Nearly all farmers get it wrong. In fact, Len Davies, a farmer and succession planner from Muirkirk, Ont., figures that 80 per cent of farmers underestimate how much cash they’ll need to pay their bills after they’ve retired, let alone pay for vacations or those new motorcycles.
It’s the same in the West, says Don Forbes, a certified financial planner and chartered life underwriter in Carberry, Man. Farmers retiring without adequate savings and income are the rule, not the exception, Forbes says.
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There are lots of reasons. Partly, it’s because many living expenses on the farm get mingled with business expenses. Items such as electricity and gas bills, vehicles and insurance, and land taxes are paid by the farm. Once that farm is gone, everything changes.
Partly too it’s because farmers retire in different ways and at different times, so they don’t spend their careers focused on a specific date when they know they’re going to be cut off from regular employment income. But part of the reason is that life simply happens too fast, says Jeffrae Rothwell, an agriculture account specialist with Affinity Credit
Union in Shellbrook, Sask. When you’re so preoccupied with today, he says, you don’t realize how quickly time is flying by.
“We’re seeing farmers start to plan for retirement at a fairly late stage,” Rothwell says. “Sometimes that doesn’t
give them enough time to get things in order.”
The situation overall is improving, Rothwell says. Still, if you think you are going to have a healthy retirement with a nest egg of less than $500,000 — after you’ve bought somewhere to live — it’s time to put some actual numbers down on paper and see how they add up… that is, if you plan to retire and leave the farm.
President and founder of Grayson, Sask.’s Wheatland Financial Services, Paul Kuntz finds that grain farmers he’s spoken to plan to stay on the farm and keep their hand in its operations, and therefore don’t need as much savings to sustain them.
“As one guy put it, ‘This job is easy — there’s not a whole lot of work left in this job any more. Most of our bins are hopper bins, we have GrainVacs, we sit in huge tractors that steer themselves. It’s not like you have to do a whole lot of physical labour nowadays to run a big grain farm.’”
Kuntz says that at planning sessions he does with farm couples, the wives concede it’s not their ideal retirement, but they know it’s the only way their husbands want to do it, and they can live with it if they both take a few weeks of holidays.
“Nobody wants to build a house in town,” Kuntz says. “That whole concept is done.”
What’s made retirement life on the farm more feasible is improved roads and infrastructure. Kuntz says it might have been a risky proposition 30 or 40 years ago, but not any more with better winter clearing operations and passable all-season roads, not to mention four-wheel-drive trucks.
“They’ve built this life for years and years and years — this is their paradise,” Kuntz says. “We’re dealing with people who enjoy not having somebody 16 feet away from them. So where are you going to retire where you can have that luxury of having space to yourself? You’re not going to find that anywhere else.”
So when Kuntz tries to scare his clients into thinking about the money they need for succession planning, many answer that they’ll keep working until
they can’t any more and that they’re not moving.
“It’s pretty tough to come back and say you need $500,000 to retire. Well, maybe they don’t,” Kuntz says. “They probably only have another 10 to 12 years that they have to sustain themselves, and they’re at that point in life where they’re probably not spending that terribly much, and they’re still going to be earning income.”
But that raises the issue of the next generation, which is another good reason to get realistic about your retirement expectations. Forbes recalls working recently with a farm couple ready to retire who intended to give their son their farm. In their minds, they only needed $1,000 a month to enjoy their golden years.
$2,500 a month, and up
Forbes knew that didn’t sound right and after going through their particulars, he discovered they’d need at least $2,500 a month, and as much as $3,500 if they wanted to go through with plans like travelling and buying a new car to replace their vehicle.
“Their lifetime’s work was tied up in the farm equity and they’re going to give it to the son,” Forbes says. “Well, they couldn’t afford to.”
New costs and monthly incomes vary greatly between old-timers leaving the farm and those who, say, retired from companies they’ve worked for over the course of many years. For one, farmers can be challenged with the cost of buying a new residence in town, whereas many other retirees by that stage of life have already paid off their mortgages. For another, there’s no monthly company pension cheque that farmers will find in their mailbox. Also, while farmers can qualify for the Canada Pension Plan, what they receive will depend on how much taxable income they’ve previously declared.
