Rutgers New Jersey Agricultural Experiment Station [Later Life Farming]

Module 1a: What is a Retirement "Paycheck"?

Question: What exactly is a retirement "paycheck"?

Answer: It is income received on a regular basis after someone stops working or decides to cut back on work hours in later life. A retirement "paycheck" makes it easy to pay monthly bills, which provides financial security and peace of mind. It also continues a money management system that most people are used to before retiring where they received income in regular payments. While farmers and other self-employed business owners may not have always earned a "regular" income while working, as retirees they'll want a steady income to pay household expenses, travel, and achieve other important financial goals.

Another benefit of a retirement "paycheck" is that it can be structured to provide a "safe" withdrawal rate to reduce the risk of outliving your assets.  Second to out-of-pocket medical expenses, outliving savings is the biggest worry about retirement security according to a 2008 survey by the Charles Schwab Corporation. Researchers have found that an inflation-adjusted withdrawal rate of 4% of a retiree's portfolio balance will generally last for 30 years when the portfolio consists of 50% stocks and 50% bonds. For example, with $500,000 of savings, you would withdraw $20,000 during your first year of retirement and $20,600 and $21,218 in years 2 and 3, assuming a 3% annual inflation rate. As a result of the 2008-2009 economic crisis, however, this model has been refined somewhat. Retirees are now advised to suspend annual inflation adjustments during severe market downturns.

So how does someone create a retirement "paycheck"? There are a number of strategies to arrange regular income payments at regular time intervals. Farmers who own their farm land and equipment also have additional methods that are unique to agriculture, such as renting out parcels of their land to other farmers and receiving structured income payments from the sale of land or through farmland preservation programs.

Listed below are five methods of creating a retirement "paycheck" with money held in savings and investments. This assumes that, of course, that money has either been set aside over a farmer's working years or that a lump sum payment of some sort was received, or will be received, and is available to invest.

  • Automatic Withdrawal Plans - Available through mutual funds, this feature allows investors to designate a dollar amount and a date (e.g., $500 on the 15th of the month). Payments are made by the investment company until the account balance is depleted.
  • Income Replacement (Managed Payout) Mutual Funds - A new type of actively managed mutual fund, with a choice of maturity dates (e.g., 2048) that investors select to match their projected life expectancy. The funds pay a monthly income that is adjusted annually for inflation, and monthly payments continue until assets are exhausted.
  • Bond or Certificate of Deposit (CD) "Ladder" - A "ladder" is a portfolio of bonds or CDs with different maturities (e.g., 6, 12, 18, and 24 months). As each bond or CD matures, the proceeds are reinvested at the longest time interval to maintain the ladder.
  • Regular Withdrawals From Cash Assets - Many financial advisors recommend setting aside enough cash to provide 3 to 5 year's worth of income not provided by Social Security or other sources (e.g., some farmers have spouses with off-farm jobs and pensions) to "ride out" recessions and bear markets. The remainder of a retiree's assets would be placed in stocks, bonds, or mutual funds. For example, if a farm couple plans a $40,000 annual income in retirement and expects $25,000 from Social Security and rent, their income "gap" is $15,000 and 3 to 5 year's worth of cash assets is $45,000 to $75,000. Income can be withdrawn monthly or quarterly, as needed. The cash balance should be replenished regularly, starting with income from bonds and dividends and capital gains from stock when market conditions are favorable.
  • Purchase of Annuities - An annuity is a contract with an insurance company where an investor deposits a sum of money, and the insurance company makes regular payments for the investor's life (or a joint life expectancy with a spouse) or for a fixed time period. Annuity payments are generally based on factors such as age and gender. Investors should shop around for annuities with low expenses that are sold by insurance companies with high ratings for financial stability from insurance rating firms such as A.M. Best, Standard & Poor's, Moody's, Weiss Research, and Duff & Phelps.

Other common retirement "paycheck" methods for farmers include:

  • Post-Retirement Income - Several research studies, plus focus groups conducted by Rutgers Cooperative Extension, have found that farmers plan to continue working far past the traditional retirement age of 65. Farming is viewed as a lifestyle as well as an occupation. Income earned in later life can be an important part of one's retirement "paycheck." In addition, continued employment provides an opportunity to keep depositing money into retirement savings and to earn a higher Social Security benefit.
  • Social Security - Social Security benefits are available as early as age 62 and are discussed in detail in Module 5a.

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