The very nature of farming can squash all of a farmer s best intentions for off-farm investing. Busy schedules, fluctuating incomes and the constant demand for new technology can each put the reins on even a modest plan.
Yet for more farmers, off-farm investing is becoming an essential business strategy, both so they can inject some stability into their current financial health and also so they can expand future options.
Len Davies of Davies Legacy Planning Group in Chatham, Ont. is among a growing number of advisers strongly advocating diversity. If you sink all your net worth in the farm, Davies warns, retirement and estate planning have pretty much got to come down to selling assets.
Read Also
Adapting, innovating and thriving in Saskatchewan agriculture
Cyle and Erika Stewart have embraced their ability to pivot and take a new approach to ranching on more than…
Succession can be so much easier if the older generation puts aside more in off-farm investments and everything isn t tied up in farm assets, Davies says. If less money is needed from the farm to finance retirement or to buy another home, estate planning for other children becomes simpler, and more achievable too.
Still, knowing that it s a good idea to diversify farm investments is a lot simpler than actually getting the job done in a strategic, goal-based way, as federal numbers suggest. According to the 2009 Canadian Farm Financial Data Base, the average annual investment income per Canadian farm was $11,200, even when farm families with pension income are included.
Off-farm investing can be complex to the point of confusing. The time demands can also feel overwhelming. It s a business sector with its own jargon, loaded with paperwork and topped off with fast-talking salesmen. Even finding a financial adviser who suits you can be difficult.
Plus, it s tough to set clear objectives. Even under the best scenarios, setting a target for how much you need to save in order to generate a certain income will depend on your portfolio s performance. For example, with a GIC at two per cent, you need to invest $2.5 million in order to net an annual $50,000. By contrast, if you can find an investment that will guarantee you five per cent, you only need to put away $1 million to generate that same $50K.
All this can add uncertainty and challenge to the job of setting a goal for an individual farm even before you start grappling with the specifics about how much annual income you should actually target for your retirement years.
Still, that s a critical question too. How much will you need to succeed your farm?
Farm succession planners say you need to start with some honest self-analysis, mix in some credible insights about markets, and then look at what the farm can afford, all the while keeping inflation in mind.
One of the approaches we take is to start with the desired income and then work backwards from there, says Mike Duffy, director of the Beginning Farmer Centre at Iowa State University. For example, if you want $70,000 in income and you earn $45,000 from the farm, that means you ll need $25,000 in other income.
According to a survey done in Iowa in 2006, most farmers only want to semi-retire. They expect to retain the farm and derive some income from it in their retirement.
How much does retirement cost?
Succession planners suggest you begin with what they call a needs assessment budget. Elaine Froese, farm family business coach from Manitoba, suggests keeping very close track of all personal living expenses for a year.
Generally, farm folks don t pay enough attention to the resources they need to plan for after they let go of management, says Froese. They can transition ownership slowly, but the bottom line is they need to know their lifestyle cost number and be ready for it.
Davies gives his clients an example budget to help them remember all the things they ve claimed as farm expenses. Sometimes farmers are so used to filling up from the farm gas tank or lumping the cost of insurance for their dwelling with the farm, they forget to budget for it. Doing the budget really opens their eyes, says Davies.
Larry Morin, owner of Farm and Small Business Planning in Fort Saskatchewan, Alta. starts succession planning by asking if either generation keeps track of their personal spending. He finds in most cases, they do not.
Morin suggests breaking down personal spending into two categories: mandatory living costs and lifestyle spending. Mandatory living expenses include things like food, clothing, medical expenses, utilities, insurance, home maintenance and vehicle expenses. While actively farming a bunch of these costs are normally hidden in the farm expenses, says Morin. Typically, a couple will spend between $2,000 to $3,000 per month for these expenses.
Beyond that, lifestyle spending depends on how the couple visualizes living in retirement. It is more about personal choices. Do they see themselves still living on the farm, helping out when they can but taking a couple of weeks each year to go camping or travelling to family members for short visits? Maybe they envision having a condo in Victoria and one in Hawaii and a yacht to travel between the two.
This number can range from $10,000 or less per year and up from there, says Morin. This includes annual costs and what type of assets will need to be purchased. Those yachts do not come cheap.
