In part one of this multi-part series (see the last issue), we stressed the importance of understanding and committing to very clear goals prior to entering into retirement planning. This commitment to specific and well understood goals will provide you with a strong compass as you navigate through the rest of the process.
In this article we will tackle the next two questions that are critical in your quest to avoid the Lodge and the Dodge: How much will you need to fund your retirement; and, how will you fund your retirement?
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HOW MUCH YOU NEED
No matter what your passion following farming, the only way to get there when you want and enjoy it to the extent that you want is to plan. Although what you will need to fund your retirement is a bit of moving target, understanding how much you’re living on today isn’t a bad start. From there, figure it out cash flow needs with added travel and toys.
For a real basic calculation, try adding up your entire cash inflows from all of your bank statements and subtract all the business expenses. These business expenses can be found in your income tax forms under statements of farming activities or your statement of business activities. Any funds not accounted for in these expenses are either sitting in cash, have been invested or else were consumed in living and recreation.
WHERE THE MONEY COMES FROM
Now that you have a basic understanding of cash flow needs in retirement, how will you fund it? There are only two ways to generate these funds: earn it or sell assets
Figure 1 illustrates the numerous ways your accumulated resource base can be utilized to help you earn your way through retirement or help you sell your way through retirement.
Assets can be rolled into a corporation that will be managed by you and your successor. If you are already incorporated you may choose to simply bring in the next generation of management and pay them to manage the company. This option only works if this company will continue to generate profits adequate to pay management and provide you with adequate cash.
For example, we have seen retiring cattle ranchers lease out their cow herd on a cash lease or even a share of the calf crop. You may choose to retain some of your machinery, such as a high-clearance sprayer or a highway tractor and super B trailers, and use that equipment to operate a custom business. You also have the option of renting or leasing your equipment out but you need to be comfortable that it will be well maintained. Your land base can continue to earn revenue by being rented out through a cash rental agreement, or various crop share agreements.
If you choose to sell your assets to fund retirement, consider the following. Perhaps an agreement for sale or vendor financing can be used to facilitate the transaction with benefits to both vendor and purchaser. If you are selling land at a reduced price or gifting land consider using a mortgage with forgivable payments or a forgivable note, an option that will allow you the opportunity to purchase the land back if resold, or covenants such as a life interest to ensure that you are able to use the land the way you intend even though you have sold it.
Your investments can be sold or continue to earn interest, but with current interest rates you would need significant investment to earn any interest revenue.
Often when planning for retirement, understanding what to do with each of your asset classes can be overwhelming. Working through them one by one and clearly identifying whether they will generate cash by earning or being sold can sometimes simplify this process. We’ll cover that in the next column.
AndrewDeRuyckandMarkSloanemanage twofarmingoperationsinsouthern ManitobaandarepartnersinRightChoice ManagementConsulting.Withover25years ofcumulativeexperience,theyoffersupport infarmmanagement,financialmanagement, strategicplanningandmediationservices. Theycanbereachedat [email protected] and [email protected] or204-825- 7392and204-825-8443
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Planned Sale
HOW WILL YOU FUND YOUR RETIREMENT? EARN
SELL
Roll into Corp.
Roll into Corp.
Lease
Roll into Corp.
Custom Work
Rent
Roll into Crop
Cash Rent
Crop Share
Financing
Interest/Dividends Inventory
Livestock
Machinery
Land
Investments
Board of Directors Hired Man on Farm
Employment off-farm CPP/OAS
Employment Pensions Planned Sale
Planned Sale
Agreement for Sale
Planned Sale
Agreement for Sale
Financing
Option/Covenants
Conversion/Sale
