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Do you want to retire on top?

By Kelvin Leibold - Columnist | May 25, 2021

Often farmers will delay retirement when prices rally and profits increase. Is that really the best strategy? With today’s grain prices we are seeing higher rents and higher machinery prices. Maybe retiring in high profit years might be a better strategy. There may be more options available in high profit times.

If you are one of those considering retirement have you thought about a succession plan? A good succession plan would involve transferring management from one generation to the next and transitioning some assets to the next generation.

The first step you may want to do is to build your management team. If you are transferring the operation to the next generation, they need to understand how to make decisions and what skills they need to run the business. Being a great tractor driver might be important today but who knows if we will even have tractor drivers in the future. Building a process where people can communicate is important to long term success.

You need a plan to transfer the decision making and the management of the operation. I like to think about transferring labor, management and assets in a farm transfer. It generally isn’t too hard to convince someone to work less and there are lots of ways to transfer assets. During life there is gifting, selling or a combination of the two. For example, one could sell equipment for less than fair market value creating a “part sale, part gift” type transaction. Or one could sell a sell a piece of land on contract and then gift some or all the annual payment back to the buyer. Often, we are trying to manage taxes in the process. The transferring of management is usually the most difficult and requires the most planning.

One also needs to think about what things can disrupt the transfer plan. Untimely death or disability are common. Major disagreements on how to manage the business can be challenging at times as well.

Another issue that we see is that over time the farm operation may not be able to fund the living expenses of two families. The younger generation may be over or under compensated for a variety of reasons. There may be promises made regarding “future compensation” that are not able to be fulfilled. Or off farm children may feel they aren’t receiving the same opportunities as the on-farm children.

In agriculture we don’t give out many gold watches; often producers tend to go through a “phased retirement” where they shift over duties over several years. Planning the transition over several years may allow for better tax management strategies and help with the transfer of management. It may also allow you to better manage other components of a retirement plan such as social security benefits, a retirement plan or a spouse’s retirement program.

One way to look at the social security system is to understand the impact of how additional contributions to the program benefit you. Once you have 35 “good years” paid into the system there is often little benefit in paying in more. The formula is rather complex as it has three different “break points” as to how social security values your contributions as well as an inflation indexing component. Fortunately, there are 12 “calculators” on the social security website: www.ssa.gov to help you work your way through your questions.

Starting the conversation about succession planning early gives people more time to set goals, discuss strategies, create a plan for the transfer, and then implement the plan over time. Planning for the future transfer will help increase the odds of having a successful transfer and a rewarding retirement.

For additional information on farm succession planning check out the article “Constructing a Farm Succession Plan: Elements to Consider” https://www.extension.iastate.edu/agdm/wholefarm/html/c4-17.html on the Ag Decision Maker Website.

Kelvin Leibold is a Farm and Ag Business Management Specialist for Iowa State University Extension and Outreach

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