Thursday, February 8, 2018

Who Can You Trust with Your Retirement Income?

Retirement Planning in Canada for the Road Ahead Pension

You keep your commitment. You show up for work with the expectation that in return you will one day receive a comfortable retirement benefit.  You hold up your end of the deal.  But something goes wrong…figuratively (and financially) speaking. Nothing you did caused this.

Types of Pension Plans

People who are fortunate to work for a company that offers a pension plan generally have either a Defined Benefit Plan (DBP) or Defined Contribution Plan (DCP).  The Defined Benefit Plan comes with a promise to pay a retirement income for life based on a specific formula based on a percentage of your income and years of employment.  A Defined Contribution Plan, also referred to as a money purchase plan, is one in which contributions made by both an employer and employee are invested into a pension plan in a similar way investments are made to a personal RRSP (Registered Retirement Savings Plan).   What you see is what you will get at the end of your working years.
Quite often people know they have a pension plan but they are uncertain about the plan’s details. If they do open their annual pension statement, they usually glance only at the breakdown of pension benefit. 

When your pension statement is dropped on your desk or arrives in your mailbox, it’s imperative to look at your statement to understand what you are entitled to receive upon retirement.  You may get to the end of your career only to discover you are not as “rich as you think you are”.

Retirement Planning for the Road Ahead Pension

Are all pension plans equal?

One of the biggest news stories lately has been the financial welfare of defined benefit pension plans.  A Defined Benefit Pension Plan (DBP) promises retirees a lifetime benefit.  They are depending on this steady stream of income in the years when they are no longer able to work.

We don’t often talk about the solvency ratios of pension plans.  When you don’t understand something you assume that if something is wrong, “they” will fix it. 

Here’s the simplified version. The financial terminology for “solvency” is the ability for one to pay their debts.  It is not complicated. If you were to stop doing what you are today, do you have enough cash to pay all your debts?  If you were no longer in business today, would you be able to meet all your debt obligations?  The formula is straightforward:

Assets – Liabilities = Surplus or Deficit

The expectation for Defined Benefit Pension Plans is their ability or inability to fulfill their commitment to pay the promised retirement benefit.  The most overlooked section on a pension statement is the section, Plan Funding, which addresses the financial health of a pension fund.

The Pitfalls Associated with Pension Plans

I read a recent pension statement that didn’t provide the specific details about its solvency ratio.  However, the statement clearly indicated that the plan’s assets would not have been sufficient to cover its liabilities if the plan had been wound up on the last valuation date.

This particular pension plan is a Public Defined Pension Plan. Any shortfall in these types of pension plans has the backing of the government and will be picked up by the taxpayers.  On the other hand, Private Defined Pension Plans do not have this kind of luxury.  If there is a deficiency in their pension plan, no one picks up the pieces to replenish the plan to fund 100% of the promised benefits.  When a business goes bankrupt, the assets are liquidated and are distributed firstly to secured creditors.    Unfortunately, retirees are like an unsecured creditor; they come at the end of the line.  Whatever amount of cash is held in the pension pool is theirs to be divvied up.

The deficiencies (shortfalls) in pension plans have analysts scrutinizing the demise of Sears Canada.  Because their case is recent and unexpected, many want to know what went wrong. The greatest discovery was the extravagant amount of money doled out to the shareholders rather than directed to the pension plan’s deficit. Where do the obligations reside?  Who has a greater entitlement to the company’s retained earnings:  the shareholders who made a sizable investment into the company or the employees who worked for the company to create the profits?

An insightful observation into the status of Defined Benefit Plans is outlined in the report, The Lions Share, Pension Deficient and shareholder payments among Canada’s largest companies. Cole Eisen, David Macdonald, and Chris Roberts identify the need for policy reform to protect the beneficiaries of defined benefit pension plans.   

