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Small Farm Conference Prresentation-UMES
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What Small Farm Operators Need to Know About Personal Finance
Barbara O’Neill, Ph.D., CFP®, CRPC®Professor II and Extension Specialist in
Financial Resource ManagementRutgers University
Workshop Topics
• “New Normal” financial realities
• Focus group findings with NJ farmers
• 10 essential personal finance skills
• Personal finance resources for farm families
• Financial Q & A
New Normal Analogy
The “New Normal” and the Trump Plaza Hotel (Atlantic City, NJ)
What is the “New Normal”?• A constellation of economic events coming together
– Projected to linger throughout much of the 2010s decade
– Rebounds: 2017 for labor market? 2021 for housing market?
• Different trends than those experienced previously
• Puts a “framework” on recent events– People like to identify patterns to make sense of them
• Instructive but always subject to change– Dangerous to assume “New Normal” will last indefinitely
– Some NN trends will have long-lasting impact (e.g., concerns about employee benefit sustainability and “broken promises”)
Characteristics of the “New Normal”
An extended period of:
• Slow U.S. economic growth
• Low single-digit average annual stock returns
• Stubbornly high unemployment levels
• Precarious job security (public and private sector)
• Struggling housing market
• Tightened credit standards
• Increased precautionary household savings and debt repayment
• Decreased household spending
• Ultimately, when financial crisis abates, higher inflation (? ) (minority view: consumer deleveraging will mitigate government debt)
Why a New Normal?
We didn’t just have a perfect storm…
…We had a perfect TORNADO!!!
Recent Financial Shocks• Recession/Shrinking economy (GDP)
• Collapsed and merged investment banks
• Bank failures and government takeovers
• Increasing cost of basic necessities
• Mortgage defaults and high foreclosure rates
• Declining home values
• High unemployment rates
• Bear market/stock market volatility
• Increased poverty rates and rich-poor “wealth gaps”
• “The Paradox of Thrift”
Four Common Aftermaths of Financial Crises
• Deep and prolonged asset market collapses
– Housing prices
– Stock market indices
• Profound declines in output (deleveraging)
• High unemployment (in both public and private sector)
• Explosion in government debt as tax revenues decline
Reinhart & Rogoff (economists) study of past financial crises: takes at least a decade to recover– The Aftermath of Financial Crises:
http://www.nber.org/papers/w14656
Baby Boomers and Older Gen Xers Especially Affected By the Financial Crisis
• Fully experienced, not just one asset bubble- BUT TWO- during long stretches of their working lives– “Tech Bubble” and extraordinary run of double-digit stock
market returns in late 1990s– “Housing Bubble” during much of the 2000s
• Limited recovery time for battered investments
• Money Magazine (April 2009):
“A generation of Americans grew into middle age thinking that they had more wealth than they really did and their future was a lot more secure than it really was.”
For Some, the Dream of Upward Mobility Appears to be Slipping Away
How People Receive “Bad News”DABDA Model (Elizabeth Kubler-Ross Model)
The “Retirement Planning Grief Cycle”• Denial: “Not to Worry. This is just a blip and things will get back to
normal soon” OR “I’ll be OK. I’ve had this job for 20 years”
• Anger: “This isn’t fair. They’re taking away [X]” OR “I’m really mad. They’re cutting my retirement benefits”
• Bargaining: “Maybe they won’t lay me off if I agree to a pay cut” OR “I’ll ask the union to demand they exempt older employees from this change”
• Depression: “It’s hopeless. I’ll never be able to retire” OR “I’ll probably end up a bag lady when I’m older”
• Testing: “If I adjust my spending or work a little longer, I could probably still retire comfortably” OR “I’ll do some work on the side to make up for what I lost from the pay freeze”
• Acceptance: “I’m OK. I have a new financial plan for my retirement” OR“I’ve figured out a few good ways to live on less”
Some Research Findings About Farm Family Finances
• Face-to-face focus groups in 2 New Jersey counties (2008)
• To determine learning needs related to retirement planning
• Participants included:
– Full-time farmers
– Part-time farmers
– Land owners
– Renters
– New producers
• Most plan to farm at least part-time in retirement
• Most had some type of retirement account such as an IRA (often through a spouse)
• Fear of legal restrictions and regulatory impacts on development and land values; high medical expenses; family feuds; and losing the farm
• A smooth and equitable transfer of the farm concerns families with farming and non-farming heirs.
• When no heirs are interested in farming, the farm’s future is uncertain
Key Focus Group Findings
Some FG participants avoided tax-deferred savings plans for the self-employed because of
Future income uncertainty
A desire to avoid administrative paperwork,
The legal requirement to fund employees’ accounts if they make plan contributions for themselves.
