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 Knowledge for the CommonWealth

How Much Is Enough?

Farm Business Management Update, June 2002

By David M. Kohl and Alex White

One of the biggest concerns of older Americans is running out of money in their retirement years. Increased life expectancy and medical costs and uncertain investment markets have increased this anxiety in recent years. Some of the factors that need to be considered before one embarks on the journey in the golden years include.

The Income Stream

The first step in the analysis is to determine where your retirement income will be derived. Sources can include Social Security, pensions, sale and lease of the business or personal property, continued employment, gifts and inheritances, and, of course, earnings from your retirement investments such as IRAs, SEPs, 401(k)s, 403(b)s, and Keoghs.

Unfortunately for agricultural producers and small business people, a large share of this income will be generated by the sale and lease of the business. Recent research has found these items can be as high as 93 percent because businesses have historically invested margins in the business for growth. The resulted is an Enron-like scenario in agriculture since the retiree's investments are all in one basket.

Second, many businesses have instructed the accountant and tax preparer to pursue strategies that minimize paying income taxes. This strategy has resulted in few, if any, earnings coming from Social Security. This decision can be particularly devastating for a spouse who has historically had no employment. The premature passing of a mate, with insufficient equity to draw upon, may result in poverty during the golden years.

Where to Live

There are many factors to consider in the pre-planning stages of retirement. First, where will you live? For agricultural producers, housing may require moving away from the farm or business to allow the younger generation to take over the reins.

If you plan on moving to an urban, suburban, or resort area, you should check the cost of living index before moving. Moving to an area with a higher cost of living may significantly reduce the number of years your retirement portfolio will last.


Develop a budget for your intended retirement lifestyle. Chances are you will have the same categories of expenses in retirement as you currently have (groceries, insurances, utilities, etc.). However, the distribution of expenses between these categories may shift as time passes. For early retirement years, you may incur extra costs by traveling or pursing hobbies. In later years, costs may increase because of health and medical costs.


Conduct a thorough analysis of your insurance coverage. Medical and health coverage need to be assessed. Sixty percent of lifetime health care costs occur in the last six months of life. Don't forget to include health care coverage from Medicare! One method of reducing your expenses during retirement may be to eliminate your term life insurance policies. If you don't have dependents or significant debts, you may not need life insurance during your retirement years.

Analyze the need for assisted care and the possible benefits of Long Term Care (LTC) insurance. In this examination, consider whether you qualify for LTC, the length of the care package, the level of coverage, and the inflation clause. The average stay in a nursing home is 3.3 years but is very bimodal either 9 months or 7 years or more.

Read the fine print on the policies to determine what they do and don't cover. Rates are relatively inexpensive if arranged early in life. Often people wait until health deteriorates, which may result in higher annual premiums or rejection when applying for a policy.

Will You Continue to Work?

According to a recent USA Today article, nearly one-third of all Americans work in their retirement years. Many people are working during retirement to remain active. However, others are forced to work because their retirement investments and Social Security benefits are not sufficient to meet their living needs. Remember, income earned during retirement may reduce the amount of Social Security benefits you will receive.

Macro Economic Factors

Try to maintain a relatively long-term investment outlook during your retirement years. A 30-year investment horizon once you retire is not unusual. To make sure your retirement investments will last for this time span, you need to consider the rate of return on your investments. Recent years have shown us how uncertain the return on our investment portfolio can be.

A common mistake among retirees is to become too conservative with their investments. The lower returns associated with conservative investments may drastically reduce the duration of your portfolio, both in real and nominal terms. For example, certificates of deposit (CD) are relatively safe, conservative investments; however, after you adjust for taxes and inflation, your real return on CDs may actually be negative. As a general rule of thumb, your retirement investments should be earning rates of return that are at least 1.5 times the inflation rate.

As an example of the effects of inflation, $50,000 in today's dollars will only buy $25,000 worth of goods after 18 years, assuming a 4 percent inflation rate (Rule of 72). Divide the inflation rate into 72 to determine the number of years that the purchasing power of your money will be cut in half.

When to Retire

Finally, consider at what age you will retire. If you decide to retire between 50 and 60, a net worth of approximately $1 million will be required to provide sufficient earnings over a 30 to 35 year life expectancy. This amount assumes a $50,000 annual pre-tax withdrawal, 8 percent rate of return, 4 percent inflation, and no Social Security benefits.

Your retirement years require planning, just like the other cycles of life. A series of planning assumptions that ask "what if?" can provide the framework for achieving peace of mind in the golden years.

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