Farming is in Blake’s blood. He grew up on a family farm and now has 100 acres of his own with his wife, Linda.
To them, it’s the ideal way to be entrepreneurs. “We independently get to make decisions regarding our farm management, being accountable only to ourselves,” Blake says. “It’s satisfying at harvest time knowing the decisions we made directly influence the amount of profit we make.”
They grow field crops, including corn, wheat and soybeans, which they sell on the commodity markets through the Chicago Board of Trade. Blake, 31, and Linda, 36, see their southwestern Ontario farm as a solid investment – and they want to invest in more land. Their five-year goal is buy another 100 acres to expand production.
With unpredictable weather and fluctuating commodity prices, managing a farm can be stressful. “It takes a lot of financial planning to be able to roll with such fluctuating incomes season-to-season,” Blake says.
Luckily, they have other income to sustain them. Blake works as a contract manager, specializing in pressure vessel and piping inspection for an electric generation company; Linda also works, though only part-time until their daughter goes to school in a year and a half.
Income from the farm is usually rolled back into the business, but the family hopes to use savings from non-farm income for a $250,000 down payment for new farmland worth a total of $800,000. While the uncertainty of farming significantly varies their monthly income, they have about $175,000 in annual income for family and investments.
The couple has $50,000 invested in tax-free savings accounts, with assets made up of 31-per-cent fixed income and 69-per-cent equities. The couple also plans to invest $11,000 into a tax-free savings account (TFSA) annually, as well as $20,000 each year into a non-registered portfolio.
For retirement, the couple has $30,000 in registered retirement savings plan (RRSP) investments, and Blake has a defined-benefit pension that will be worth $82,000 annually, adjusted for inflation, in 2040, when he hopes to retire. And this May, Blake will get 51 per cent of the commuted value of a pension from a previous employer, totalling $50,000, which he plans to invest in a locked-in retirement account (LIRA). He’ll get the rest, worth $47,000 today, in May of 2018.
Blake and Linda want to find the best investment profile for their new LIRA. They also want to know whether they should adjust their current investments, and how to best invest their future income, so they can buy more land to farm in the next five years.
Expanding the farm, Blake says, will let them continue to set an example for the farming community. “We take pride in being able to maintain best practices of environmental stewardship and sustainable land management, ensuring the land will be productive for future generations of farmers.”
For advice on Blake and Linda’s portfolio, we turned to two financial advisers: Susan Le Roy, senior wealth adviser with the Le Roy Financial Group at Scotia McLeod in Toronto, and Bill Bell, a financial adviser and founder of Bell Financial Inc. in Aurora, Ont., as well as the author of two books: Simple Money (2007) and One Step to Wealth (2000).
$175,000 in annual non-farm income for family and investments
$800,000 cash-crop farm with $220,000 remaining on 2.4 per cent farm mortgage
$50,000 TFSA investments
$30,000 in RRSP savings
$51,000 from previous pension (with another $47,000 coming in 2018)
$20,000 in cash (floats for business purposes)
Susan Le Roy’s tips.
1. When it comes to buying the new farm, Ms. Le Roy advises that Blake and Linda’s TFSAs are “far too aggressively invested for money that you know you are going to want in five years.” She suggests a maximum of 40 per cent equities instead of the current 69 per cent. “Liquidity is one of their most obvious investment objectives, so you want to keep this money as liquid as possible. This means bonds and cash equivalents should make up a minimum of 60 per cent of these accounts,” she says. “Even though, bonds are very highly priced right now, when bonds lose money, they lose far less than stocks.” To mitigate the risks here, she recommends diversifying their bond exposure, including outside of Canada, perhaps in emerging markets, where returns are more promising.
2. For the couple’s non-registered investments, Ms. Le Roy recommends buying corporate class mutual funds. (She also notes to avoid buying funds that use forward contracts, as the new federal budget aims to restrict their ability to restructure the nature of the income.) “The corporate class funds will take dividend income and interest income and offset it with the expenses of the fund,” she says. “Your resulting yield comes to you as a capital gain. If we’re talking about a 60-per-cent bond portfolio, there will be lots of interest income, and corporate class has the potential to halve the tax bill on this income. This is of particular importance to Blake, as he looks like he is being taxed at the top marginal tax rate.”
3. Exercising caution with their farm savings doesn’t mean that all of Blake and Linda’s investments should be slow-growers. After all, they have decades to go until they can withdraw from the LIRA. If they’re going to be aggressive anywhere, this is the place to do it,” Ms. Le Roy says. With this, the couple can invest even more aggressively than in their current TFSA portfolio, she says – even as much as 80-per-cent equities. But once they buy the extra land, she says, they should tone it down. “I view portfolios as a whole, and look for the most tax efficient allocation of the investments that make up that whole. Anything that is in a RRSP or LIRA is just a growing tax liability. So, if you have slow-growing investments in your allocation, put them in these accounts. But for the next five years Blake and Linda cannot afford to do this.”
Bill Bell’s tips.
1. Five years isn’t enough leeway time to recover from market drops, which means the money Blake and Linda are saving for their next farm – both in TFSAs and non-registered accounts – “need to be safe and liquid, and so should all be kept in cash,” Mr. Bell says. The 1-per-cent returns from cash will leave them about $38,000 short of their $250,000 down payment target, according to rough calculations, which means Blake and Linda might have to borrow more or delay the purchase. But it avoids the risks that other options bring. “Bonds could go negative if rates rise, and GICs take away your ability to act on opportunities, like a correction in real estate,” Mr. Bell says. “Cash is the only sensible solution.”
2. Blake and Linda need to contribute to their RRSPs and LIRA at their maximum levels, and should plan to refocus their TFSAs as a retirement asset once they buy the next farm and have their debt at manageable levels. “These funds should be managed like a pension plan,” Mr. Bell says. “I recommend a target of 25- to 30-per-cent fixed income, making sure to diversify this among government, corporate and foreign holdings, and probably even GICs.” The equity portion should be split into three equal chunks: Canadian, international, and U.S. “They can use exchange-traded funds as core holdings in each section, but I recommend they include well-managed funds as well,” Mr. Bell says. “Rebalance periodically, but otherwise maintain these weightings for the foreseeable future.”
3. The couple is eager to make financial decisions for the short term, but Mr. Bell recommends they look at their portfolio, and life, in the broader context. Some questions need to be answered, he says. When will the farms generate cash flow to the family, and how much do you expect? When you retire from your salaried job, will you keep farming, and if so, for how long? Do you see the farm as an asset to be sold one day, or is it something you intend to work on as long as possible and then leave to your heirs?
“These and other questions will help you understand the importance that non-farm assets will play in the distant future, allowing you to make better decisions about how those assets are accumulated and invested.”
You can get your portfolio reviewed by the experts, too. Send us a confidential e-mail to firstname.lastname@example.org. If we profile your portfolio, your identity will not be revealed.