Factors to Consider in Retirement Planning

VCE Agricultural and Applied Economics: Management and Production Economics June1995

by David M. Kohl, Alex White, Dixie Reaves, and Ryan Clouse

Agricultural producers and small business owners frequently put saving and investing for retirement at the low end of the management priority list. This is because additional earnings are frequently invested in the business to grow and nurture the business. Also, many producers consider their business equity generated over time to be a means for their retirement.

A recent study in the Department of Agricultural and Applied Economics found that nearly one-third of agricultural producers surveyed want to retire by age 60, and about 80 percent want to retire by age 65. Nearly two-thirds have the desire to live on the farm and be actively involved in the business, but in a reduced role. A majority of the producers expect their living expenses in retirement to be about 80 percent of their current net income (from farm and non-farm earnings).

Factors to Consider for Retirement

Many producers and small-business owners consider their business equity the base for earnings in retirement. Often, elaborate estate plans are developed to preserve equity that can be passed down to heirs. But, most business persons overlook the need for cash flow from their investment to sustain an adequate standard of living until death.

One of the major dilemmas facing the next group of retirees is the possibility of outliving their investment savings. According to Money Magazine, a male reaching the age of 65 will live an average of 17 additional years; a female will live nearly 24 additional years. A reasonable estimate of years in retirement is the foundation to any retirement plan.

A second consideration is family living expenses in retirement. Most agricultural producers and small-business owners include some of the normal every day living expense in the business expenses. Some estimate this to be as high as 17 percent. Thus, many business persons are going to require perhaps 110-120 percent of net income in retirement, rather than the standard 80 percent figure used by financial planners.

A third consideration is Social Security proceeds in retirement. This past winter in producer seminars, some 60 to 65 year old producers were surprised to find that they would receive little proceeds from Social Security in retirement. This was a result of not paying into Social Security, because their goal was to minimize taxes in the business over the years. Even more troublesome, their spouses had not worked off the farm, so they would receive no proceeds. Some 46 percent of retired Americans use Social Security as a major means of income in retirement; with this resource, a potential retirement crisis may be on the horizon for agricultural producers and small-business owners.

A fourth factor to consider is the liquidity or cash generation from the sale of business assets. Most producers and small businesses have put their "eggs" in the one "basket" of their business assets; thus, deferred taxes and actual sales strategies for business assets are critical to preserve equity for living needs. Most financial planners suggest that if net business and non-business income has historically averaged $30,000, an individual will need nearly $600,000 in equity by retirement to maintain an adequate standard of living until death. If the income from business and non-business has averaged $50,000, an individual will need nearly $1,000,000 in equity in various retirement vehicles to maintain a reasonable standard of living.

A final aspect to consider, especially for the late retirement years, is medical and health care needs that can exceed a person's investments. Today, nearly 60 percent of lifetime health care costs occur in the last six months of life. These costs may include extended hospital care, nursing home care and private nursing, medical care, and medicine.

Strategies in Planning for Retirement

First, estimate costs and determine living arrangements in retirement. If one is going to live on the farm, housing needs must be arranged. Also, if the next generation is going to be encouraged to purchase the business, how much of the business can be purchased and financed and still maintain a viable business? A crucial question is, how much the retired couple will expect from business earnings. A major dilemma in today's business is an older generation that has mentally and physically retired from a business, but still requires a family living withdrawal from the business, now being operated by the younger generation.

Second, determine retirement income from Social Security. To do this, contact the Social Security administration. Within six to eight weeks after placing a call to the agency, the producer will have an estimate. It is suggested that this be done every three years, as any mistakes by the agency on an account cannot be retroactive more than three years. As one producer stated, "I would not like my contribution going to Michael Jordan's account."

Third, consider living wills and power of attorney for future life- support situations. These strategies can reduce the need for equity being used to sustain life if the producer and family find extended life support inconsistent with their wishes. Also, some producers have taken out nursing home policies to ensure they will have adequate care and resources in the event nursing home care becomes necessary.

Finally, map out a game plan for retirement needs. The plan should address how much income will come from Social Security, pensions, investments, and farm or business aspects, and also determine the length and amount of needs.

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