How Much Income Do You Want When Exiting Your Farm or Ranch Business?
As with many of the tasks undertaken in farm and ranch succession planning, determining how much income you as a farmer or rancher need when exiting the business is simple, but not easy. For farmers and ranchers, retirement planning looks very different than it does for other business owners. Income is often variable, assets are tied up in land or equipment, and the line between personal and business finances can be blurry. That makes one question especially important: how much income do you actually need in retirement?
The answer starts with understanding your current lifestyle. Many producers are surprised to find they live on less than their gross income suggests. A good first step is to determine your true annual spending—separate from reinvestment in the operation, capital purchases, or debt service. What does it really cost to run your household? Beyond what you absolutely need, what do you want?
Some things to look at are:
Housing Costs
Mortgage Payment
Utilities
Maintenance
Insurance
Property Taxes
Household Expenses
Food
Supplies
Personal Items
Clothing
Cleaning
Transportation
Automobile Purchases
Maintenance and Repair
Fuel
Insurance
Health Insurance
Life Insurance
Long Term Care Insurance
Liability Insurance
Entertainment
Travel
Meals
Clubs
Charitable Contributions
Other Current Regular Expenses
Other Debt Repayment
After you have determined what you will need/want in terms of expenses, consider what income sources will remain post-exit. Will you continue to work in the operation? Will you be leasing land to the operation? Do you have income from sources such as off farm investments? What will you receive in social security? If there is a shortfall, time must be spent on looking at ways to increase income or decrease expenses.
While a practical rule of thumb is that retirees often need between 60% and 80% of their pre-retirement income, this range can be misleading for farmers and ranchers. A more accurate approach is expense-based: calculate your anticipated annual spending and build a reliable income plan to meet it. Sound succession planning can eliminate unnecessary taxes, family conflict, and cash flow problems.
Retirement for farmers and ranchers isn’t just about stopping work—it’s about reshaping how your operation supports you. With thoughtful planning, you can create a steady income stream that reflects both your lifestyle and the legacy you want to leave behind.
This post is for informational purposes only and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem. Nothing herein creates an attorney-client relationship between Hallock & Hallock and the reader.