VCE Agricultural and Applied Economics: Finance, Capital, Credit

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In the decades ahead, the United States will experience a drastic change in its population. The aging of the baby-boomer generation will cause a dramatic increase in the average age of the American population. This phenomenon, colorfully referred to by sociologists as "The Graying of America," will lead to a greater number of elderly citizens in the United States than ever before.

This dramatic rise in the number of elderly American citizens will stress the Social Security System as well as other organizations designed to assist the elderly. Experts project that soon after the year 2000, the federal government will have to take serious steps to insure the continuation of the Social Security program: reduction of payments, taxation of benefits, an increase in the age at which people become eligible, or some combination of these strategies. If steps are not taken, predicts the American Enterprise Institute, the Social Security trust fund will be insolvent by the year 2036. Not only are there increasing numbers of elderly people in the United States, but life expectancies are increasing as well. Life expectancy at birth and at age 65 is increasing for both sexes. This means that Americans will be living longer in their elderly stage and will require a larger amount of money to support themselves after retirement.

The aging of the American population is a challenge for American society's pension systems. The problem is accentuated by a declining personal savings rate in the United States over recent decades. The U.S. Department of Commerce reports that the average American is currently saving about four percent of his/her after-tax income. Americans seem to be relying very heavily upon Social Security to get them through retirement, but Social Security was designed to provide retirees only enough money for basic necessities like food, clothing, and shelter.

The graying of America is affecting American agricultural producers, as well. In fact, the farming population 65 years of age and older is nearly twice the national average of 12 percent. In 1987, 21.4 percent of U.S. farmers were 65 years of age or older; this is a sharp increase from the 16.6 percent in 1969 and the 13.6 percent in 1940.

In light of these population trends, the Agricultural and Applied Economics Department at Virginia Tech, with funding by Farm Credit and agricultural bankers, recently conducted a study to examine the current retirement strategies of agricultural producers to determine farmers' levels of investment and financial-planning knowledge. This was done through the analysis of a survey of 336 producers in Iowa, Kansas, Nebraska, Virginia, and Washington. The study also made a recommendation for the construction of a computer-based expert system to assist producers in developing retirement plans and strategies. This system is to be completed based on study results, literature dealing with personal financial management, and information provided by individuals knowledgeable in personal finance.

The survey was conducted in 1994-95. A majority of the survey respondents use the services of banker/lenders, CPAs, insurance agents, lawyers, and extension agents. Relatively few of the surveyed farmers use investment brokers or Certified Financial Planners. Producers felt that extension agents and lawyers are the most important professionals to consult when planning for retirement.

Only six percent of the surveyed producers plan on retiring from the farm all at once, while 64 percent plan a gradual withdrawal from the farming operation. Over one-third of the respondents planning a gradual withdrawal want to begin by the time they reach age 60. These producers will need a substantial amount of assets to fund their retirement, because they are likely to live another 15 to 20 years.

Thirty percent of the respondents had no off-farm investments. Most of these producers did not invest off the farm either because they were concentrating on paying down farm debt or because they had no funds to invest in non-farm assets. The 70 percent of surveyed producers who did invest off the farm cited diversification and tax advantages as their leading motivations. Most were encouraged to invest off the farm by family and friends or their accountants.

One-third of respondents felt that they are sufficiently preparing for retirement. Thirty-five percent believed they needed to do more planning and 31 percent were unsure. Nearly 36 percent of responding farmers expected to need only 60 percent of their current annual income in retirement. Forty percent felt they would need between 70 and 80 percent, a level which is recommended for the average United States citizen by financial planners. Farmers, however, may need an even higher percentage of their current annual income, even 100 percent or more. This is because producers may find that they will have to cover expenses in retirement--such as fuel, insurance, and property taxes--that the business was able to capture during their involvement in the farm. Only 19 percent of the responding producers planned to need 100 percent or more of their current income.

Producers with more formal education were more likely to invest in non- farm assets. Eighty percent or more of the producers with bachelor's or advanced degrees had invested in non-farm assets, while less than 60 percent of those with a high school degree or less had investments off the farm. The better-educated respondents were also more informed of their retirement needs. Most surveyed farmers with a high school degree or less believed they will need 50 to 60 percent of their current income in retirement, while respondents with college degrees most often choose the 70 to 80 percent range.

Less-educated respondents started saving for retirement at a later point in life. Sixty percent of responding producers who have less than a high school degree waited until after they were 40 years of age to start saving for their retirement. As education levels increase, higher percentages of farmers began saving before 40. Respondents with advanced degrees were the exception, but this may be due to the length of time spent in school.

Seventy-eight percent of respondents with non-farm jobs had invested in non-farm assets. This could be a result of exposure to plans through their non-farm occupation, or of having more income to invest. Producers with non-farm employment may benefit from employer plans and contributions that allow more funds to be invested off the farm.

Most respondents in each enterprise, except dairy cattle, beef cow/calf, and sheep, invested in IRAs. Dairy producers planned to use the sale or lease of farm assets to fund their retirement, while beef cow/calf operators and sheep producers seemed more interested in life insurance.

The survey results indicate a need to educate agricultural producers on retirement planning practices and strategies. Over the next year, we will be writing a series of articles in FM Update on specific areas of the survey results. It is obvious that more education in retirement planning is needed if Virginia producers are going to be prepared for retirement. Educational programs need to target both producers and their spouses and need to include both in the planning process.

Programs need to inform farmers of the benefits and drawbacks of the different retirement plans. The producer can then use this knowledge to determine which plan or combination of plans best suits his or her needs. Producers can base this decision on tax benefits, maximum allowable contributions, and off-farm employment.

Educational programs should also suggest that the producer carefully evaluate the amount of income he or she will need in retirement. Many farmers do not realize that they may need 100 percent or more of their current income in retirement to maintain their current lifestyle. Educators should guide producers in what factors to consider when forecasting income needs.

Finally, farmers need to know whom they can contact if they need additional assistance in putting their retirement plan together. Survey results show that few agricultural producers would consult a certified financial planner or investment broker to plan for retirement. Unfortunately, these are the professionals they should consider first. Educators need to communicate to the farmers how these professionals can benefit them.