Retirement Planning and Investment
Gilles Lapointe , Partner, BDO Dunwoody LLP
The Milk Producer
May, 2008
As a farmer, most of your wealth is probably in your farm business and represents, in most cases, millions of dollars. Then why would you need to plan for your retirement? Before concluding that you have enough money to retire only on the value of your farm assets, here are some considerations that you should take into account.
The first step is figuring out whether you have enough money to have that ‘golden retirement.’ Various economic and situational factors come in to play here, starting with life expectancy – if you live until you’re 90, will you have enough money to last? Along the same lines, the age which you retire at makes a difference as well. The later you retire, the lesser number of years of retirement income you will need. If you retire at age 65 and live until age 90, you will need 25 years of retirement income. If you expect $100,000 in pre-tax income from your investment, you will need 1.4 million dollars if you live until 90 and spend it all. Added into your life expectancy calculations is the cost of health care. You must account for increased health costs as you reach advanced age. A big chunk of your retirement income could go towards additional health costs.
Then there’s the matter of the kind of lifestyle you plan to lead after retirement. The amount of retirement income you need will further fluctuate if you plan on traveling, doing some community work, living in Florida or even continuing to work part-time.
The issue of your investments is another area that you need to monitor. The value of your farm and quota can change quickly. There are no guarantees that your farm or quota will be worth the same in the future when you retire as it is today. Can you sell your farm at fair market value to an outside party? Will you find a buyer who is willing to pay the price you want for your farm? What will quota be worth at that time? If you have a succession plan, selling your farm to a family member may result in you selling for a bargain price because they may not be able to pay fair market value.
If you think the farm assets you intended to fund your retirement will not be worth as much as they are worth today, you have options which you can begin to implement now. It all begins with investing as soon as you can outside of the farm’s operations.
- Maximize your RRSP. If you invest $ 10,000 a year for 20 years at a rate of return of 6% you will accumulate $ 389,927; in 30 years $ 790,582; and 40 years $ 1,640,477.
- Invest in the stock market – but consult your financial planner before you do so. You have to be able to accept the risks that go with the returns.
- Invest in a universal life insurance policy. The benefits are sheltered from income taxes.
- Invest in real estate, as this type of investment has proven over the years to be a good source of retirement income.
- Factor in your Canada Pension Plan and Old Age Security pension. It is important to determine how much of your retirement income will be made up of your CPP, OAS and RRSP. Then you will know how much will have to come from your own investments.
If you are planning to retire, should you still be investing in your farm? Many farmers are still investing in their farms as they approach retirement age, and by doing so, they might not recover their investment unless they are certain that a family member will take back the farm operation. Some farmers may invest in an additional tractor or a building improvement, spending $100,000 or more without the likelihood of getting this returned to them in the near future when they retire. Use a portion of this investment outside the farm in another type of investment. If you have to make an investment on the farm make sure it’s because you need it and not just because you want to save income taxes.
So then, how do you save for your retirement? Consider an automatic monthly contribution from your bank account so you don’t have to think about it. By taking this step early on, you will provide yourself with a lot more options when it comes time for your retirement. Take advantage of tax-sheltered savings vehicles such as an RRSP which reduces the cash-flow impact now due to the tax deduction obtained.
In many cases, farmers can’t just rely on their farm assets to retire, so it would be wise to invest outside the farm to avoid putting all your eggs in one basket. Talk to a financial advisor to help you create a financial plan that will help you retire comfortably.
