retirement financial planning annie’s project february 6, 2007 coweta oklahoma

Retirement Financial Planning

Annie’s Project

February 6, 2007

Coweta Oklahoma

Critical questions to address

How do you envision retirement? Where will retirees live? What will retirees do? Business? Hobbies?

How much income will you need? What income sources will you have? What expectations do you have for the farm?

Farm transferred slowly, or sold outright If transferring to next generation, will retiring

generation still be involved?

Steps in planning

Anticipate your retirement lifestyle Gather data Establish goals Establish income needs Identify time lines for goals

Build a spending and investing plan Estimate investment returns Factor in taxes or potential changes

Control your assets as you near retirement

Anticipate your lifestyle….

“Too many of us are spending money we haven’t earned to buy things we don’t need to impress people we don’t like.”H. Jackson Browne

Anticipate your lifestyle

World travel, luxury hotels? Volunteer work? Hobbies? Support kids, grandkids?

Actual Sources of Retirement Income

27%

27%

25%

6%

7%8%

Social Security Savings, investments

Pension Part-time work

Home value Other

Source: Glennis Couchman

Evaluate your income sources

Spousal income Social Security Farm assets Work during retirement Pension plans Savings and investments


First year Social Security (SS) income starting in 2015 at age 65 (born in 1950)

Salary in Year Before

Retirement

Wage Earner’s Monthly Benefit

Wage Earner’s Annual Benefit

$30,000 $943 $11,316

$40,000 $1,139 $13,668

$50,000 $1,335 $16,020

$60,000 $1,531 $18,372


Social Security (SS) Minimum age to receive SS = 62 (80% of benefits) Age 65+ to get full SS benefits Retirement benefits increase each year retirement is

delayed up to age 70 No reduction in SS benefits no matter how much you earn

after age 65 Average monthly benefit paid to an individual retired

worker is 804. Check your earnings record periodically: www.ssa.gov


Lease out farm assets Land: $9 for native pasture, $13 for bermuda, $28 for

cropland CR-216, OK pasture rental rates and CR-230, OK cropland

rental rates F-214, Developing cash lease agreements for farmland and F-

215, Developing share lease agreements for farmland Need $25,000 in cash income?

2,778 acres of native pasture, or 1,923 acres of bermuda, or 893 acres of cropland

Livestock WF-571, Breeding livestock lease agreements and WF-572,

Stocker lease agreements Machinery and equipment

Consult with your tax advisor


Sale of land, breeding livestock, machinery and equipment Tax basis – Purchased, inherited, or gifted Market value Taxable income

Ordinary income (depreciation recapture) Capital gain (sale price in excess of purchase price)

Consult with your tax advisor

Oklahoma Per Acre Values for All Land, Pasture, and Cropland

670

445

300

546

404

251

961

570464

200

300

400

500

600

700

800

900

100019

75

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

$/A

cre

All Land Pasture Cropland

How much retirement value in the million dollar farm? Farm would sell for $1,000,000 but selling

costs might approach $100,000 = net sale price of $900,000?

Taxable gain = ? Capital gain tax rate of 5% or 15%? Is there debt? Equity to retire on?


Work during retirement Social Security earnings limits

Some limits if retiring early Age 65+, no limit on earnings

Enhance benefits by filling in zero years


Pension plans Payment options

Single life Joint and survivor Term certain Lump sum

Cash flow Taxes Survivor benefits and beneficiaries

Evaluate your income sources Savings and investments

Taxable accounts and investments Savings accounts CDs Bonds Stocks Mutual funds

Employer sponsored plans 401(k)s, 403(b)s and profit-sharing plans Must begin to withdraw funds by age 70 ½ from certain tax

advantaged retirement plans or face penalty IRAs Annuities and other insurance contracts

Don’t expect to get rich quick!