Their research included this alarming observation:

The recent news that Sears Canada will shutter all remaining stores as a result of its insolvency leaves its DB pension plan with a $267 million funding shortfall on a wind-up basis.  Since 2010, Sears Canada paid back $1.5 billion to shareholders in dividends and share buybacks.  In other words, Sears Canada paid back five-and-a-half times more to its shareholders than it would have cost to entirely erase the deficit in its DB pension plan. As Sears proceeds to liquidate its entire Canadian operations, it will be Canadian retirees who are left to deal with that decision.  Regulators, policymakers, and Canadians will quite rightly ask whether this disaster could have been avoided.  

Equally alarming are comments made by Sears retiree, Ken Eady.   In the Money Sense’s article, What Sears retirees can do about the reduced DB pension, employees were aware of the events that were transpiring in the company.  

Mr. Eady shared, “They sold the assets, took the capital and did not make any meaningful investment in the business, including the pension plan. They let the company drift into a very bad spot and stripped it of many revenue-generating assets. If they had invested in the company, built a new online sales platform or other revenue-generating enterprises, Sears would still be operating and we wouldn’t be talking about this.”

My hearts goes out to these retirees or near-retirees. For many, the clock has run out on their working years.  These veteran employees trusted their employer. They trusted the pension regulators, The Office of the Superintendent of Financial Institutions (OSFI), to watch over their pension funds.  Who failed them?  Knowing there is a deficiency in the pension plan and providing too much leeway to make up the difference are the makings of a disaster. Someone made an incorrect assumption, claiming the company needed time to restructure and then they would rebound. 

I also questioned the role and responsibility of the actuaries.  They advise trustees and companies on the management of their pension schemes. Pension actuaries are on the scene to purposely check the financial health of the Defined Benefit Plan and ensure its viability to withstand the test of time to meet its obligations to plan members.  Their valuation is reported annually or triennially to the Office of the Superintendent of Financial Institutions (OSFI) who supervises federally regulated pension plans.   

With so many checks and balances in place, one would expect an alarm to be sounded during this rigorous process. But obviously, the rules around best practices haven’t been firmly established. The potential problem has been compounded with lower-than-ever-expected interest rates and the longevity of retired employees. The pension fund may have been depleting more rapidly than anticipated.

Looking After Your Retirement Income

The take-away from this unfortunate circumstance is that promises can be broken.  Things can and do go wrong with the financial operations of any business.  If the business has a pension plan, like Sears Canada and others did, there can be detrimental effects to people’s retirement income.  There is minimal comfort in knowing a benefit, even if it is 19% less than originally anticipated, will be forthcoming.  Any reduction will be a severe blow to a retiree living on a fixed income while inflation affects the cost of living expenses. 

If you are relying too heavily on your pension plan to provide income in your retirement, the simple answer is “Don’t”.  In CBC’s news article, Sears Case Shows the Risk of DBP for Employees, personal financial experts say there is a risk with this kind of dependency.  I couldn’t agree more. 

Retirement Planning for the Road Ahead Pension

The outcome is your lack of control over your future.  You are allowing someone else to drive your destiny. When your pension statement appears, make the time to understand your pension plan and its projections. If necessary, speak to a CERTIFIED FINANCIAL PLANNER® professional to make sense of your retirement plans.  What you see on paper today might not be what you get in a pension benefit tomorrow. 

Thursday, January 25, 2018

Can You Do This?

I am not sure I could do it unless I was locked in my house.  The temptation to shop would be even greater when you live near a shopping centre.   To spend no money for a period of thirty days is a bold challenge to undertake.    

Watching the CTV News, I was intrigued by Donna Lee Criss and her 30-Day Apocalypse Challenge Her challenge is to spend absolutely no money other than pay the monthly bills and purchase gas for her vehicle.  She plans to make do with the ingredients she has in her home and, if necessary, barter and accept goodwill from others. The challenge is an opportunity to reflect on her spending habits. 

