Are you ready for retirement? You should take several critical steps to ensure you’re able to live the life you desire once it’s time to pass the management reins to the next generation.
On average, men age 65 today will live 84.3 years, according to the U.S. Department of Social Security. That’s almost 20 years of retirement bliss or blunder, depending on how well-prepared you are. The average monthly income for a couple drawing Social Security benefits is $2,176 — roughly $26,000 per year.
That should trigger concern among producers, says David Marrison, Ohio State University Extension specialist.
“If $2,176 is an average benefit, it’s safe to say farm couples will receive less,” he says. “Farmers are really good at avoiding tax payments, so many probably haven’t even paid in average contributions.”
Even if they do receive the average, Marrison says, farmers should think through where the remainder of their living expenses will come from. “The average household lives on $60,000 per year,” he says. “If $26,120 will come from Social Security, what about the rest?”
In many cases, the difference directly affects the farm business, Marrison says. “It is important that the profitability of the farm be such a family member can retire and not adversely affect the financial position of the business,” he says. These tips can help you plan for retirement.
1. Set a retirement timeline and goal. Many people default to retiring at 65, but farmers should let finances dictate when the time is right to step away from day-to-day operations and regular income, says Joshua Mellberg, president and founder of J.D. Mellberg Financial in Tucson, Ariz.
“With that approach, you are more likely to have the savings necessary to sustain you for the rest of your life,” he says.
2. Determine your budget. Next, figure out how much money you’ll actually need to cover your living expenses once you retire, explains Tim Eggers of Iowa State University Extension.
Also think through family living expenses, such as fuel and utilities. In many cases, these costs might have been commingled with farm expenses, Marrison adds.
3. Figure out inflation. Then identify your target savings goal, accounting for inflation. Marrison suggests using the Rule of 72. Take the number 72 and divide it by an interest-rate factor. Marrison uses 4%, which is the average inflation rate the past 50 years. In this example, in 18 years, your living expenses will be double what they are today because of higher inflation.
4. Determine a savings plan. Meet with your financial adviser to develop a series of next steps, Mellberg suggests.
View retirement as a way to reduce tax liability, Marrison adds. “In times of good prices, farmers were doing a lot of tax mitigation by buying equipment, when in hindsight maybe what we should have been doing is putting that money into a 401(k) for the older generation,” he says.
5. Start saving today. Even investing 10% of your income today can add up to a nice retirement savings if you start soon enough, Marrison says.