Presented by Eileen St. Pierre, Ph.D., CFA
Personal Finance Extension Specialist
Oklahoma State University
Farm Transitions 2009

Farm Transitions 2009

Why Plan?
• Retirement planning is long-term in nature.
• Current recession and market uncertainty
• Social Security will not be enough!
• Effect of inflation
• Reduces children’s burden in long run
• Allows you to have control over the quality of your retirement years
Farm Transitions 2009

How do you envision retirement?
• Where will you live?
• What will you do?
Expect your answer to this question to change, possibly several times.
This is why you have to save as much as you can, as early as you can.
Farm Transitions 2009

What If ?
• Unanticipated health care costs
• Need for long-term care
• Forced to permanently retire
• Kids/Grandkids move away
• Replace vehicles
• Downsize house
• Stock market rollercoaster ride continues
• Unexpected change in inflation or interest rates
Farm Transitions 2009

How do you achieve financial independence?
1. Spend less than you make
2. Budget in order to save
3. Manage your credit wisely
4. Aim to save at least 10% of your net income
5. Pay yourself first
6. Avoid procrastination
Farm Transitions 2009

Farm Transitions 2009

What if something happens to the cow? Your money is gone.
Need to diversify.
Do not put all your eggs in one basket.
Farm Transitions 2009

• Financial Net Worth is a measure of economic security
• Calculate Current Net Worth
Net worth = Assets – Liabilities
• Financial Net Worth (Non-F/R)
FNR = Net worth – Home Equity
• Financial Net Worth (Farm/Ranch)
FNR = Net worth – Home Equity – Farm Equity
Farm Transitions 2009

1. When you get paid, take some % of that money and immediately put it in a savings or money market account.
• If 10% is too much, try 5% or even 3%. The important thing is to start saving.
• This takes a lot of discipline!
2. Always keep 2 years of living expenses in your savings account.
3. Put extra into a retirement account. This account should be invested in riskier assets than your savings account.
Farm Transitions 2009

What expectations do you have for the farm?
• Transferred slowly or sold outright?
• If transferring to next generation, will retiring generation still be involved?
• Lease out assets?
Do not ignore tax consequences.
Do not underestimate the emotional element in your decision.
Your decision affects the cash flow you receive in retirement.
Farm Transitions 2009

Where will the money come from?
• Social Security
• Pension Plans and 401(k)
• Plans for the self-employed
1. Keogh Plans
2. Simplified Employee Pension (SEP) IRAs
3. SIMPLE Plans
• Traditional and Roth IRAs
• Other savings and investments
• Home/Farm Value
• Part-time work
Farm Transitions 2009

• Age 50: Begin making catch up contributions
• Age 59 ½: No more tax penalties for early withdrawals from retirement accounts
• Age 62: Minimum age to receive SS benefits
• Age 65: Eligible for Medicare
• Age 66: Born 1943-1954, eligible for full SS benefits
• Age 67: Born 1960 and later, eligible for full SS benefits
• Age 70 ½: Start taking minimum withdrawals to avoid penalties
Farm Transitions 2009

need
• 70% to 100% of current working income
• Calculate current monthly income and expenses
• Calculate estimated retirement monthly income and expenses
• Online retirement calculator http://www.ces.purdue.edu/farmretirement
Farm Transitions 2009

Ways to Increase Retirement Income
1. Decrease living expenses
2. Wait longer to collect social security
3. Increase contributions to IRAs and 401(k)s
4. Earn higher returns on non-farm investments
5. Earn more working part-time in retirement
6. Increase rent on pasture land and farm property
7. Lower farm-related payments such as insurance and property taxes
Farm Transitions 2009

What assets should I invest in?
• Money market securities (Cash)
• Bonds or Fixed Income (FI)
• Stocks or Equities (E)
Instead of direct investment, it is easier and less costly to use mutual funds or Exchange-
Traded Funds (ETFs). There are plenty of low cost companies out there (ex. Vanguard,
Charles Schwab, T. Rowe Price)
Farm Transitions 2009

What do I need to know before investing?
• There is a positive relationship between risk and expected return.
• Need to earn a high enough return to beat inflation and ensure your money will grow enough for your retirement.
• This involves taking on enough risk.
• Need to have enough equities in your portfolio to accomplish this.
Farm Transitions 2009

73-year average annual return:
1926-1999
Source: The Vanguard Group
Stocks
8.2%
11.3%
2.6%
Bonds
5.7%
T-bills
0.0%
0.8%
3.9%
5.0% 10.0%
Total Return Real Return
15.0%
Farm Transitions 2009

Source: Fidelity.com
Averages over this 11-year time period
Large-Cap Stocks 9.75%
Small-Cap Stocks
Foreign Stocks
9.74%
9.75%
Bonds
High-Yield Bonds
Money Markets
6.15%
6.85%
3.85%
Farm Transitions 2009

S&P Index
1825-2008
Source: Value Square Asset Management, Yale
University (http://www.ritholz.com/blog)
Farm Transitions 2009

What do I need to know before investing?
• Look into automatic withdrawals.
• Make sure you are comfortable with the amount of risk in your portfolio.
• The younger you are, the more time you have to recover from market downturns.
• Adjust your portfolio as you age.
Farm Transitions 2009

How do I allocate my assets?
• Consider lifecycle investing.
• Starting point: Put (100-age)% in E and the rest in FI and other asset classes.
• Age 45, 55% in E, 45% in FI
• If you are a late saver or want (need) to take on more risk, increase E%
• As you age, put higher % in FI and Cash
• Age 60, 40% in E, 55% in FI, 5% in Cash
Farm Transitions 2009

How do I allocate my assets?
• There are funds that do this for you.
Lifecycle or Target Date funds
Example: Lifecycle 2040
• Read the prospectus!
Many take a more aggressive approach.
Is the equity allocation too high for you to accept?
Farm Transitions 2009

http://www.ces.purdue.edu/retirement
Are You Ready to Retire?
Do You Have a Retirement Plan that Your Employer Funds?
How Much Will Your Expenses Be in Retirement?
When Can You Collect Social
Security?
Would You Like a Quick Estimate of Income Needed in Retirement?
Are You Self-Employed &
Responsible for Your Own
Retirement?
Do You Have an Individual
Retirement Account?
What is a Lump Sum Retirement
Distribution? What Should You Do
With It?
Are You Eligible for Medicare and
Other Health Benefits?
Do You Have Other Concerns?
Farm Transitions 2009

Homework
• Estimate income and expenses in retirement using online farm retirement calculator and/or worksheet
• Identify potential income sources, including farm business assets
Farm Transitions 2009

http://www.ces.purdue.edu/farmretirement (Online Farm
Retirement Calculator) http://www.ces.purdue.edu/retirement (Online Retirement
Course) http://www.irs.gov/pub/irs-pdf/p560.pdf
(Retirement Plans for Small Business)
Farm Transitions 2009

Farm Transitions 2009