The challenge would provide the opportunity for us to focus on what we all have rather than what we don’t have.  Most would agree our cupboards, fridges, and freezers do not portray Mother Hubbard’s in the favorite nurse rhyme. Recall Mother Hubbard’s cupboards were bare.    Ours certainly are not. Yet how often has have our spouses or children said, “There’s nothing to eat in the house”?   An Apocalypse 30-Day Challenge might change everyone’s perspective and create an epiphany for us.

Donna Lee Criss’ Apocalypse Challenge resembles a similar yet different challenge related to food. I tried to curb my uncontrollable eating habits with the Sacred Heart Diet-Soup Base 7 Day Plan. You could eat all the soup you wanted for the week. On specific days, you were allowed to eat fruit and raw vegetables along with the occasional teasers, a baked potato and steak.  You were never hungry on the Sacred Heart Diet but you eventually became tired of eating the soup.  If I was given the option, I would rename this diet, “The Gratitude Diet”.  After a week with limited food options,  I was grateful for even a morsel of chocolate cake rather than none.  The elimination of having anything and everything I wanted gave me a new perspective on“having some is better than none”.   
The theory is we all have a tendency to feel deprived when we are told, You can’t do something, can’t buy something, or can’t eat something.”  An impulsive urge or craving automatically triggers us to want to do the exact opposite.  We naturally want to do that, to buy that, to eat thatthe very thing they said, “you couldn’t, you shouldn’t, you mustn’t!” 

Here’s the revelation:  Deprivation leads to gratification.

Anytime we are deprived of something even for a test period, we develop a deeper sense of gratitude for it.  If you have watched a child receive a toy after it has been taken away for a stretch of time, they have a new sense of gratitude for the old toy.  As adults, we are no different than children.   The realization that you can resume your normal activity, like shopping or eating, means doing so in moderation and with a keen awareness. We want to foster sound control measures.  The challenge was a “discovery process” to uncover our soft spots.   This process also allows us to set or reset our motives. Gauging our spending habits is critical before they get out of control and cause serious harm.  Imagine barely recovering from our Christmas purchases then jumping all over “January Blowout Sales” .

I would tread cautiously about a test period lasting for thirty days. This is a long time to be banned from spending money on anything.  My concern is that the experiment might trigger a reverse effect, an overspending frenzy to make up for “lost time”.  You might  sway yourself to believe you deserve to be pampered for your month of good behavior.      

The true reward comes when you focus on what’s really important in terms of your wants and needs.   The reality is one day you may not have the choice to cut back on your spending. You may find that your retirement income simply cannot sustain a costly lifestyle and changes will be inevitable.  The reality is we need to be good custodians of our money. There is nothing quite like a challenge, even for seven days,  to align your spending priorities with your current income.     

Thursday, January 11, 2018

Anything Can Happen – Be Prepared

The news reports we hear of peoples’ stories are real.  They shock us. They surprise us.  They cause us to be sympathetic but do they ever move us to make changes in our own lives? Maybe. Maybe not. 

The latest news is the unexpected demise of Sears Canada.  No one saw this coming.  A reputable Canadian company with a solid financial track becomes a victim of retail bankruptcy.  Ron Husk’s story paints a grim reality that you can never be prepared enough for this kind of situation.  At age 72, Ron is returning to work part-time at Home Depot.  It's the last thing he expected in his retirement years.  Retired employees like Mr. Husk had their life insurance, health and dental benefits cancelled in September.  Soon, Sears' retirees are expecting their pension to be reduced by 20 per cent.  The point is these kinds of situations can happen to anyone.  Financial mishaps occur in different ways, sending our financial situations spiraling out of control.  

You have witnessed your share of stories like I have.  I have seen a man lose his home and everything he owned because of a house fire.   I heard from a young husband and father of two who was fighting pancreatic cancer by travelling to Austria for medical treatment.  I have seen a woman struggle with pain as a result of a vehicle accident which broke multiple bones and caused severe brain injury. These incidents are traumatic.  We are na├»ve if we believe nothing can happen to us. This dismal reality causes us to be aware of our priorities.

Where am I going with this?