Concerns About Retirement Savings Plans for the Self-Employed
10 Things Small Farm Operators Need to Know About Personal
Finance…at ANY Age in ANY Economic Environment
1. Your Financial Goals
• Include a specific date (e.g., 2014)
• Include a specific cost (e.g., $7,000)
• Develop an action plan to achieve the goal (e.g., “I will contribute $400 monthly to an IRA [or SEP]”)
• Measure your progress periodically
2. The Nuts and Bolts of Self-Employment
• Business plan
• Irregular earnings (“feast or famine” budgeting)
• Quarterly estimated tax withholding
• Self-funded retirement savings plan(s)
• Self-funded health insurance
3. Your Net Worth, Cash Flow, & Budget
• Net Worth = Assets - Debts
– Calculate your net worth annually to measure your financial progress
– RCE net worth Excel spreadsheet: http://njaes.rutgers.edu/money/default.asp#resources
– Calculate the percentage of your net worth in farm-related assets
• Cash Flow = Income – Expenses (past)
• Spending Plan/Budget = Income – Expenses (future)
– http://njaes.rutgers.edu/money/pdfs/fs421worksheet.pdf
4. How to “Pay Yourself First”(Automated Savings)
• 401(k)s, 403(b)s, Section 457 employer tax-deferred retirement plans (through off-farm employment)
• Automatic checking to savings deposits
• Mutual fund automatic savings programs that regularly debit a bank account for deposits
• DRIP accounts for stock purchases
• Regular savings withdrawals from money earned during growing season
Try to give savings the same “respect” as major household bills (e.g., car payment)
5. How to Use Credit Wisely• Check your credit file regularly; correct errors, if any
– www.annualcreditreport.com
• Pay credit bills on time (35% of credit score)
• Avoid charging >50% of available credit
• Avoid co-signing loans for others
• Accelerate debt repayment with PowerPay
– http://powerpay.org
• Pay more than the minimum payment!
– $3,000 balance, 18% APR
– 3% minimum payment ($90): 14 years; $2,625 interest
– 6% minimum payment ($180): 6 years; $938 interest
6. Tax-Avoidance Strategies
• Legal tax-reduction strategies
– Not the same as “tax evasion” (a crime)
• Business-related purchases
• Off-farm tax-deferred savings plans
• Small business tax-deferred savings plans
• IRAs
• Tax-exempt securities (e.g., municipal bonds and tax-free bond mutual funds)
– Know your marginal tax bracket and compare taxable and tax-free investments
7. Essential Versus Non-Essential Insurance
• Cover risks with the largest potential losses, not the most frequency of happening (e.g., liability, disability, death)
• Avoid unnecessary insurance (e.g., limited health policies, dread disease policies)
• Inquire about available discounts and the cost of various options (e.g., auto insurance deductibles)
• Consider LTC insurance or good alternatives
• Purchase adequate disability insurance to protect your income stream
– Farming has most accidents of any occupation!!!
8. Savvy Investment Strategies• Weigh the return on farm vs. other investments
• Consider some stock to hedge inflation
• Seek higher-yielding cash assets: online bank accounts, credit union CDs, savings bonds
• Ladder CDs and bonds (staggered maturities)
• Dollar-cost average investment deposits
• Acknowledge “true” investment risk tolerance level
– http://njaes.rutgers.edu/money/riskquiz/
– NEVER invest in anything you don’t understand or feel comfortable with
• Rebalance portfolio as needed
9. How to Be Secure in Later Life
• Save as much as you can whenever you can
• Carefully invest windfalls (e.g., farmland preservation, land sales)
• Invest in tax-deferred retirement savings plans
• Do a retirement savings need calculation (Ballpark Estimate)– http://www.choosetosave.org/ballpark/
• If you don’t plan to stop working, plan to enjoy “retirement activities” without actually retiring (Fahlund, C. Delaying Retirement, But Not Your Retirement Dreams)
10. Estate Planning Essentials
• Key Documents
– Will
– Living Will/Health Care Power of Attorney
– Durable PoA
• Buy-Sell Agreement if multiple farm owners
– Backed by life insurance
• Life insurance for liquidity for estate taxes
• Attorney who specializes in small business legal issues and estate planning
Online Personal Finance Resources for Farm Families
Investing for Farm FamiliesOnline Home Study Course
http://www.extension.org/pages/Investing_for_Farm_Families
Free and available 24/7/365 through eXtension
Later Life Farming Home Study Coursehttp://laterlifefarming.rutgers.edu
Retirement Estimator For Farm Familieswww.ces.purdue.edu/farmretirement/
Financial Education Matters-Stay Informed!
• Classes
• Publications, books, etc.
• Web sites
• Financial advisors
• Government and non-profit agencies
• Social media
Prudent Steps for Everyone to Take• Use cash and borrow less (don’t accumulate new debt)
• Pay off what you owe
• Build an emergency “war chest”
• Prepare a spending plan
• Become a penny-pincher
– Frugality is fashionable
– Coupons, groupons, employer discounts, consignment shops, simply asking for a price break where none is posted
• Invest in high quality companies and fiscally strong countries
• Invest in yourself; try learn something new every day
Major Take-Away: Focus on What You Can Control
CAN Control
• Healthy lifestyle
• Spending and saving habits
• Human capital investments
• How you spend your time
CAN’T Control
• Speed of economic recovery
• Financial Markets
• Labor Market
• “Broken promises”
Questions and Comments?
Barbara O'Neill, Ph.D., CFP®, CRPC
Extension Specialist in Financial Resource Management and Professor IIRutgers University
Phone: 732-932-9155 Extension 250
E-mail: [email protected]
Internet: http://njaes.rutgers.edu/money2000/
Twitter: http://twitter.com/moneytalk1
