Investing For Retirement
The goal of many agricultural families is to pass their farm or ranch to their children and/or grandchildren. The income from the farm or ranch, however, is often not high enough to support two or more families. And, because most agricultural family’s wealth is represented almost entirely by the value of their farm or ranch, the parents aren’t able to rely on income from other assets.
One option for these families is to sell a portion of their land to fund the parent’s retirement. Many, however, don’t like this option. This is why it is important to have other investments to draw income from.
Qualified retirement plans such as IRAs, SEPs, Simple IRAs and 401(k)s offer significant tax-advantages and are smart ways to accumulate money for retirement. Annual contribution limits vary depending on the type of plan. The current annual contribution limit for IRAs is $5,500 if you are under age 50 and $6,500 if you are age 50 or older. If you are married and only one spouse works, you can still contribute the maximum amount for each person under a Spousal IRA. To contribute this amount, you must have at least $11,000 or $13,000 of earned income, depending on your age.
The annual contributions for SEPs, Simple IRA and 401(k) are much higher.
A 401(k) has a maximum annual contribution limit of $53,000 if you are under age 50 and $59,000 if you are age 50 or older. Contributions to these plans are based upon income. For those families with no employees, a Solo 401(k) is a great option because it offers a high contribution limit without the costs associated with a traditional 401(k) plan. Solo 401(k)s also offer a Roth component.
Selecting the right type of retirement plan is very important. What is more important is selecting the right investments for those plans.
In my experience, most agricultural families’ investment experience is limited to land and livestock. I commonly speak with families that have a net worth of several million dollars with little to no money in a qualified retirement plan.
Agricultural families tend to be conservative investors. Many invest in Certificates of Deposits (CDs) because of the safety they feel it provides. While CDs don’t expose you to market risk, they expose you to inflation risk – the risk of your investments not outpacing the rate of inflation. Outpacing the rising cost of living is a goal for most investors.
By investing in bank CDs, you are essentially trying to protect yourself from default risk. Default risk is the risk that a company or individual will not be able to make the required payments on the money they owe you. Because of the Federal Deposit Insurance Corporation (FDIC) insurance protection offered by banks, people feel they do not have to worry about their money if the bank goes broke.
The FDIC is a U.S. government corporation that operates as an independent agency. As of January 2016, FDIC provides deposit insurance guaranteeing the safety of a depositor’s accounts in member banks up to $250,000 for each deposit ownership category in each insured bank. Although the FDIC is chartered by Congress, they do not receive any federal funding. Banks pay insurance premiums to the FDIC. If a bank goes bankrupt, they file a claim with the FDIC.
If you’re concerned about protecting your money from default risk, a potentially better option is to invest in bonds issued by the U.S. federal government. The U.S. federal government doesn’t just insure your money. Rather, it guarantees it. The guarantee printed on each bond issued by the government is a “full faith and credit obligation” of the government of the United States of America.
The U.S. government has the highest credit rating in the world and has never defaulted on an interest or principal payment. You might say, therefore, that it is the issuer of the world’s safest investments. So, if you desire a safe investment, instead of a bank CD, consider investments backed by the full faith and credit of the U.S. federal government.
In our next article, we will compare investing in CDs to a mix of stock and bond mutual funds.
Chris Nolt is the owner of Solid Rock Wealth Management, Inc. and Solid Rock Realty Advisors, LLC, sister companies dedicated to working with families around the country who are selling a farm or ranch and transitioning into retirement.
To order a copy of Chris’s new book: Financial Strategies For Selling A Farm Or Ranch, visit Amazon.com or call Chris at 800-517-1031. For more information, visit solidrockproperty.com and solidrockwealth.com.