Farmers who require something like $2,500 a month for living expenses would need a nest egg of between $400,000 and $500,000. Given most farmers aren’t likely to have that amount of cash lying around, they would be forced to sell the farm to generate that income. That comes with an additional challenge, given the ugly combination of high land prices and the difficulty of being profitable.
There is a good deal of wisdom in consulting an expert before taking the retirement plunge, especially when considering the tax ramifications of selling one’s assets. For example, the first $750,000 is tax free, but after that, the government can start collecting, and a farm auctioning off everything it’s got could wind up with a $250,000 tax bill.
Forbes counselled one farmer about this when the man continuously brought up the idea of ridding himself of everything as quickly as possible.
“I said if we structure it a little differently and take some time, you can sell it or transfer it to your sons, but your sons have to farm it for two more years… (sometimes it’s two years in advance and sometimes it’s two years afterward). Then they each qualify for the $750,000 capital gains credit.”
For all intents and purposes, there would then be no tax payable.
“You should have somebody who’s competent about farming issues, because there’s a number of tax issues that are quite unique to farmers,” says Forbes, who is also chair of the Brandon chapter of the Canadian Association of Farm Advisors.
“There’s a lot of questions they need to ask themselves and others to set a plan,” Rothwell agrees, adding the first step is to consider what you need. “Are you planning to stay on the farm and retire there and assist the next generation to a certain extent? Are you planning to travel the world? Are you leaving the farm to take up residence in the city?”
That leaves a big possible range in what a farmer would need to have saved up. For example, Rothwell recounts discussing retirement with two couples from roughly the same area. One figured on $1 million in their bank account, while the second felt if they had their first old-age pension cheques set aside, they’d be set. And both were about on target based on their retirement expectations.
What will CCP and OAS pay?
For Davies, the key is to start early. With an early start, and with a realistic attitude, he says, you’re much more likely to achieve your retirement dream.
The temptation early in your career, of course, is to pump everything back into the farm. But that may not be the right decision if you take a career-long perspective. “Make sure you don’t put all your eggs in one basket,” says Davies. “In many cases it’s good to set some money aside early.”
Many farmers plan on receiving Canada Pension Plan and Old Age Security income, but do not know how much the monthly payments will be. Amounts vary based on whether or not you have contributed to the program, and what age you are at retirement.
Davies suggests calling the Canada Pension office at the beginning of succession planning to determine how much you are entitled to, preventing an unpleasant surprise when the succession plan is made.
It is also important for farmers to put some money aside in savings while they are actively farming, so there will be extra money at retirement. Tax-free savings accounts, registered retirement savings plans and guaranteed investment certificates are all options which should be explored while an individual is working.
While exploring savings plans for the future, the biggest consideration is how long you will have before needing the money. Younger individuals can invest more aggressively than older individuals, due to the longer period to recoup any potential losses.
When to call the experts
Christine Wenger, acting succession lead for the Ontario Ministry of Agriculture, Food and Rural Affairs, stresses the importance of speaking with a financial planner and business adviser early in the succession planning stages to ensure all considerations for future income are made.
“It (retirement income) really depends on the individual situation and what lifestyle the farmer has in mind during retirement. The earlier the farmer has this discussion and plans for retirement, the better,” says Wenger.
Many factors will influence what is needed for retirement. Some include government programs and previous savings, while others focus on individual plans. Some farmers plan for a lower retirement income to ease the debt load on their successor. Others want a higher retirement income so that travel and other pastimes are possible, or so they can retire early.
Succession planning does not have to be daunting, however. There are many professionals available to assist farmers in determining what they will need at retirement. In addition, fact sheets and workbooks are available from the provincial ministries of agriculture, and occasional workshops are held in conjunction with lending institutions and producer meetings.
Davies has found, on average, that farmers will need between $50,000 and
$60,000 per year after retiring. This is variable, however, and is based on the individual not requiring elder care in the future. The farmer will also have to immediately take money out of the farm sale proceeds to purchase a new house, which is an often overlooked expense.
