If the farm business is going to transfer to the next generation, the family needs to transition the current business operators out of day-to-day management of the enterprise. More important, the transition plan must provide them with a replacement income stream that does not rely on the ongoing business.
When successfully done, a free-standing retirement income plan allows the new operators the flexibility to support only one family with the revenue of the farm business instead of two.
If the exiting operators begin to build the income plan when they are in their 50s or 60s, they have a chance to be ready to exit by the time they are 70.
To have the best shot at becoming financially independent and being able to retire (stop working for money) you should follow this general guide to get started.
1. Create a cash reserve to insulate you from the financial bumps in the road that can derail retirement. Experts suggest six months of living expenses in a savings account at the bank.
2. Have enough cost-effective life insurance to protect against premature death, including term insurance for each spouse.
The death benefit will help with expenses like retiring the mortgage and other debts so survivors can afford to stay in the current home; Fund college for surviving children even on one income; replace income the deceased spouse would have earned so the family can continue with the same lifestyle; and Cover increased monthly living costs for survivor (child care).
3. Save 15% of earnings each year.
If employed off the farm, use the employer's 401k and be sure to qualify for all free matching funds. In addition to the 401k at work -- or if you don't have one at work -- open an Individual Retirement Account (Traditional IRA or Roth IRA).
The IRS allows up to $5,500 (or 100% of your income, whichever is less) on top of the 401k. If you are better than 50 years of age, the IRS allows a $6,500 per year IRA contribution.
If self-employed, consider a Self-Employed Pension (SEP IRA). IRA rules allow up to 25% of profits or $53,000 in 2015 (whichever is smaller) to be contributed to a SEP IRA.
4. Create a retirement income plan, preferably with the help of a retirement planning expert.
First, calculate your needed retirement income, tally your current retirement savings, factor in future additions until retirement day; and monitor progress annually.
If this blog has you thinking about your own situation, get in touch with my office ([email protected]).
The opinions of Rich Dunn are not necessarily those of Farm Futures or the Penton Farm Progress Group.