Planning For Stepping Back – Part I

Nine Important Points To Consider

by Arthur Littlefield, MBA
Farm Succession and Estate Planning Specialist
Lincoln Financial Advisors Agribusiness Services

As I am reflecting on clients stepping back, I do not recall ever meeting a farmer who has “fully retired” using an off-farm perspective. However, we certainly have worked with many farmers that have begun to slow down, as the decision making and farming operation has transitioned to the next generation.

The act of stepping back is an extremely important topic for a number of reasons which will be explored in this article. In my next article, “Planning For Stepping Back – Part II”, we will highlight some specific situations about which we have first-hand knowledge. It will include the outcomes and practical alternatives that, in hindsight, should have been considered. To try to accomplish both topics in this article would have made it entirely too long.

First, according to data from the Social Security Administration1:

  • One out of every four 65-year-olds today will live past age 90; and
  • One out of 10 will live past age 95.

Unfortunately, this good news might have a downside. People may outlive their savings.

Second, inflation can often be an overlooked concern. The longer you live, the greater the impact inflation has on your quality of life. The Rule of 72 is a simplified method to approximate the number of years it takes for the price of a good or service to double; divide 72 by an assumed rate of inflation. If the cost of medical care increases by an assumed 4% annually, then the cost is projected to double every 18 years.

Third, the likelihood of a long-term care need increases as we grow older. The following information is provided by American Association of Long-Term Care Insurance2 and shows the ages that claims begin:

  • 70 thru 80 – 30.3%
  • 81 thru 85 – 25%
  • 86 thru 90 – 27.2%
  • 91 and older – 17.5%

More to the point, the U. S. Department of Health and Human Services estimates that nearly 70% of people over the age of 65 will require long-term care and 20% will need it for more than five years. This can include home visits by healthcare professionals, stays in a nursing home, and 24-hour medical support3.

Numbers four and five are of particular importance today. Fourth, the impact of market volatility. This refers to not only the price of grain in the field, the bins, and at the elevators, but also farm ground and equipment. In addition, the value of non-ag related retirement savings such as mutual funds, annuities, stocks, and bonds can be subjected to the same volatility.

Fifth, taxes. I have frequently heard that farmers are borne with a gene which causes them to avoid paying taxes. This is certainly supported by the number of bins and elevators seen throughout the Midwest. In addition, new equipment will be purchased as year-end approaches and expenses for the next year’s farming operation will be prepaid. I am certain we could add many more examples.

Sixth, the failure to have an actual formal, ideally written, plan for a farm’s succession or sale at auction when a farmer decides to walk away or is carried away, preferably vertically and not horizontally. This is not just a financial issue, but also one involving both family dynamics and future generations.

Seventh, a lack of analysis about retirement cash flow needs, income, expenses, and discretionary spending, i.e., travel, vacations, new truck, boat, or you name it.

Eighth, the failure to begin a formal and disciplined retirement savings program. Starting sooner is better than later, but your adherence to your plan must be monitored on an on-going basis so adjustments can be made as a result of changing situations. Some of these are under your control and others are not.

Ninth, as your time to step back is approaching, it is important to realize that your focus should change from wealth accumulation to wealth preservation. Again, like many things, the sooner you begin making this transition in your thought process, the better.

1 - United States Social Security Administration, Benefits Planner | Life Expectancy, SSA.gov. https://www.ssa.gov/planners/lifeexpectancy.html
2 - American Association of Long-Term Care Insurance, January 2019 https://www.aaltci.org/long-term-care-insurance/learning-center/ltcfacts-2019.php#2019ages
3 - How to Pay for Nursing Home Costs, U.S. News & World Report, 2019. https://health.usnews.com/best-nursing-homes/articles/how-to-pay-for-nursing-home-costs

Lincoln Financial Advisors Agribusiness Services. 1212 Banbury Circle, Naperville, IL 60540. Art Littlefield is a registered representative of Lincoln Financial Advisors Corp. Securities and investment advisory services offered through Lincoln Financial Advisors Corp., a broker/dealer (member SIPC) and registered investment advisor. Insurance offered through Lincoln affiliates and other fine companies. CRN-3430952-020121