Sound advice Taxes, retirement planning kick off 2024 schedule of grower workshops

The 2024 Agricultural Marketing and Management Organization’s (AMMO) schedule kicked off last month with sound advice on financial planning, planning for retirement, and taxes.

Jordan Thayer, a financial advisor with Morgan Stanley Wealth Management, and Joe Cerrillo, a CPA with CliftonLarsonAllen, presented the information to growers at the Washington Wheat Foundation building in Ritzville, Wash. Following the workshop, growers enjoyed a catered lunch.

Preparing for retirement

Retirement can mean different things to different people, but the important thing, said Thayer, is that folks start preparing for it sooner rather than later.

“What does retirement mean to you?” he asked. “Picture collecting your last paycheck. How old will you be? How do you feel about working in retirement? How is your health? Have you thought about long-term care arrangements, and how you’ll pay for them? All of these things need to be considered.”

Targeting a retirement date is important, but it’s also a good idea to be flexible. The longer one can delay collecting Social Security, the more it can pay. On average, every year Social Security is delayed, the benefits increase by 8%.

Calculating how much income one will need in retirement is a critical step. Thayer recommended that growers itemize their anticipated expenses. Nondiscretionary expenses include mortgage or rent, taxes, utilities, food, and insurance deductibles and premiums. Discretionary expenses include eating out, travel and vacations, hobbies, and entertainment. Next, growers need to identify income sources, including Social Security; pensions; wages (if working during retirement); retirement plan distributions; and investment income. 

“As you calculate that nest egg, how much is tied up in heavy equipment, land, and so forth? A key component is liquidity. That sounds simple, but I can find a willing buyer for Costco stock in a split second. If you’ve got a used tractor, there’s a limited market for that, and it may take a while for it to sell,” he explained.

Thayer added that when calculating investment income, 5% is usually a safe figure to use.

Asset allocation is also an important part of retirement planning. Asset allocation is the process of combining asset classes, such as stocks, bonds, and cash, in a portfolio in order to meet risk and return goals. As retirement creeps closer, generally, the focus in one’s portfolio becomes more conservative, switching from being growth-oriented to more income-oriented. During this process, growers need to take into account factors such as age, withdrawal rates, and risk tolerance. A healthy, 65-year-old couple is expected to need almost $400,000 in today’s dollars for health care expenses in retirement.

Another factor to consider is supplementing retirement income by working. Not only will that make one’s investments go farther, it may also be healthier.

“Medical studies have concluded that in retirement, if you’ve got a reason to get up and out, have a place to go, people to see, and things to do, you’ll have a longer, healthier, happy retirement,” Thayer said.

Contemplating Social Security and Medicare can strike fear into the hearts of the most courageous. Thayer recommended scheduling a phone call with a Social Security administrator to talk through details. He also advised doing a financial plan to map out when income should start, and how it will impact one financially. Medicare is more complicated, and growers need to be proactive about it, especially considering that if one doesn’t file for Medicare by age 65, there are financial consequences. There are also supplemental plans that need to be considered, and not all doctors take Medicare.

“I know of multiple healthcare brokers in Washington who can help you price out supplemental healthcare plans at no cost,” Thayer said. “I won’t lie. Medicare is particularly complicated. Does your current doctor take Medicare? I highly encourage you to double check. That will help narrow down which supplemental plans you look at.”

Finally, Thayer advised growers to monitor their plan regularly and work with a financial advisor to adjust their plan as necessary.

Taxes and succession

Cerrillo tackled two financial subjects everyone has to deal with at one point — taxes and succession. He started out by asking growers if they run their farm like a business.

“You often work in your business, but do you work on your business?” he asked. “How do you maintain your records? Do you know your real income? Do you know your breakeven? Is there a plan to manage your debt? And do you make decisions based solely on income taxes?

He recommended growers use the accrual accounting method versus cash accounting in the management of their business. The accrual method lets farmers match up crop years with income and expenses, reduces the time and effort required when renewing loans, gives a more accurate picture of one’s progress and business value, and does not impact tax returns, which would still be filed using the cash basis.

Farmers have long deferred income as a way to manage (or avoid) taxes, but Cerrillo said payment is just a matter of time. Financial decisions need a business purpose beyond simply avoiding paying income taxes. His advice is to use tools like retirement plans, health savings accounts, gifts, charitable contributions, and managing tax brackets and Social Security limits. 

Cerrillo said growers should know and understand what their deferred tax number is and the potential consequences of that number at retirement (see slide for formula. Note that the 37% rate is for illustration and may not necessarily apply to all situations).

“Avoidance is just kicking the can down the road,” he said. “The answer isn’t always ‘we should pay zero tax,’ it’s ‘maybe we should pay a little bit of tax.’ Continued deferral doesn’t end well. Payment is just a matter of time.”

Cerrillo also touched on estate and succession planning. Growers often get caught up in the perception of “fairness,” especially when there are farming and nonfarming heirs, but the key is to determine what the goals are and then to implement strategies to meet those goals. While starting succession planning can be overwhelming, Cerrillo had a few basics to help growers get started, including talking to a professional and discussing your goals as everything should be tailored to meeting those goals. Other tips include:

• Have a will that may include the additional implementation of trusts.
• Have a power of attorney document for property and healthcare.
• Be aware of the federal and state tax exemption limits and sunsetting federal provisions at the end of 2025, which currently drops the individual federal lifetime exemption by more than half. In Washington state, investigate the agricultural exemption to see if it applies to your situation.

Growers need to understand these documents and what WILL happen versus what they WANT to have happen when they retire or die.

“Be leery of those bearing complicated trust structures,” he added. “Everything has to work, and it has to be explained to you how it works. You need to understand, and it needs to make sense to you. Have them draw you a map if you need to.”