The biggest lesson in farming is…………………
We are told that the average yield / income from a farm in NZ is below 1%.
Why on earth would anyone be a farmer then?
So a lot of farmers get by on pretty low incomes for years and years and years, but when they come to sell up, they get several million dollars.
So 30 years of hard work, pretty average income, and a big gain late in life.
I’ll leave it you you to decide if that makes sense or not.
If they earn a lowish income it will be hard to build up a good emergency fund for illness, accident, drought, flood, storm or poor farm gate prices.
And if a downturn hits and they have not salted away some emergency money, they can find themselves in financial trouble.
The biggest lesson from small businesses are …………………
Again many people work hard, gradually pay off debt and eventually have a business that is worth $500, 000 or $1,000,000 or more.
But is it? If their business is substantially built round them, and then they sell (depart) will the customers stick?
How often do we see business for sale for a few years and then close down and liquidate? Because the are no buyers.
Relying on capital gain or a high business value at the end of their working life may not be such a good idea.
It would be smart if they plan to have some substantial investments outside their business as and when cash flow allows.
Put another way, what if they thought their business was worth $500,000 but they are only able to get $200,000 for it.
They will be glad if they have $200,000 to $400,000 built up elsewhere.
We all know some retired people, and we all know some retired people who are struggling.
A couple trying to live off government super of $30,000 pa will find it tight.
It is even harder for a single or widowed retiree at $20,000 pa.
Cash flow is king.
They can’t eat capital gain. If they have made good capital gains on their property, but have no cash, the will eventually be forced to sell.
They can’t spend capital gains till they sell (and they have to live somewhere).
Retirement can be pretty tough going for those who have not planned ahead, and even worse for those who retire too soon.
The biggest lesson from property is …………………………
Capital gain is great, but it is no help in emergency.
Illness, or accident, or redundancy, or economic downturn, or poor prices, or drought, or flood, all will result in the need for cash asap.
Capital gains are not cash. Unfortunately, when a crunch hits, property is not a liquid asset, and cannot be turned into cash quickly ( and banks don’t lend to people who are in trouble).
The biggest lesson from family succession is …………………………
How many farmers and business people would love to put a son or daughter onto the farm or into their business, but just can’t afford to.
Commonly farmers and business people plough their profits back into the farm or business and so have little other cash around.
Then they get worn out and want their son or daughter to take over. But hold on minute. That means two families have to live off one cash flow source. Is it enough for two?
And do mum and dad have to buy a house elsewhere. Or does the son or daughter have to build a house?
Where is the money / cash going to come from? And at the same time, one income is split into two?
It needs planning ahead. A lot of planning and well ahead.
Just putting more and more of their profits into the farm or business is not always a good idea.
Life and money can be mean……………….….
You work hard for 20 to 30 years, want to reward yourself, and then your body says no more, and along comes these problems.
Sometimes life does not seem fair. Even worse, you pick up your newspaper and read this (sorry, ed.).
The good news
Most of these problems can be avoided, or at least minimised.
We just need to plan our finances all the time, and seek unbiased unemotional advice.
In the end we not be able to do all we want to, but any planning is better than none.
So what’s the problem with capital gains?
It does not create the cash flow you may need to do what you want.
Or alternatively the business/property/ farm may have to be sold anyway.
In which case we should focus a tad less on future gains, and a tad more on living for today.
And building up liquid assets too so we have more choices:
- In emergency
- For succession
- For retirement
Supplied by Alan Clarke, financial & retirement adviser, & author.
His 2nd book “The Great NZ Work, Money & Retirement Puzzle” is available on line.
Alan is an independent authorised financial adviser (AFA) FSP26532.
His disclosure statement is available on request and free of charge.