Rutgers New Jersey Agricultural Experiment Station [Later Life Farming]

Module 5b: Tax-Deferred Investing

Retirement planning today is very different than it was decades ago. It is truly not your father's (or mother's) retirement. In fact, many people don't even relate to the word "retirement." Phrases like "second act," "third age," and "refirement" have been used to describe the stage of later life where people transition from full time work to other pursuits. Many people, especially farm families, have stated that they never plan to retire, period.

A few generations ago, defined benefit (DB) pensions were plentiful. Workers were promised benefits according to a formula based on their income and years of service. The most common type of retirement plan today is the defined contribution (DC) plan (e.g., 401(k)s) where workers bear all the investment risk of setting aside an adequate amount of money. DC plan participants must decide if and how much to invest and select specific investment products. Benefits at retirement are based on accumulated savings and investment earnings.

Some farmers are able to access employer-based tax-deferred retirement savings plans through previous jobs, current off-farm employment, or retirement benefits provided by a spouse. Others are completely "on their own" to save for retirement in accounts such as individual retirement accounts (IRAs), Keogh plans, and SEP-IRAs. Unit 7 of the Cooperative Extension basic investing course, Investing For Your Future, contains information about all of these options. Below are three retirement planning tips regardless of where you invest:

  • Invest as much as you can as early as you can. Aim to save 10% of your gross income in your 20s and 30s and gradually boost your savings to 15% in your 40s and 20% or more by your 50s and 60s. A good time to ramp up retirement savings is when a farm expense or household expense (e.g., car loan payments) ends.
  • Invest the maximum allowed by law into a Roth or traditional individual retirement account (IRA). Workers with earned income can contribute up to $5,000 in 2008 ($6,000 for those age 50 or over with an additional $1,000 catch-up contribution). If married, you can also contribute an equal amount for a non-employed spouse to a Spousal IRA.
  • Have a plan and work your plan. In today's self-reliant retirement planning environment, you are your own pension manager. Invest with a well-thought out plan and not with emotions like fear and greed. Follow a dollar-cost averaging strategy by investing a regular amount at regular time intervals (e.g., $100 per month).

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