Most people have never heard of Abraham Harold Maslow or his creation of the Hierarchy of Needs.  His study reveals that we have a five-tier model of basic needs. Once our basic survival needs are met then our desire is to move up the pyramid to the next level.  

Many articles and blog posts have connected Maslow’s Hierarchy of Needs to our financial needs at each of these levels.  One quick Google search will link you to many explanations about applying this theory to managing your finances accordingly.

For me, the one thing that stands out is how we have a tendency to mix up our priorities.  Literally, this breaks my heart. I see a picture of a two-year old daughter going for her first manicure and pedicure.  I see a two-year old son getting a remote-operated toy monster truck for a Christmas gift.  I see people trading vehicles less than a year old “just because”.  Spending money on your children and yourself goes beyond meeting the first two needs:  physiological and safety/security.  They are fulfilling the need for love (spoiling your children) and esteem (displaying what you drive as important).

I don’t like using the term “wasting money” per se.  However, the truth is you may not have built a strong solid foundation of security before you jumped ahead to impressing your children with gifts.  If they were old enough to choose, they may have chosen security over gifts of love.  They would have preferred knowing that if you lost your job or had to deal with a serious illness, they would feel loved knowing they had a home and you.

Setting boundaries on our spending habits is one way to love our families.  Other ways are ensuring we have put in place the security of insurance, contributing regularly to an emergency savings account, and paying down our debt to free up cash to save for our retirement years.

You might not fully appreciate hearing from a financial planner “what is important in life”.  However, you may appreciate hearing from someone young with her whole life in front of her who didn’t have the chance to grow old and wrinkled. A heart-breaking news story comes from a letter written by Holly Butcher. Holly passed away at the age of 27 from cancer.  Before she died, she shared her thoughts about the true meaning in life. Click here to read Holly’s story.

Here’s the challenge. I believe you can write your own story.  You can learn from others as well as Abraham Maslow about your basic needs.  Life teaches us lessons.  What have you appreciated learning from others and your own experiences? You may share your news. 

Thursday, December 28, 2017

A Time for Reflection and Planning

Have you ever had a song’s lyrics, playing over and over again, stuck in your head?  During the holidays, I kept hearing these words to “So It is Christmas” so much so that I felt compelled to share its message with you.

“So this is Christmas and what have you done
Another year over, a new one just begun…”

“A very merry Christmas and a happy new year
Let's hope it's a good one without any fears…”

This time between Christmas and the New Year can be an excellent time for reflection, to think about what we have done, both good and bad.  Since Santa keeps a list of all the children who are naughty and nice, we could copy Santa’s practise by keeping a list to see if we are naughty or nice with our finances.  

During the holidays, my brother-in-law toasted to a year of “having enough”. In all seriousness isn’t that all we need, “enough”?  Diane McCurdy, a CERTIFIED FINANCIAL PLANNER® professional, wrote the book, How Much is Enough, and created a list of twenty key strategies for making enough.  We could all take a lesson from her.

Here’s your assignment.  

Read through the list below.
Reflect on what you have done.
Plan to make enough.
And have a great 2018!  

Twenty Key Strategies for Making Enough

  1. If you know what you want, you can get it.
  2. It's never too late—or too early—to start financial planning.
  3. A little is better than nothing.
  4. Any interest you pay is money you can't spend on yourself.
  5. Clearing up debt is short-term pain for long-term gain.
  6. Make compound interest work for you, not against you.
  7. Pay yourself first: take at least 10% off the top to save and invest.
  8. Registered retirement plans put more money in your hands and registered education plans put more money in your children's hands.
  9. Revisit your wish list to refocus on what you're aiming for.
  10. If you didn't want something in the first place, it's not a deal no matter how cheap it is.
  11. Never hand over financial control—no one else cares about your future the way you do.
  12. Get rich slowly—put your money regularly into solid investments.
  13. Markets go up and down. Don't panic.
  14. Invest only in things you understand and feel comfortable with.
  15. If you miss an opportunity, there will always be others.
  16. Borrow only for things that appreciate in value (except for your first car).
  17. A financial advisor can make sure you're making the most from your money.
  18. By taking care of yourself, you're helping other people.
  19. Reward yourself in big and little ways for staying on track.
  20. Know where you are on the road to where you're going. 

