In this Section:

Farmers, Ranchers Need a Special Breed of Retirement Planning

The average farmer in the United States is 57 years old. It’s reasonable for someone that age to start thinking about succession planning in terms of having enough money for retirement and deciding what to do with the farm. Financial planning is an important tool to reach a successful outcome in both of those areas.

First, let’s address the issue of having enough money in retirement. Farmers and ranchers may be forced to accept a lower standard of living in retirement unless they develop realistic and effective financial plans to have the lifestyle they want.

This problem is especially challenging for them as self-employed people because they don’t work for an employer that sets up a retirement plan for them. Further, they tend to get so caught up in day-to-day activities that they neglect financial planning. Beyond that, many simply do not plan correctly or save enough.

The good news is that farmers are uniquely positioned in terms of flexibility to set up their retirement plans, because they can go from providing 100 percent of operations and management responsibility to simply renting their land. Either way, the first step in creating a retirement plan is to visualize what that plan should look like by writing down a description of its aspects, including what the farmer or rancher would like to do with their remaining years.

From a practical perspective, farmers and ranchers should outline the things they need to be doing to make their dreams a reality. It starts with figuring out how much they will need in retirement to live as they want.

On that score, financial planners normally assume that an individual will need anywhere from 70 to 100 percent of their working income for retirement.

However, when farm families calculate the costs of retirement, a primary consideration is to recognize that an annual estimate of costs of living allocated across a 25-year period is too vague. That is because months and years in retirement are not all the same in terms of cost. Nonetheless, coming up with a monthly figure is a good start.

The next step is to figure the costs that are not incurred monthly, such as vacations and other wants.


How Much Will They Need in Retirement?

Once the long-term budget is in place, the next step is to determine how much the desired standard of living will cost and then compare that figure with the farmer’s net worth. Net worth is calculated by subtracting total liabilities from total assets (Assets - Liabilities = Net Worth). After that number is known, the farmer can figure out the additional amount they will need to accumulate for their retirement.

When making the calculation of how much additional wealth is needed for retirement, time is the farmer’s best friend. By engaging in a regular program of investing as early as possible, they can take advantage of the power of compounding.

One of the most efficient ways of acquiring wealth is to take advantage of retirement plans established under IRS regulations for the self-employed. Included are individual retirement accounts, Keogh plans and simplified employee pensions. IRS Publication 560 provides an explanation of the plans that are available for farm families. Note, however, that each farm and ranch operation has a different ability to use these arrangements and that each type of plan is unique, so it is important to find the right one for each individual situation.

Besides putting money in tax-favored retirement plans, farmers can create a portfolio of investment assets. The key is for them to start early and invest continuously at a level of risk that is appropriate to their situation and personal disposition.

Further, studies show that the most important factor impacting one’s rate of return is asset allocation. In fact, asset allocation will account for 90 percent of the investor’s return, with market timing and the selection of individual securities making up only the remaining 10 percent.


What to Do With the Land?

In addition to setting up tax-favored retirement plans and investment portfolios, there is the question of what to do with the land and equipment. In that regard, farmers may intend to sell their land and equipment to an outsider to generate the income they need.

Alternatively, they may plan to transfer it to the next generation, but that leaves the issue of how that generation will pay for it, along with the following questions:

·         Is the next generation committed to farming or ranching?

·         Is the present owner/operator willing to share control and work side by side with the next generation?

·         Do the two generations share a common vision for the future of the farm or ranch?

·         Does the farm or ranch have the economic capacity to realistically support both generations?

·         Is there a viable plan for treating off-farm family members fairly?

·         Is there enough operational capital to fund the transition to the next generation?

·         How will both generations be housed on the property?


This raises the question of what to do if the next generation does not want to take over operating the farm. In that case, there must be a plan to transition from an operating farm entity to an income-producing investment.

This assumes that the owner/operator is willing and able to become the managing landlord or can find someone to handle their interests. Of course, there would have to be sufficient rental income to support the farmer’s overall needs and objectives.

If renting cannot provide the needed income, some alternatives might be to find a tenant or to hire a professional farm manager. On the other hand, if none of these options prove to be viable, then the farmer should consider selling the property. This raises the following questions:

·         How do you determine the best selling price?

·         Should any part of the business be spun-  off to enhance profitability of the rest of the operation?

·         Is a sale a financially viable option considering what the proceeds will be after deducting its costs?

·         What is and is not included in the sale (Assets, intellectual property, brand names, trademarks, customer lists, etc.)?

·         What are the tax consequences of selling, and how might they be minimized?

·         What is the best way to go about selling the property?

·         What is the best way to invest the sales proceeds to provide for the future?

·         Does the farmer want to stay on in an advisory management capacity? If so, for how long and at what compensation level?


The best way to determine the value of the farm may be to get an appraisal by a specialist. The specialist can make an assessment based on the amount of acreage, the value of machinery or equipment in the operation, and the crop or livestock the farm is able to send to market.

Moreover, the professional appraiser might help pinpoint problems that could reduce the property’s value, and may suggest changes to improve the operation and its overall value. In any case, if equipment is going to be sold, make sure it is clean and in working order before sale. It is also a good idea to have documentation that demonstrates the value of the farm, such as copies of tax returns.

The farmer should be sure to keep track of all licenses and permits operated under their business so they can cancel them when they cease operating.

Next, they should have a written agreement containing all the terms of the sale and should plan for how the farm’s short-term and longer-term debts will be paid off.

Finally, they should be sure to keep all of their employment records up to date and make certain that all employment taxes are paid.

Now that you know some of the fundamentals of farm family succession, it’s time to sow some seeds for a fruitful new practice.


Louis S. Shuntich, J.D., LL.M., is director, Advanced Consulting Group, Nationwide Financial. Louis may be contacted at [email protected] [email protected].

More from InsuranceNewsNet