When NOT to Invest in Your Dairy

When does not investing in the dairy actually improve the odds of sustaining that family dairy?

Each year, farm families across the USA face a dilemma: how to provide 25+ years of reliable retirement income for a retiring owner while still allowing the farm to grow. All too often, a large payout or decades of payments to an owner hamstring a dairy. It's hard to expand if large amounts of cash leave the business each year.

If more than one owner is retiring at the same time, it's even more difficult.

Questions such as:

• "How much does an owner deserve to take from the farm?"
• "When does retirement occur?"
• "Is my retirement income at risk based on the actions of the next generation on the farm?"
• "What happens if I want a lavish retirement while my business partner wants something less?"
• "If the dairy wants to expand, does that mean my retirement income falls?"

It's not hard to see the potential for stagnation in farm growth, conflict between generations, or both. When retirements are tied only to the farm operations, the list of potential issues is long and ongoing.

It's a hard topic. What's a solution?

We have seen a myriad of retirements, succession plans, and payouts. There isn't a one-size-fits-all, but one method has consistently worked, and it's simple.

The farm is not on the hook for anyone's retirement. Everyone funds their own retirement from non-farm operating assets.

Everyone funds their own retirement, and no farm operational assets (barns, cows, tractors, shares, cash, etc) are sold to the next generation to fund retirement. Instead, the land is rented back to the farm. Social Security is taken. The balance is made up by cashing out retirement plans, rental homes, land rent, or ethanol plants—anything but farm assets.

Fully funding an IRA each year from the early twenties through a full retirement age, coupled with Social Security, is often enough. With this strategy, many generations have found a nice nest egg capable of a nice retirement income for 25+ years.

Investing outside the farm for retirement might seem unappealing, but ironically, it puts the farm's legacy in a better position. I was going through this with a young farmer, and he stopped me and said. "In the big picture of how much money it takes to run my dairy, funding a retirement plan isn't much. I'll spend less than a used tractor over a lifetime of investing into my retirement, and I don't have to buy it all at once. I can buy it over 40 years!"

Look at it any way you like, but NOT requiring the farm to fund retirements is good for sustaining farm growth and strengthening a legacy.