one of two types of investments. For example, if you had $1,000 to invest at 45 years of age, 75 percent should be in growth types of investments like stocks, while the remaining 25 percent should be in more conservative funds like bonds (120-45=75). Statistically female partners tend to outlive their male partners by five to seven years. For this reason, female investors should tend more toward 120 than 100 in calculating long-term investments.
Other than food and shelter, healthcare is another basic need, especially in the golden years. Many farmers and ranchers get caught between the responsibilities of raising their own families and caring for their elderly parents. Of course, both require significant time and money. Securing assisted care insurance between the ages of 45 and 55, or before chronic health issues emerge, often makes the coverage much more affordable. Unfortunately, once health issues arise, insurance can be difficult or perhaps impossible to obtain. With the cost of assisted care ranging between $60,000 and $90,000 annually, this is a topic for a critical discussion and must be included in any retirement plan.
The planning process is also the time to consider costs for other needs or desires such as travel, exercise, or hobbies. This will most likely include sharing and setting of goals with your spouse, partner, and family.
I often hear the various factors involved in estate and retirement planning are overwhelming. While this certainly can be the case, a good facilitator can help navigate the discussions. A third party planner is helpful in raising the right questions, steering clear of emotional decisions, and formulating a plan that matches incomes with expenses. Don’t be surprised if the participation of an outside facilitator is required to get the topic on the table and open for discussion.
It is interesting that a farm spouse’s role in long-term planning is sometimes undefined because they are not always directly involved in the daily farm business. Yet, even if intricately involved, the unique perspective of a farm spouse makes that individual invaluable to the planning process. Serving as an advisor, investor, referee, and in numerous other roles, a spouse or life partner can bring the rare and wonderful perspective of disconnected connection. In other words, any farm spouse, even if working off-the-farm, is intimately and undeniably connected with the farm business. Yet, their connection is also usually tied to the needs of the family, extended family, and future in a way that is not colored by the business.
Retirement planning has several components and some may seem more relevant than others at any given point. However, as time moves ahead, each part of business and personal planning becomes important and even critical to business sustainability and profitability and family health and happiness. Thus, as your most important ally in life, reach out to your spouse and partner to tackle the plan for a long, abundant life together.