According to Wenger, the key to achieving the retirement you want is to begin planning early, and treat succession as a process, not an event. The earlier an individual retire-n
begins speaking to advisers and using the resources available, the easier it will be for them to achieve their retirement goals.
Although the planning process should begin early, all succession plans need to have room for revisions over time as retirement gets closer. As with all family matters, leaving communication open between family members is the best way to ensure the plan will fit everyone’s needs.
“A family needs to communicate to openly discuss individual plans, hopes and dreams. It’s also important to negotiate and handle some conflict resolution,” says Wenger.
Each farm, and each succession plan, is different. There is no “right way” to do it, and no magic amount the parents will require. The lifestyle being planned for after retirement will be the ultimate factor in finding how much will be needed.
Where the new house will be, how many extra costs will be incurred from the move such as water charges or condo fees, whether or not the individual would like to travel, how early in life the
$60,000 per year after retiring. This is variable, however, and is based on the individual not requiring elder care in the future. The farmer will also have to immediately take money out of the farm sale proceeds to purchase a new house, which is an often overlooked expense.
According to Wenger, the key to achieving the retirement you want is to begin planning early, and treat succession as a process, not an event. The earlier an individual retire-n
begins speaking to advisers and using the resources available, the easier it will be for them to achieve their retirement goals.
Although the planning process should begin early, all succession plans need to have room for revisions over time as retirement gets closer. As with all family matters, leaving communication open between family members is the best way to ensure the plan will fit everyone’s needs.
“A family needs to communicate to openly discuss individual plans, hopes and dreams. It’s also important to negotiate and handle some conflict resolution,” says Wenger.
Each farm, and each succession plan, is different. There is no “right way” to do it, and no magic amount the parents will require. The lifestyle being planned for after retirement will be the ultimate factor in finding how much will be needed.
Where the new house will be, how many extra costs will be incurred from the move such as water charges or condo fees, whether or not the individual would like to travel, how early in life the
ment will be, and how soon after selling the farm will the individual stop working completely are all deciding factors in coming up with the amount of money needed.
Once these questions are answered, parents should look at other sources of income such as government programs and previous savings to determine how much of their needs will be covered without the sale of the farm.
Lastly comes what many see as the biggest question in succession planning: Will I be able to have the retirement I want while still having my children carry on farming? There are cases where the money the parents will require is greater than the children will be able to pay. This doesn’t mean that the succession plan was a failure. Instead, it means details need to be reviewed more closely.
The retirement you want
In Davies’ experience, it is possible to have a good retirement and still see your children farm. In cases where the family owns several farms, this could mean selling one farm to a non-family member, lowering the debt burden for the children who wish to purchase the remaining farms. It is also possible to spread the costs out by allowing the children to purchase the farm assets in stages.
There are many options available to farmers who wish to create a succession plan. The key to developing the right one is to find advisers to work with, make use of resources such as fact sheets, workbooks and workshops, and most importantly, Davies repeats, “Begin planning early.” CG
ment will be, and how soon after selling the farm will the individual stop working completely are all deciding factors in coming up with the amount of money needed.
Once these questions are answered, parents should look at other sources of income such as government programs and previous savings to determine how much of their needs will be covered without the sale of the farm.
Lastly comes what many see as the biggest question in succession planning: Will I be able to have the retirement I want while still having my children carry on farming? There are cases where the money the parents will require is greater than the children will be able to pay. This doesn’t mean that the succession plan was a failure. Instead, it means details need to be reviewed more closely.
The retirement you want
In Davies’ experience, it is possible to have a good retirement and still see your children farm. In cases where the family owns several farms, this could mean selling one farm to a non-family member, lowering the debt burden for the children who wish to purchase the remaining farms. It is also possible to spread the costs out by allowing the children to purchase the farm assets in stages.
There are many options available to farmers who wish to create a succession plan. The key to developing the right one is to find advisers to work with, make use of resources such as fact sheets, workbooks and workshops, and most importantly, Davies repeats, “Begin planning early.” CG