Thursday, December 14, 2017

The Ultimate Checklist

If you have your vehicle serviced on a regular basis, you are generally given a Vehicle Inspection Report.  The report has three separate categories highlighted in distinct colours. When the vehicle’s systems and components are checked, the appropriate colour receives either a “thumbs-up” or “thumbs-down”.  

Checked and Okay at this time
May require future attention
Requires immediate attention

We would never drive a vehicle that was not road-worthy for two reasons.

          1. We might never reach any of our destinations because the vehicle would simply quit working.

          2. We could potentially be injured or killed if we chose to ignore any maintenance required to our tires and brakes.

Here’s the dilemma.

Without regular check-ups and the proper maintenance, our vehicles can create frustration and grief for us. So what happens when we don’t regularly review our financial goals and check our current financial status? How do we know whether our systems are running up to speed? In other words, how do we know whether we are efficiently meeting our financial goals?

Financial Planning Standards Council created a publication called “Get More Out of Life”.     To begin my client conversations, I refer to FPSC’s checklist to gain a better understanding of my clients’ feelings. 

Scrutinizing the nine questions below allows us to conduct an inspection test.  Each question can be assigned a distinct colour to determine whether everything is okay at this time or requires future or immediate attention. If you are far away from having many “Green” thumbs-up, you might consider a service package, a comprehensive financial plan, to gain peace of mind and confidence about achieving your life goals.    

Do you feel…

q    In control of your finances?
q    Prepared for a financial emergency?
q    That you have sufficient discretionary income to lead the life you want?
q    The people you care about would be financially looked after if something were to happen to you?
q    Able to retire in your desired lifestyle?
q    You will be able to pass along your wealth in a tax effective way?
q    There is enough money to pay for post-secondary education for your children?
q    Your goals and aspirations are achievable?
q    You have peace of mind?

Since we are in the Christmas season of creating lists, this list is worth putting in our stockings as we approach the New Year.  If we wish to begin the New Year on the right foot, then we could use some help identifying where we need help.  Reviewing our list is a great start.  

Merry Christmas!

Thursday, November 30, 2017

“Somehow” Doesn’t Just Happen

A vague sadness looms over the days and weeks following the annual Grey Cup game.  This all-important finale marks the end to the year’s CFL season. Everything comes to a standstill.  The year is built on rough and tough plays, unpredictable wins and losses, surprising statistics, and the firing, hiring, and trading of players and coaches.  Anything can happen in the season.   Unexpected! Unanticipated! Sometimes ending with a dramatic and exciting finish like this year!  

This is the CFL, though. This is Canadian football. Bo Levi Mitchell hit Jorden for a deep ball, a gutsy throw. He had a shot at the end zone. The ball sailed up through the snow, and for a second in the press box a reporter yelled, “He’s open!” The clock was ticking down.

And Matt Black, an old Argo, came across and intercepted the ball in the end zone. Eight seconds on the clock, and the snow was still falling. Somehow, the Argos won the 105th Grey Cup, 27-24.”

You can breathe now.  The game is over.  But you have to admit that as the clock ticked down, you must have held your breathe like I did. 

No surprise here, I am not a sports columnist and this is not a sports blog.  So, why am I sharing Bruce Arthur’s sports column about the upheaval the Toronto Argos created for the Calgary Stampeders in Sunday’s Grey Cup Game?

Hidden in the sports columnist’s writing is one word which defines the chances of this happening. 

Read it again.  Search for it. See if you can find it.

The word is “somehow”.  There’s a mystery surrounding this word. “Somehow” means “in some way” or “by some means”. Unknown! Unexplainable!

As a financial planner, I am all about “certainty” and “surety” especially when it comes to having a “game plan” for the future. 

