They are making good money but we are told by the “experts” that it is not if, but when, NZ gets foot-and-mouth disease.
If that happens, Sid and Sara could lose everything.
Single risk & no diversification
The cold hard reality about many farms, businesses or orchards is that they often produce just one product, crop, sell a single item, or work in a single sector. If the worst happens, they can be wiped out.
Tragically it does happen - Kiwifruit orchards wiped out by PSA disease.
Yes it is true, risk is everywhere and “nothing ventured, nothing gained”. Young people in particular have to start somewhere and risk is inevitable as part of getting ahead.
But what if you have been at it for quite a while ? You may have done quite well, but getting older and probably still have most of your eggs in one basket, and so you are still at quite high risk.
· Global recession
· Accident or Illness
· Death of owner or spouse,
· Entrepreneur illness or accident
· Key staff illness or accident
· Economic downturn in NZ
· Poor produce prices
· Foot-and-mouth disease
· Imported pests
· Rising mortgage rates
· High dollar
You won’t get wiped out if you are diversified.
The factors for & against
· Your age ?
· Your equity or your debt to equity ratio ?
· Your energy ?
· Your health ?
· Risk – how much do you rely on one single market or product ?
· Will you have enough income if you sell ?
Some people won’t
Middle aged people might be doing well, have a passion for it, and are on top of their debt.
Older people might agree with me, but still not want to sell, as that’s what they like and that’s what they know.
While things are booming, some will stay in for the profit (like the current milkfat price).
Selling Big Assets
“Know when to hold it, and know when to fold it.” - Kenny Rogers
Not always that easy to do, of course, but perhaps the key factors are your age and economic cycles.
· Sell in boom.
· You don’t live forever.
· If a downturn arrives sooner rather than later, do you want to wait for the next upturn?
· Prices don’t rise forever.
· Downturns can sneak up on you.
· Over exuberance can ambush you when times are good.
· Talk to more than one adviser if in doubt.
· Don’t delay or haggle too much over a good price.
· “A bird in the hand is worth two in the bush.”
If you are a good operator and sell, you will most likely get a lower return, maybe much lower, than you were used to, by working and using your expertise and energy.
If Sid and Sara sold up, bought a good house for $1 million, they could invest $1.5 million.
$1.5 million invested @ 5% pa drawing down $6,000 per month ($72,000 pa).
A nett $100,000 pa income
Govt. super of $28,000 (if over age 65) plus $52,000 from investments .
Increasing at 3% pa to allow for inflation, their $1.5 million will last 27 years.
They have a debt free home to “fall back” on as well.
You can dramatically reduce risk
Older well established owners of farms, businesses and orchards can dramatically reduce risk.
Either by selling up, or by downsizing and getting a nice pile of cash out, and diversifying .
Supplied by Alan Clarke, financial & retirement adviser, & author. His second book is virtually complete, & he also writes regular articles for the media & on line – see www.acfs.co.nz
Alan is an independent authorised financial adviser (AFA) FSP26532 & his disclosure statement is available on request and free of charge.