Small farm conference what sf operators need to know about personal finance
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Transcript of Small farm conference what sf operators need to know about personal finance
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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
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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
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New Normal Analogy
The “New Normal” and the Trump Plaza Hotel (Atlantic City, NJ)
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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”)
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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)
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Why a New Normal?
We didn’t just have a perfect storm…
…We had a perfect TORNADO!!!
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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”
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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
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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.”
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For Some, the Dream of Upward Mobility Appears to be Slipping Away
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How People Receive “Bad News”DABDA Model (Elizabeth Kubler-Ross Model)
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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”
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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
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• 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
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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
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10 Things Small Farm Operators Need to Know About Personal
Finance…at ANY Age in ANY Economic Environment
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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
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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
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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
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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)
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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
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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
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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!!!
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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
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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)
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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
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Online Personal Finance Resources for Farm Families
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Investing for Farm FamiliesOnline Home Study Course
http://www.extension.org/pages/Investing_for_Farm_Families
Free and available 24/7/365 through eXtension
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Later Life Farming Home Study Coursehttp://laterlifefarming.rutgers.edu
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Retirement Estimator For Farm Familieswww.ces.purdue.edu/farmretirement/
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Financial Education Matters-Stay Informed!
• Classes
• Publications, books, etc.
• Web sites
• Financial advisors
• Government and non-profit agencies
• Social media
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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
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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”
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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