While it may be a generalisation, the basic premise of the request for advice is the goal that mum and dad should retire without having to sell the land thereby allowing the kids to run the property and continue a tradition that has been in the family for perhaps many generations.
However, a rural property is no different to any other business that needs to be handed to the next generation – if the current owner has not accumulated sufficient assets to “walk away” in a comfortable financial position then a sale of some or all of the farm assets will have to occur.
The expertise of succession planning or retirement advice comes in assisting the owners and their families to make decisions within their current financial circumstances – there is no magic panacea or alchemy that will allow an outcome that is outside the current asset base without the use of debt for the incoming owner.
We have written previously about the importance of building a portfolio off farm. This is a goal that should be a part of every business model of every rural producer. Put simply those families that have given time to building a portfolio of assets off farm will have far greater capacity to hand that property down to the next generation.
Unfortunately a bit like a prize breeding herd, an off farm investment portfolio is not accumulated over night. Accumulating assets takes time, and is generally achieved with a steady and consistent cash flow being directed towards the purchase of quality assets.
I have given this opinion many times to various audiences and the general response in the first instance is for people to highlight the obvious difficulties of achieving “steady and consistent” when they are in an industry that is famous for irregular cash flows. I get reminded again and again of the harsh nature of rural business with seasonal conditions bringing drought, floods. Persistent low cattle prices or the persistent high Australian dollar are also put forward as the barrier to achieving a constant cash flow.
Unfortunately the same messages of why it can’t be done have been used for generations – I have even used them myself 20 years ago. The truth is that all of us put up roadblocks to achieving something that looks hard or perhaps a bit out of our comfort zone.
While the harsh nature of the industry you have chosen to work in can be fun to discuss at the local show, it unfortunately does not change the facts. If you want to retire and leave the farm to the next generation you have to have accumulated sufficient funds to give you an income stream that is unrelated to the income of the property – otherwise be prepared to sell the asset.
So recognising all the difficulties, what can you do?
The first step is to recognise the business budget and the family or personal budget are different and should be maintained separately. Your personal goals of retirement annual holiday or whatever, will be different to the goals of the business. If this is not reason enough for you, consider this. If it is your intention that you pass the property to your children then at that time you will be forced to have a separate personal budget, so you might as well introduce it sooner rather than later.
A very important consequence of defining a personal budget as different from the business budget is that it implies the business will be giving you, the owner, a nominated wage or salary each year. This is the certainty that removes the most often discussed roadblock to a steady and consistent cash flow. A nominated wage should not be hard to find because you will already have allocated the money to this. It’s just that the expenses will be hidden within the business costs and drawings rather than isolated to you separately.
Once you have come to terms that you, like your staff, are paid for your endeavours from the business you operate, you can start to allocate what you are going to do with the money in your personal budget.
A simple budget approach is to use the 50/20/30 rule. Where 50pc of your budget is allocated to essentials. These are literally the essentials of life and generally limited to housing, transport, utilities and groceries. You could perhaps expand these to include education and medical but the idea is that this portion is no more than 50pc of your budget and really is only the bare necessities of life.
The next 20pc is allocated to financial wellbeing. This is the portion that takes care of personal debt and is the steady and consistent income stream that will allow you to invest for your retirement. The idea is that this portion is after the bare essentials of life but before you use your money for anything else. The order is important.
The final 30pc is the lifestyle expenses and will include shopping, entertainment and personal expenses – the fun part. What is important about this category is that it is allocated last – after the 20pc allocated to financial wellbeing.
This approach will take some level of discipline to achieve and it will be helpful to articulate why you are doing it. Just like all the self-help books recommend – stating a goal actually does work, just make it achievable. I generally suggest nominating a modest goal in the first instance and raising the bar over time once some discipline has been achieved.
This approach will work, we have been part of some remarkable achievements by people that have chosen to take control of their destiny using this approach. It is too easy to focus on the roadblocks when focussing on the goals will give you so much more financial freedom.
Graham Financial is a privately owned boutique financial planning practice which has been in operation since 1985. AFSL 327520. The advice in this article is general in nature; advice specific to your circumstances should be sought before acting on this advice. The author of this article can be contacted on (07) 4613 0514, by email at [email protected] or online at www.grahamfin.com.au
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