There are a number of options to help calculate your retirement needs. You can use a spreadsheet program, Froese suggests, or ask for standard living-expense forms that many banks and credit unions distribute.
As well, Saskatchewan Agriculture has an estate-planning checklist for farm families (www.agriculture.gov.sk.ca/Succession_Planning)
that lumps expenses together in a monthly budget form. Simply print it off and fill out an estimate of monthly living expenses, including automobile, debt payments, food, gifts and donations, insurance, medical, property maintenance, property taxes, utilities, and vacations. Budgeting for unexpected expenditures can be guesswork, but a cushion is wise.
Timing is everything when it comes to financial planning and some advisers suggest a budget for immediately after you retire, and in five and 10 years time. Retiring at age 50 instead of age 70 requires entirely different financial plans. So does succeeding at 20 years old versus 40.
If the client is unsure of when they ll retire, Davies uses age 65. He puts their budget into a computerized needs analysis and financial-planning program used by many financial planners called NaviPlan. This program adjusts for inflation.
Clients are really amazed what inflation will do to what they need now and will need in 15 or 25 years from now, says Davies.
The estate-planning checklist says that if the annual rate of inflation is two per cent, your income needs 10 years in the future will be about 22 per cent higher than they are today. If the inflation rate is four per cent, your income needs will be about 50 per cent higher.
Once an outline of how you envision your retirement is budgeted, you can use a multitude of programs to determine how much you ll need in investments to support your plans.
Timing is also important when filling out the income portion of the budget. If a parent is young and retirement is far in the future, financial programs such as NaviPlan will give them a goal to work toward, says Davies. These people are the exception in my practice.
The income side
Saskatchewan Agriculture s checklist for farm families suggests starting the income portion of the budget by writing down all your non-farm assets, including any household and vehicle assets and life insurance. On this list you put any GIC, TFSA totals, RRSP investments, stocks, bonds, mutual funds, rental properties and loans receivable.
Additionally, don t forget to include Canada Pension Plan (adjusted if taken before 65) even if it s small. Farmers can voluntarily pay into the CPP plan so the more you put in, the more you ll get out. The maximum amount is about $950 per month, but would require that people contributed the maximum amount to their CPP over the years, which many farmers do not, says John Hunt chartered accountant for BDO Canada s office in Hanover, Ont.
Old Age Security and CPP are automatically indexed for inflation each year. CPP can also provide disability and survivor benefits. Watch for changes coming in 2012 for CPP rules which will impact some farmers and others.
With a complete budget, Davies generates a cash flow projection for his clients. The cash flow will show them the shortfall, he says. This has to come from the sale of the farm or dividends from the farm corporation.
About 80 per cent of the farms Davies consults with on succession planning have smaller RRSPs. Most transitions I deal with are within the next five years so they re more preoccupied with what they need and whether the farm can support it, he says.
Completing a risk profile helps determine risk tolerance and timelines, thereby narrowing down appropriate investments vehicles and products.
Much depends on your risk tolerance. Some people are cautious, while others don t hesitate to invest in more volatile investments in anticipation of higher returns, says Morin. Typically a good balanced mutual fund provides an acceptable level of risk versus return for most people.
Outside investments are normally easier to liquidate than farm assets, adds Morin. For example, selling a mutual fund when you need money is quicker and easier than having to sell a quarter section of land. This can become all too real a consideration on the farm.
What happens, Morin asks his clients, if your son has a poor production year and cannot afford to make his annual payment to you?
If the farm has both types of investments, they can use the payment from the successor when available and then draw on other investments if the successor struggles with making the payment to them.
Will it be enough?
Some experts recommend that the older generation should plan on drawing at least 50 per cent of their retirement income from outside investments and non-farm-related income. However, few farmers have those kinds of off-farm numbers.
Besides, few farmers are eager to sell their land. Renting out is easier to adjust to, they find.
Still, there s no denying that such attitudes can pave the way toward difficult succession disputes, warns Froese. If they insist it is all going back into the farm, be prepared for fights about removing working capital and shareholder loans.
Yet farm assets can also be treated like investments and be used for retirement funding, Froese adds. Entering into an agreement with the successor to purchase those assets over time and using the loan payments as income can be part of the compromise. So can liquidating a portion of the farm assets.
Each family is unique with a full range of situations that a good financial adviser will explore. The key, advisers agree, is to get started early.CG
