Retiring farmers face declining standard of living

Retirement doesn't look too rosy for the American farmer, according to a study by the American Corn Growers Association and Americans for Secure Retirement. But a new bill proposed in Congress could give them the tax break they need to turn hard-earned assets into income.

The study said that America's farmers are at a higher risk of experiencing declining standards of living in retirement, and warns Congress that to provide farmers with a secure retirement, “the challenge goes beyond Social Security.”

The report details how farm and ranch operators and their workers face significant and unique obstacles in planning and providing for their retirements. “With less access to employer-based pensions and volatile business risks, farmers often face a more difficult retirement path than the average American,” noted Larry Mitchell, CEO of ACGA.

The study recommends that policymakers encourage investments in retirement vehicles that provide steady income that cannot be outlived, such as lifetime annuities, to complement Social Security.

Lifetime annuities are especially helpful to farmers because many have real, tangible farm assets such as farmland, machinery and livestock and non-farm assets such as stocks, bonds, real estate and cash, that if managed properly can essentially provide a paycheck for life, according to ACGA.

A bill introduced in Congress earlier this year called “The Retirement Security for Life Act” would address many of the issues cited in the report and is gaining bi-partisan support among key legislators, according to ACGA. Under the proposal, individuals would not pay federal taxes on one-half of the income generated by lifetime annuities, up to a maximum of $20,000 in excluded income per year. For a typical American in the 25 percent tax bracket, this would provide an annual tax savings of up to $5,000.

“We believe legislation that encourages lifetime annuitization would give farmers more tools to control their retirement standard of living,” Mitchell said.

Here's an example of how the bill would help a married farm couple:

Larry and Anne are married, both 67 years old. They own and operate a 450-acre corn farm as a family business. Now ready to retire, they have decided to sell their family farm and farm equipment to generate income for their retirement.

Their farm is worth approximately $900,000, and they have $100,000 in equipment that can be auctioned off. Less $450,000 in loans and taxes, the couple is left with $550,000 from the sale of their land and equipment.

Larry and Anne plan to reside in their current home, which they own together. Because they own a family farm, they do not have a traditional employer-based retirement plan — their farm assets are their most significant retirement assets. They have managed to save some money in an individual retirement account and some additional money in a deferred annuity. They plan to use these assets, along with Social Security and income generated by the sale of their farm asset, to support themselves during retirement. Now they need to convert these assets into an income stream they can live on the rest of their lives.

To do this, Larry and Anne make an additional $350,000 contribution to their annuity using the farm sale proceeds, then elect to receive $2,500 per month (before taxes) from their annuity for the rest of their lives. The annuity also guarantees that if both Larry and Anne die within the next 20 years, their beneficiaries will continue to receive the monthly annual annuity payments during that period.

When added to their monthly Social Security benefits and anticipated IRA withdrawals, the annuity payments will provide them with the steady retirement income they desire and will leave them with $200,000 in the bank for discretionary spending and emergencies.

Because Larry and Anne are in the 10 percent tax bracket, their tax bill for 2005 would be about $705. If the Retirement Security for Life Act is enacted, their tax bill would be reduced to $32. This amounts to about an extra $55 per month they can use towards their basic living expenses.

Here are more findings from the study:

  • Farmers are less likely to participate in employer-sponsored retirement plans, further limiting their sources of retirement income. Just 30 percent of agricultural workers in America work for an employer with some form of retirement plan. Less than a quarter actually participate in a retirement plan. This means that the vast majority of farm workers have no other guaranteed sources of retirement income beyond Social Security.

  • Farming as a business is far more volatile than most, making saving for retirement more difficult. Everything from weather and biological risks to global economic conditions to policies can cause significant variation in farm income. The variability of farm household income far exceeds all U.S. households.

  • Retirement ripple effect in rural communities. Of the 386 counties in the United States with persistent poverty, 340 of them are rural. Retired farmers and farm wives who outlive their savings only add to the demands that strained local governments are facing to provide health, transportation and other social services to the poor and elderly.

  • Farm wives are particularly vulnerable to declining standards of living in retirement. Today an average 65-year old woman can expect to live nearly an additional 20 years, and there is approximately a one in three chance that she will live to age 90. Because they live longer than men and spend more time in retirement, farm wives are especially at risk for drastic declines in their standard of living in retirement. According to the USDA, 66 percent of rural persons age 60 or above earning less that $10,000 a year were women, and by 85, the statistic jumps to 80 percent.

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