November 29, 2023 by Thomas Blonde

Saving for retirement on the farm

Given the all‑consuming complexity of any farm business, it’s not uncommon for farmers to overlook the importance of retirement planning. The constant need to reinvest in these businesses means there’s rarely a good time to think about saving for the future. With that in mind, you have to be proactive about planning for retirement throughout your career, so you have a clear sense of what will transpire when you leave your farm business behind. In this article, we will explore the challenges, risks and opportunities facing farm businesses planning for retirement. Considering all of this early is essential to eventually having the option to slow down, collect some passive income and take a well‑deserved break from physical labour.

Know your limitations

Clients often make the mistake of underestimating their future financial needs, which causes them to give their children a bigger financial break than they can afford when they transfer the farm. You really need to look at your current budget and consider what you'll need in retirement. You might think x dollars is enough, but you didn't consider the fact that you or your spouse might end up in an expensive long‑term care facility, which would cause a sudden increase in your monthly expenses. By sacrificing too much to the next generation, some clients are forced into a hand‑to‑mouth retirement, rather than the more enjoyable one ⁠–⁠ full of travel and adventure ⁠–⁠ they worked for and always imagined for themselves. This could also make it impossible to make comparable contributions to the well‑being of your other kids, who aren’t part of a farm operation.

Budgeting for the future

When it comes to budgeting for the future, it may seem difficult to predict your own longevity, but family history tends to be a reliable indicator of how long you are likely to live. If your parents and grandparents lived into their 90s, there’s a good chance you will also live to your 90s. However, if you had a heart attack or cancer in your 50s or 60s, that might lead you to be a little less cautious in your spending because your longevity potential may be diminished. Then again, with the quality of today’s health care, you could still live a very long and healthy life after overcoming medical adversity, so there's no strict rule of thumb. Fortunately, there is help out there from the government through the CPP and other programs, but these will not offer the support necessary to maintain a more comfortable lifestyle in retirement. With that in mind, we always suggest saving a little more than you think you’ll need.

Asset value

Farm assets are quite valuable in relationship to the cash flow they generate, so these assets really pay off when it comes time to fund your retirement. However, the high cost of these assets is also an obstacle for family members who might be interested in taking over the business. As a result, parents often transfer these assets to the next generation at a significantly reduced price, making it easier for them to take over the business. Of course, this deprives the parents of a crucial source of funding for their retirement. In cases like this when you opt not to sell your assets to the highest bidder on the open market, it always pays to have other strategies already in place.

Strategies to consider

No matter where you are in the evolution of your farm business, the time is right to start saving for retirement, and there are three standout options available:

  1. Establish an estate freeze – In an estate freeze situation, the current value of a farm is locked‑in (in the form of preferred shares) and future growth transfers to the next generation. Rather than pass the entirety of your business and its value on to your kids, you are simply giving them an opportunity to grow the business and generate additional profit while you live off the value that has already been established.
  2. Feasible discounts – Another option is to sell farmland to the next generation as an interest‑free promissory note, which protects the parent’s equity on farm assets. Under this strategy, a selling price is decided upon that meets the parent’s retirement cash needs while also offering a discount to the buyer. In addition, the capital gains exemption can help reduce the income tax owing on the transfer.
  3. Off‑farm savings program ⁠–⁠ If all your resources are tied up in the farm and you hope to make the farm available to the next generation at a discount, you should start saving off the farm. This will ensure you have additional resources available for retirement. Options include RRSPs, a tax‑free savings account and other business investments.

Meet the Author

Thomas Blonde Thomas Blonde
Elora, Ontario
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