Lifestyle Costs “Missing in Action”

 



Are you like me? Do you cringe when you go shopping, wondering how much money you will spend?  You name it: food, gifts, laundry detergent, garden seeds, gas, or clothes.  We always need something and we always need money to pay for these things.  

The truth is that our purchases add up to a grand sum. Yet when people are asked how much money they need for their lifestyle, they are clueless.  This information always remains missing in action because we don’t track and tally up these expenditures. To further complicate matters, these small everyday items only make up a portion of our total lifestyle costs.  We haven’t begun to add into the equation the big ticket items, like vacations, appliances, furniture, or home renovations, to name a few.

When you operate a business, you are aware that business income is required for operating expenses, unexpected emergencies, and loan payments for land, buildings and machinery. You then need to consider the portion drawn from the business for personal lifestyle expenses.   Answering the critical question, “How much is enough?” can be tricky when aligning your lifestyle and income. 

At a recent Farm Succession Planning Seminar, Kim Gerencser, President of K.Ag Growing Farm Profits Inc., posed the obvious question:  How does your total lifestyle relate in proportion to your income?  Kim’s illustration below indicates that when your income is on the positive side and your lifestyle matches, you are a reflection of a “Rock Star”.  When your income is on the negative side but you choose a high maintenance lifestyle, then you’re obviously “Going Broke”.  When your income gravitates to the positive but you choose a low maintenance lifestyle, you’re perceived to be “Scrooge”. When your income remains on the negative side, matching your low maintenance lifestyle, then you are a “Martyr”. 

 

When looking at Kim’s descriptive chart, it is obvious that striking a balance between “Income” and “Lifestyle” is critical for everyone. It’s even more significant when you’re in business. In order for a farm business to thrive and survive, it’s a must to know the amount of your personal lifestyle costs.  In essence, you’re being asked, “How much can the farm afford to pay you?”  

Taking one step further, when the farm is transitioned to the next generation, the question is “How much do Dad and Mom need for their lifestyle?”  They are looking to be fairly compensated for their farm investment so they can live their dream retirement.  Reaching a compromise may seem like a “tug of war” in the negotiation process between the two parties, the retirees and successors. The starting point is knowing the parents’ lifestyle needs to quantify the amount of retirement income.        

Needless to say, some people are confused by an Estate Plan and a Succession Plan.  An Estate Plan details your wishes to allow for a smooth transition of your assets when you die. A Succession Plan primarily focuses on a smooth transition of leadership, management, and ownership of assets while the retirees are alive. The purpose of a Succession Plan is to determine how the owners will access the value they poured into the farm while their farm still remains viable for the next generation.   

To help with the creation of a successful succession plan, a set of guidelines was developed by the governments of Canada and Saskatchewan under the Farm Business Development Initiative (FBDI) program.  Discovering the answers to specific questions ensures a number of critical areas are addressed.     

 

 

One important component in a Succession Plan is “The Retirement Plan, a when, where, and how plan for the retiring couple”.  These questions must be considered:

A.    Can they fund their retirement?

B.    Describe the retiree’s future lifestyle.

C.    What housing is required? What is the capital cost? Where will this money come from to purchase/rent housing?

D.    What is the retiree’s projected annual cost of living including such things as food, shelter, utilities, medical, travel, taxes, etc.?

E.    Does this retirement plan address life expectancy?

F.    What are the tax consequences for this retirement plan?

 

This question keeps appearing, “What is the retiree’s projected annual cost of living?”  It’s evident we need “cash” to pay for our purchases, both our “needs” and “wants”.  The next question which begs an answer is “You can have anything you want in life, you just can’t have everything you want” so what do you really want?

 

Farmers are business people. Analyzing spending costs, both business and personal, is important to define your limits and whether inbounds or out of bounds.  Lifestyle costs can no longer be missing in action. We need to find the number. One simple tally of the personal debit transactions on your bank statement will tell the story so you can know for certain.