In a recent seminar, a producer had written down a well-thought-out question. “When we are withdrawing funds from the business for living expenses, is it a good idea to try to put some of the money in retirement savings even though the business is marginally profitable? Will we be penalized because our living costs, when including the savings, will be high?”
I recently read an article about an individual attending a Rolling Stones concert in 1973. At that time, the sponsor of the concert was an annuity and savings business. Their point was that Mick Jagger would need to start saving early in life because he would not be generating income after 50 years of age. Wow, they sure missed the mark on that prediction!
Saving for retirement early in life is always a good idea, but sometimes preparing for the retirement years as an agricultural producer can be challenging. My advice to this individual was to set aside some money in living withdrawals for personal savings to build wealth outside the farm and ranch. This is a tall order now that agriculture is deep into a down cycle. If at all possible, be disciplined and place the funds in an IRA or a simplified employee pension plan (SEP). If a spouse is working off the farm, use a 401(k) or IRA, or a 403(b) if employed by a public institution. All these plans allow one to earn wealth and defer taxes on the money set aside.
If the business is not profitable, it may be the result of excess regular depreciation or depreciation from Schedule 179. Excess depreciation or the manipulation of revenue and expenses, particularly at year-end to reduce taxable income, can result in negative profits. Knowing the true profitability of a farm business can provide perspective on the issue of savings and investments off the farm.
Remember the 98% rule when evaluating excess family living costs as a result of savings. A former graduate student of mine conducted a study years ago and discovered that people who save and invest outside the business were more likely to pay off their loans and pay them on time 98% of the time. The exceptions were doctors, lawyers and other professionals who have high incomes, but often have poor personal finance skills. While each situation is unique, saving early and often for retirement will pay dividends in the long run.
Dr. Kohl is Professor Emeritus of Agricultural Finance and Small Business Management and Entrepreneurship in the Department of Agricultural and Applied Economics at Virginia Polytechnic Institute and State University. Dr. Kohl has traveled over 8 million miles throughout his professional career and has conducted more than 6,000 workshops and seminars for agricultural groups such as bankers, Farm Credit, FSA, and regulators, as well as producer and agribusiness groups. He has published four books and over 1,300 articles on financial and business-related topics in journals, extension, and other popular publications.