Dairy producers, are you prepaparing for your retirement?
You will not find a group of people more dedicated to their careers than dairy producers. Dairy producers surround themselves with people, living creatures and crops that must be attended to 365 days a year. They often get so wound up in what they do that they forget time passes by and one day they will not be able to do the physical and mental work required to run the business.
So, are you preparing for that time down the road? Here are some of the directions you have when thinking ahead to the “Golden Years”. The key to remember is that your dairy will have to be passed on to someone. That may be a family member(s) or the next buyer.
1. If you have dairy that supports a single family, you will need to have most of the debt satisfied when you decide to retire. Most of these types of farms have stuck every dollar right back into the farm for machinery, cattle, land, buildings or other things the farm needs. Many times there is a spouse that works off of the farm. That income will be used for family living or buying farm items that are needed. A lot of times the off-farm income will have some type of a retirement plan tied to it. That can be used in a retirement plan as well. Also consider putting money away in investments off of the dairy so you do have a nest egg put away.
The key to any off farm investment is to start early. Find a trusted investment person who can help you set up a retirement savings and earnings account with monthly deposits for the future. Now, when time comes to pass on the farm, the relative or new buyer can borrow money from a bank to pay off the retiring couple. The retiring couple may be in a position to offer a land contract and get paid back over a period of time, basically turning the farm asset into an annuity that pays back monthly. Here again, the farm has to be mostly debt-free so the first couple is not also having to make bank payments. The cash flow of the farm is a key factor here as well. So make sure you have a productive herd of cows that can generate enough income to support the next generation’s payments.
2. If you have a larger multi-family dairy, you may have some additional options. With an adequate cash flow, invest money can be set aside off of the dairy for a future retirement. Here again, it is important to start early. Therefore, when retirement comes, there are off-the-farm investments to fund a new lifestyle. This farm as well needs to be in a strong financial equity position. There is nothing wrong with these farms carrying debt. It just has to be able to manage the payments. Borrowed money must be able to generate at least twice the return that it is borrowed at.
Many times the owner(s) of a larger dairy are managing people and making management decisions. They are doing a lot of mental work. They can continue this style for many years. The key is to train the next generation to make decisions so they can slowly phase themselves out as retirement nears. Stock or ownership transfers can occur with the next generation, assuming the business debt and responsibilities. The first generation can be paid out over time with a monthly income or all at once if lender borrowing can be arranged. Tax planning is critical and any time a farm transfer is being considered on any size farm.
It is never too late to start planning for retirement. It really should start in the early years, because some day you will not be able to do what you are doing today. To get the planning process going, contact your local Farm Business Management Instructor today.