PEACE RIVER, Alta. – Getting started is the hardest part of financial planning, says Jo-Ann Hall of Alberta Agriculture.
Women should be as involved as their husbands in the family’s finances because they are often left as widows, she told a workshop at a recent farm women’s conference.
To set up a plan the family needs to do four things:
- Know the annual family expenditures.
- Earmark something as an emergency fund, whether it’s a bin of grain or a few cows. Most farm families don’t have the three-month chunk of cash often suggested by urban financial planners.
- Take into consideration when capital items like appliances and furniture will need to be replaced.
- Determine your lifestyle and any changes planned, such as more travel, a foreign holiday or new house.
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Prepare for uncertainties
The family should also plan for the unknown, which includes:
- Average age of death. For women it’s 78; men are three years sooner.
- The inflation rate. It’s 0.2 percent a year now, but follows a cycle. The average in the past 50 years has been 4.3 percent annually.
- Political changes to the income tax system. The federal government has been testing the idea of taxing RRSPs.
- Changes to social programs like the Canada Pension Plan due to deficit cutting.
Hall said the Canada Pension Plan, introduced in 1966, didn’t factor in the retirement of the baby boom generation. Many people assume there will be no Canada pension when they retire, but Hall said this is not true. The government is already raising the pension contribution made by employees and employers from today’s 5.2 percent. The pension tax will take about 10 percent of the work force’s cheque in the year 2011.
Ottawa could also introduce a clawback and tax back the pensions of the richer citizens, just as it does today with the Old Age Security payments.
A separate net worth statement for the farm business and for the family’s personal belongings should be drawn up, she said.
“It’s a listing of what you own and what you owe. Subtract what you owe and that’s your net worth.”
Ideally these statements should be done once a year so families can see the changes in their lifestyle and in their business, as often required by a financial lender.
“Sometimes when you feel you’re not getting anywhere, when prices are low, you can use this net worth statement as a checkpoint to see if your equity is building in the farm.”
Hall said a popular form of saving money is the RRSP which is really a tax shelter, not an investment. Tax is paid when the RRSP is cashed in, but usually that happens when there is no other income so the money is taxed at a lower rate. While spouses can buy RRSPs for each other, children can’t have them in their own name until they are adults.
Hall said children should be taught the benefits of such funds because “the quicker and earlier you can get your money working, the better.”
NISA accounts can also work well. Farmers who have the cash sales can put money into the account and have it matched by government. More money can be invested in a NISA account than an RRSP.
“The drawbacks of NISA are you must take it out as a lump sum and pay the tax or draw it out over a five-year period,” said Hall. “NISA was never developed as a retirement fund for farmers but it works pretty well as one.”