Yet, I appreciate the similarities between a well-played, well-executed football game and a well-designed, well-executed financial plan.  Both have the ability to create winning drives which result in achieving goals and dreams. 

When the word, “somehow” gets thrown in, it seems like any clear thought out plan did not exist.  There’s no strategy; there’s no planning with “somehow”.

Here’s the question:

Wouldn’t we rather be certain about our financial future than uncertain?
          Somehow means we’re not sure.

          Somehow, one day we will pass our business to our children.
          Somehow, one day we will retire.
          Somehow, one day we will be debt-free.

Think of your life as one important Grey Cup game. Imagine each of your life planning stages divided into separate quarters.   

          The 1st Quarter is your 20’s, 30’s and 40’s.
          The 2nd Quarter is your 40’s to early 50’s.
          The 3rd Quarter is your mid-50’s to early 60’s.
          The 4th Quarter is your 65 to 70.

Then you are at the Grey Cup Party, enjoying your well-designed retirement into your 70’s and beyond.   When the game is well-played and has ended, you have the distinct privilege of hoisting your victory cup, living your dream retirement. 

Every quarter, or life planning stage, has its own unique challenges.  Each quarter will come with a change of priorities, circumstances, and needs. When you create winning plays in each quarter, you will reap the benefit when your game is complete.  Your life’s playbook is specific to your needs and should be designed to drive your goals and dreams.  You shouldn’t have to wonder whether somehow you will achieve them.      

At age 20 or 30, your retirement years will feel so distant when your focus is on paying off your student loans, planning your wedding, acquiring a house, and raising your children. At age 40, your retirement will feel more realistic.  By the time you are 55, you might recognize retirement knocking on your door.  By 65, you may actually retire.

No football game ever plays out the way we would like.  Real life is like this too.  Your playbook is a compilation of strategies built on everyday realities.   Winning plays are created to tackle your debt, pick you up after a fumble, and to keep you in bounds with your spending plan.  Specific interferences can rock your game plan.  Your drives might need to be tweaked to combat life’s intrusions, like a disability, an unexpected death, or the adversity of a divorce. 

Financial planners know that creating your own winning plays might be difficult.    A financial plan, is like a playbook, specifically aimed at successfully reaching your retirement goal.   Having a plan is far better than wondering if “somehow” you can win without one.  No longer will your retirement have to be an elusive dream, some pie-in-the-sky fantasy. When preparation and planning begin early and play a part in all life stages, your dream can become reality.

Robert Collier makes an excellent point. He conveys “Success is the sum of small efforts repeated day in and day out.”   When you believe this to be true, you will be ready to design your game-winning playbook.

Thursday, November 16, 2017

Zoom in on a Bigger and Brighter Future

It’s obvious, isn’t it?  The zoom tool on a software program is used to make our text or images appear larger.  When we click on the magnification icon, we can see our working image or document much clearer.    

A prototype of this tool can be invaluable for looking at our circumstances. Sometimes, we have a minuscule view of our financial future.  A zoom tool would help change our settings to a grander view for a bigger and brighter future.  Undoubtedly, thousands of books are written with helpful advice to do just that, to improve our financial well-being so we can have a better outlook. 

Here’s a different kind of book to add to our collection.  It’s not about money; it’s about thinking.  The book, How Rich People Think, may be our “zoom tool” to change our perspective.    Steve Siebold, the author, identifies one hundred different ways the middle class and world class think, focus, believe, worry, earn, equate, experience, and dream about money.  Every short chapter compares the “middle class” (the average person) and “world class” (world class thinker).  This book made me curious about examining how I think.   Do I think like the middle class or the world class?  You may be wondering the same thing about yourself.

I met Steve Siebold when he and his wife, Dawn Andrews, instructed the Bill Gove Speech Workshop in Chicago.  Steve is very sincere and genuinely interested in helping others succeed.  Like he says in his introduction, he was inspired by the wealthy.  As a college student who was completely broke, he set himself on a journey looking for answers to become rich.  Steve said when he changed his thinking, he eventually became a millionaire.  He wrote this book to be our guide. 

