Examine retirement needs, goals to ensure sufficient finances

The financial needs of the retiring generation are often not worked through in detail when developing a succession plan.

This critical piece of the plan is unintentionally lost in tax and estate planning discussions.

It’s important that retirement living costs be analyzed in detail to ensure that enough money will be available to support the standard of living that the retiring generation desires.

Without adequate planning, the retiring generation may find that their income is not sufficient. They are often unable to make adjustments to meet their needs, either because of a lack of time or because of previously completed asset distribution.

Year over year living costs are one consideration. For example, large capital expenditures can significantly affect financial affairs.

As a result, it’s important that the retiring generation ask questions, do research and gain a thorough understanding of their financial realities in retirement before completing the transition of ownership and management.

Here are questions that the retiring generation can ask to stimulate discussion regarding retirement and related financial needs:

  • What do you envision yourselves doing in retirement?
  • How much income will you need to live this way?
  • What are your current costs of living?
  • Have you thought about inflation pressures and how this might affect your retirement needs?
  • Are you planning to buy big ticket items in the five years following retirement, such as a house, cottage or extensive travel?
  • Are you planning to make asset or cash gifts to your children? If so, how much and when?
  • Do you wish to leave a financial legacy to family, community or other causes?

There is a free, downloadable re-tirement calculator on my website at www.backswath.com.

Similar calculators are available from investment advisers, but mine is farm-specific and adapted from Manitoba Agriculture’s RetirePlan. It requires that you enter certain information, such as:

  • birth dates
  • life expectancy
  • inflation rate
  • rate of return on investment
  • current income tax rates

You are asked to record your current monthly living costs, which is one area where I find information to be insufficient.

Detail is important. If the information is not readily available, work through an exercise to determine your actual living costs. The calculator applies the inflation rate you provided and forecasts what your living costs through retirement will be, so it’s important to get an accurate starting point.

Pension information is required. Old Age Security information is readily available through the Canada Revenue Agency website. Canada Pension Plan information is specific to an individual, and you can determine your entitlement by visiting a Service Canada office or by accessing www.servicecanada.gc.ca.

The retirement calculator also records savings, such as registered saving plans and tax free savings accounts, large capital expenditures in retirement and large inflows of money, such as those from the sale of land. Ongoing income in retirement is also entered, such as employment and land rent.

The calculator provides a summary once information is entered. It indicates if there is enough money through retirement and what residual may exist, given life expectancy. It will also indicate if there is a shortfall.

What-if scenarios can be entered.

For example, the retiring generation estimates they will need $500,000 from the farm to adequately fund their retirement.

Working through the calculator indicates there will be a shortfall by age 76. They can increase the capital from the farm to $750,000 and see if that will be sufficient. Any number of options can be considered, such as increasing rental income or decreasing retirement needs.

There is another significant benefit to using the calculator: the ongoing farming generation can apply the retirement estimates to the farm’s ongoing financial performance. How will the $750,000 be paid? Will it be financed in whole or in part? How will this affect the farm?

Scenarios can be analyzed in an attempt to find mutually workable arrangements. The calculator should be updated at least annually to reflect changes in family and farm circumstances.

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