Savings Needed for RetirementQuicken Financial Planner assumptions: retire now at age 62, assets are owned free and clear, overall retirement tax rate of 15%, withdrawals until age 85, inflation = 3%

Investment

Rate of return

$300,000 $600,000 $900,000

3% $12,425 $24,850 $37,275

5% $14,847 $29,693 $44,540

7% $17,486 $34,973 $52,459

Build a realistic investing plan

73 year average annual return: 1926-1999Source: The Vanguard Group

3.9%

5.7%

11.3%

0.8%

2.6%

8.2%

0.0% 5.0% 10.0% 15.0%

T-bills

Bonds

Stocks

Total Return Real Return


Add it up Spousal income Social Security Sale/lease of farm assets Work during retirement Pension plans Savings and investments

How diversified are you?

How to increase retirement income? Retire later Work during retirement Set aside more Diversify your retirement portfolio Take advantage of IRAs Tap the equity in your home and land

Build a realistic spending plan

Family living needs Farm expenses (cash and capital investment) Life expectancy and age of retirement Health insurance Long term care insurance Life insurance Taxes Emergency funds Inflation


Family living needs Housing, food, clothing, health, taxes,

insurance, transportation, education, childcare/eldercare, charitable contributions, organizations

Capital expenses (home improvements, vehicle replacement)

Loan repayment Leisure, recreation, entertainment, luxuries

Worksheet

Family Living Expenses

21%

20%

13%14%

10%

6%

4%

4%4% 4%

Medical + Health Insur.

Household

Food PurchasedPersonal & Recreation

Contributions & Gifts

Life Insurance

Auto

UtilitiesClothing

Education & other

Source: KS Farm Business Management Association, 2005

Family Living Expenses

38,000

40,000

42,000

44,000

46,000

48,000

50,000

< 6 6-13 14-17 >17 Couples Average

Total $

Source: KS Farm Business Management Association, 2005

Cash Needs Over Time?

0

20

40

60

80

100

25 35 45 55 65 75 85

Age

Th

ou

san

ds

of

$

House Family living Farm land Total


Farm expenses Three year trend worksheet IFFS IFMAPS Enterprise budget software Quicken for farm financial records


Plan to beat the averages

At age… You should plan to live another…

Females Males

45 46 years 43 years

50 41 38

55 36 32

60 31 27

65 27 22


Health, disability, long term care insurance, life insurance Nursing home costs $50-70,000/year on average

nationally. Have to pay in 40 quarters to get disability


Spendable income needed during retirement to buy what $10,000 buys at the start of retirement

No. of years after the start of retirement

Inflation rate

2% 4% 6%

5 11,041 12,167 13,382

10 12,190 14,802 17,908

15 13,459 18,009 23,966

20 14,859 21,911 32,071

25 16,406 26,658 42,919

Source: Planning Ahead for Retirement, TIAA-CREF

The realistic spending plan

Family living needs Farm expenses Life expectancy and age of retirement Health insurance Long term care insurance Life insurance Inflation Tax considerations Emergency funds needed

Manage your assets as you near retirement Start learning now about your alternatives Using your investments during retirement

Use dividends and interest, shift to other investments, use principal balances

Short-term reserves, taxable accounts, tax-exempt accounts, tax-deferred investments

Make your investments last Change your investments?

Close to Retirement?

How much income will you need in retirement? How do you plan to dispose of farm assets? How will you invest the proceeds? What will you do with your time? Have you discussed your plan with others that it

will impact? Consult with an accountant and lawyer….

Steps in planning

Anticipate your retirement lifestyle Evaluate your income sources Create realistic spending and investing plans Control your assets as you near retirement Review, update your estate plan

Cracks in the Nest Egg Planning too late

Failing to take advantage of the years immediately before retirement Ignoring employer sponsored plans

Miscalculating how much is enough Failing to consider long-term care needs Failing to consider the effects of inflation and taxes Underestimating life expectancy Underestimating expenses in retirement Investing too conservatively

Failing to protect your assets Making large loans to family and friends Over-managing a retirement portfolio Taking too much risk with investments

Wall Street Journal, Oct. 22, 2001

Financial Planning Tools

Quicken: www.quicken.com The Motley Fool: http://www.fool.com/ American Savings Education Council:

http://www.asec.org/ Smart Money: http://www.smartmoney.com/ Fidelity Investments: http://www.fidelity.com Vanguard Group: http://www.vanguard.com TIAA-CREF: http://tiaa-cref.org/

retirement financial planning annie’s project february 6, 2007 coweta oklahoma

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