“What does he say?” you might ask.

To whet your appetite and convince you that owning a copy is justifiable, I am sharing a summation of only four of Steve’s observations.  Again, like me, you won’t be surprised by the findings. If these have crossed my path, I know they likely have crossed yours.

1st.     Middle Class believes money is the root of all evil…World Class believes poverty is the root of all evil.
How many times have you heard this infamous saying, “money is the root of all evil”?  You, like me, and countless others may have been brainwashed into believing this to be true.   Steve is quick to point out that it’s a result of poor programming and ignorance which infected us with the disease of focusing on lack and limitations. The world class thinks differently.  Although they realize money will not buy happiness, they know their life will be better because of it.  They choose to focus on the wealth within themselves and build world class beliefs to create a better life for themselves. 

2nd.     Middle Class worries about running out of money…World Class thinks about how to make more money.
If we lie awake at night worrying about our finances, we could take a lesson from the World Class.  When the World Class thinks about how to make more money, they think about how to creatively solve problems.  Certainly there is no lack of problems in our world today.  The middle class have a tendency to focus and direct their energy on worrying about a shortage of money;  the world class use their creative energy to develop great ideas to ensure they have a continuous cash supply.


3rd.     Middle Class has a Lottery Mentality; World Class Has an Action Mentality.
The difference is that the middle class do not have an empowering belief system about money to lead them into action like the world class.  The middle class believe the lottery is their only chance to get rich.  Both classes may have the desire except desire alone does not trigger the appropriate behavior which creates results.  Steve concludes, “If you want to get rich, dissect your beliefs about money and upgrade them to world class.”   

4th.     Middle Class believes money is complicated…World Class believes money is simple.
The World Class view is a game changer.  If we could only grab hold of an opportunity and believe its value, then our ability to solve a problem on the world market could turn into wealth.  The strategy doesn’t have to be complicated.  The complications arise in our mind when we believe it’s difficult and next to impossible.  The World Class embrace the endless possibilities.  They see trading solutions for money as a means to becoming rich.  “The bigger the solution the bigger the paycheck. It’s that simple.” 

Crossing Over from Middle Class to World Class

You might already be on the side of the World Class.  You have embraced this kind of thought pattern and are experiencing wealth.  You are enjoying the worry-free life that Johnny Carson proclaims. He says, “The only thing that money gives you is the freedom of not worrying about money.”  

However, if you are interested in making the transition to the World Class, Steve offers useful zoom tools at the end of each chapter:  an inspirational quote, additional rich resources, critical thinking questions, and action steps.  These magnification tools will help you zone in on any problematic thought patterns as well as offer inspiration and guidance to take you on a new journey. 

Like Steve, I want you to succeed financially.  Examining how we think might be a revelation that will result in a positive change.  When you dissect your belief system, who knows what you will find. 

Thursday, November 2, 2017

What is Your Farm Child’s Sweat Equity Worth?

When I don’t know the answer to a burning question, I go hunting for it.  Usually, the best answer is found by researching the topic. What do the experts say? They’re the ones with the insight and experience.  We look for answers in the same way we hunt for a tasty recipe, an effective worksheet, or a lucrative bargain. When we need to know something, we will discover the path. 

Recently, the agonizing question was calculating sweat equity.  Each farm family, who has worked together for many years, has a different way and means for determining the value each family member brings to their business.  Until I began researching the topic, I believed the contentious issue was limited to only sweat equity. I had no knowledge that slave labour was also prevalent on some Prairie farms because of unfair compensation.    

Here is something I do know: Peace and harmony are achievable among family members when you begin your succession and estate planning early.  Determining what your farming child brings to the business in the way of labour and management abilities may play a big part in getting your succession plan off the ground.  Sweat equity is certainly an important component of the plan.    

