When planning succession and your future it is essential to understand what levels of income all parties will require to ensure the business can support each individual’s plan. A key part to this is planning how much you will need to live on in your retirement. Retirement brings with it more free time which can lead to an increase in your cost of living. You can finally take up the hobby you’ve always wanted to do or take those holiday trips you’ve dreamt about doing.
When planning for retirement people regularly underestimate what they will need financially. This is partly due to the fact that a good proportion of your living expenses is paid for by the farming business, e.g. fuel, electricity, council tax, telephone, car maintenance, life insurance, pensions and house repairs. These will all need to be factored into your requirements if you are going to be self-sufficient when you retire and not draw heavily on the farm business.
I recently went to visit a new customer to look at exactly this scenario. They were looking to start taking a step back and their son was keen to return to the farm. In order to establish if the business could afford to allow the parents to retire and the son to return home, we first needed to establish what the parents would need to live on. To do this we completed an income and expenditure form. This details what income you expect to have from pensions, investments, rentals, etc., and then looks at your cost of living.
The cost of living element is probably the hardest part to complete as it is very easy to forget items. The following list may help you with this exercise:
• Vehicle costs: finance, MOT, tyres, service, insurance and fuel
• Telephone, broadband and mobiles
• TV licence and packages, e.g. Sky
• Electricity, heating oil and gas
• House insurance
• Council tax
• Christmas and birthday presents
• Public transport, bus, train
• Socialising/eating out/entertainment
• Health insurance
• Life insurance
• House repairs/gardening/DIY
• Charitable giving
• Mortgage or rent
• Misc. purchases
Whilst this list is reasonably comprehensive each individual needs to consider what costs they expect to incur to come up with an accurate figure. Most people are surprised/shocked at what the final figure can be. For the new client I visited this was between £50K and £60K per year!
If you would like to discuss the above and help with ensuring the business can afford for you to retire, please contact Phil at firstname.lastname@example.org or your local FCG Office.