Beyond the farm
Author: John Hunt
Date: September 2010
Publication: The Milk Producer
Over the years, I have had many conversations with clients about investing off-farm. There are many good reasons why farmers might consider such a move. Some of them are:
Before you go delving into figuring our what type of off-farm investment you’d like to make, first consider your farm’s debt level, cash flow and whether you can afford to set aside money for investing. If you do have extra cash, look at whether you should put that money back into the farm or use some or all for outside investments.
You’ll also want to consider the rate of return for on-farm versus off-farm investments, off-farm salaries and pension plans and market volatility.
What’s involved
Investing off-farm lets you diversify and manage risk by not putting all your eggs in one basket. Many farmers rely solely on the farm for retirement. However, you could lose everything if the farm venture fails. Diversification helps you make the best use of your assets and build up a sizeable nest egg.
If you’re considering off-farm investing, here are some points to consider:
Pros
Retirement
At some point, you’ll want to retire. Off-farm income can reduce the amount of money you’ll need from the farm and make the transition to retirement a little less frightening. Retirement savings can also be used for gifts or estate bequests to non-farming children.
Tax savings
There are many types of off-farm investments, such as money market and mutual funds, bonds, stocks and real estate. You’ll need to put a lot of thought into deciding what type of investment vehicle suits you. For instance, registered retirement savings plans (RRSPs) offer certain tax deferrals, while registered education savings plans (RESPs) lets you save for your children’s or grandchildren’s education.
Unforseen circumstances
Family circumstances can change in an instant. Taking care of an ill child or spouse or dealing with a death in the family or a marital breakdown can put serious financial strain on your personal and professional life. This is the time to tap into set-aside funds to help pay for these unexpected circumstances.
Succession planning
Succession planning is not an easy task. It often involves years of planning and family discussions. Having off-farm savings can help simplify your farm’s transition to the next generation since you will need less money from the farm to finance your retirement or purchase another home.
Cons
Debt ratio
If your farm’s debt level is high, it may be difficult to put money aside. After all, even farmers running profitable farms have trouble finding spare cash. You should first get your debt down to a more manageable level. Your lender may require you do so before investing. Putting away $250 a month when you are adding $400 a month to your line of credit is futile.
Spouse’s income
If you or your spouse has an off-farm job with a pension, this can take some of the pressure off trying to save for retirement. However, if either of you retire early or become ill, your savings may not amount to much. Similar to investing all your money in the farm, relying on an off-farm job alone for savings can be risky.
Market volatility
There are some situations that are out of your control, like the recent market volatility. Many farmers who had money invested in the stock market saw poor returns last year. I’ve heard many farmers say, in hindsight, they wish they had purchased another farm, given recent farm land value increases.
Ask for advice
Keep in mind, there is no right or wrong answer when it comes to investing off-farm. The investment plan you choose may not be the best option for your neighbour, who may be at a different stage in life and in the farm business.
If you’re looking to invest off-farm, talk with your spouse, accountant, banker or financial advisor to come up with a plan that makes sense for you and your business, taking all factors into account. Your decision will ultimately depend on your farm’s goals, needs and objectives.
John Hunt is a partner with BDO in Hanover, Ont. He can be reached at jhunt@bdo.ca
