Small Farm Conference Prresentation-UMES

1. 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 Management
Rutgers University
oneill@aesop.rutgers.edu

2. 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

3. New Normal Analogy
The “New
Normal” and
the Trump
Plaza Hotel
(Atlantic
City, NJ)

4. 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”)

5. 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)

6. Why a New Normal?
We didn’t just have a perfect storm…
…We had a perfect TORNADO!!!

7. 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”

8. 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

9. 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.”

10. For Some, the Dream of Upward
Mobility Appears to be Slipping Away

11. How People Receive “Bad News”
DABDA Model (Elizabeth Kubler-Ross Model)

12. 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”

13. 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

14. Key Focus Group Findings
• 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

15. Concerns About Retirement Savings
Plans for the Self-Employed
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.

16. 10 Things Small Farm Operators
Need to Know About Personal
Finance…at ANY Age
in ANY Economic Environment

17. 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

18. 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

19. 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

20. 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)

21. 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

22. 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

23. 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!!!

24. 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

25. 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)

26. 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

27. Online Personal Finance
Resources for Farm Families

28. Investing for Farm Families
Online Home Study Course
http://www.extension.org/pages/Investing_for_Farm_Families
Free and available 24/7/365 through eXtension

29. Later Life Farming Home Study Course
http://laterlifefarming.rutgers.edu

30. NH Family Farm Finances Web Site
www.familyfarmfinances.org

31. Who Will Get Grandpa’s Farm?
www.ces.purdue.edu/farmtransfer

32. Retirement Estimator For Farm Families
www.ces.purdue.edu/farmretirement/

33. Financial Education Matters-
Stay Informed!
• Classes
• Publications, books, etc.
• Web sites
• Financial advisors
• Government and non-profit agencies
• Social media

34. 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

35. Major Take-Away:
Focus on What You Can Control
CAN’T Control CAN Control
• Speed of economic • Healthy lifestyle
recovery
• Spending and saving
• Financial Markets habits
• Labor Market • Human capital investments
• “Broken promises” • How you spend your time

36. Questions and Comments?
Barbara O'Neill, Ph.D., CFP®, CRPC
Extension Specialist in Financial Resource Management and
Professor II
Rutgers University
Phone: 732-932-9155 Extension 250
E-mail: oneill@aesop.rutgers.edu
Internet: http://njaes.rutgers.edu/money2000/
Twitter: http://twitter.com/moneytalk1