Experts Share Their Perspectives

On my discovery path, I came across an article written by Country Guide’s senior editor, Maggie Van Camp.  She did her homework.  She hunted down experts and shared their expertise in her article, Cleaning Up Sweat Equity.     If you catch yourself awake at night because you are wrestling with the best way to treat your children fairly, you might find some comfort in her publication.

Both sweat equity and fair compensation deserve equal recognition.  When your farming child decides to return to farm with you, the first question is, “Can the farm support another family?”  This leads to the next question: “What is fair compensation for the child’s labour and contributions to the operation?”   Don’t stop there. Because then you will need to know, “Do they deserve more based on their commitment to take on risk, unique contributions in terms of management skills, and living their dream while carrying on your legacy?”  

I see a line that eventually gets crossed.  Initially, a farming child may be working for Mom and Dad but eventually working with Mom and Dad.  What may begin as compensation for hired labour may later be factored as a combination of compensation and sweat equity for their contribution.  
One of leading experts is David Goeller, a transition specialist with the department of Agriculture Economics at the University of Nebraska-Lincoln.   He provides an example in his paper, Putting A Value on Sweat Equity, as a guideline to determine the successor’s contribution based on the Net Worth of the family business at two specific time periods.  You can liken this to “before and after” financial snapshots of the family farm.  What was the farm’s financial net worth before the farming child returned and then after his return at a specific future date?  All participants, Mom and Dad and their farming child, will share in the growth of the business.  

The example set forth by David Goeller is only a guide.  This is a starting point which you can build upon.  As he states in his paper, every operation will have different factors and likely arrive at a different percentage for the value of the successor’s contribution.   

Mr. Goeller made a very profound statement when addressing non-farming children. He said, “Treating unequals equally, may be the most unfair thing you can do!”   

“Sweat Equity” Vital to a Successful Succession Plan

Your succession and estate plans are important but when you can estimate sweat equity you are one step closer to finalizing these plans.  

We are often reluctant to do something unless we understand the purpose of a specific activity.  Diligently keeping accurate Net Worth Statements provides proof of the farm equity built up over the years as a result of your efforts and those of your farming child.  This evidence may be the proof needed to convince yourself as well as other non-farming members.  I fear that if there are no means of tracking, then you have no means of measuring financial success.   

You may even recognize that your farming child’s contribution may be the leading factor in the expansion and profitability of the farm. Without his or her labour, management ideas, specialized knowledge, leadership abilities, and experience, your farm may not have advanced as efficiently on your time clock. Using the financial statement as an assessment tool, or job performance report, may provide evidence for delivering compensation in recognition of a job well-done. Whether your farming child is the brains-behind-the-operation and/or the grunt-labour, you have a method to measure their contribution.

The Worst Outcome

The saddest outcome for any family is to find themselves in court disputing an estate settlement.  Parents are somewhat reluctant to openly discuss the decisions they have made about the division of their family farm property.   Your intentions shouldn’t surprise family members. Once you have a tentative decision, then your next step is to share this with your family to avoid any future litigation in court.

Your Net Worth Statements over multiple years will provide concrete proof of the family member’s contributions. This truth allows you to justify your actions to your children while you’re alive rather than have them wonder what you were thinking once you’ve passed away.  I’ve heard comments, “I’m afraid what our other son will think if we leave our home quarter to his brother.”   I realize fear is often a factor that hinders people being open and honest.  Having family members duke out unresolved issues in court is far worse than you facing your fears and sharing your intentions.  

Information Helps You

Information educates us about issues we might normally never have considered.  Arming yourself with a wealth of resources is equivalent to arming yourself with ammunition. When you do, you are prepared to set the stage for meaningful conversations with your family to determine what works for you and them.   

I recognize the benefit of starting the “planning phase” early so you can measure the fair market value of your farm at pre-set increments to determine the contribution your farming child makes (or doesn’t make) to your farm business.   

In the end, I value and appreciate the wisdom David Goeller shares as he wraps up his paper.  The main desire is to ensure your family will all be eating Christmas dinner together for years to come.