A Rural Case Study

It is fast approaching the Institute of Financial Advisers Financial Awareness Week (September 6 -13).   We thought it appropriate therefore to make use of a case study to illustrate some issues that many families, especially in rural areas, may be facing. The case study was initially prepared by the IFA, and we have modified it. Any resemblance of names etc is purely coincidental.

Don and Cath Brown are Manawahe dairy farmers. Don is aged 60, and Cath is 12 years younger. They have been married for 19 years and have two teenage children, Luke aged 18 and Matt aged 15. Luke has just started university, studying agriculture at Massey’s Palmerston North Campus. At this stage Luke hopes to take over the farm. Don and Cath’s wills date back to when they were just married and before they had any children.

The Browns’ Manawahe farm had been a sheep and beef one, but two years ago they borrowed heavily to convert to dairy after watching several neighbours successfully go through the process. Now with the large fall in expected dairy payouts, they are struggling to pay the mortgage and expect to have a loss from the current season. They have a seasonal overdraft facility with the same bank that holds the mortgage, but they are wary about what will happen as they need to renew the overdraft facility.

At their bank’s insistence, they have life insurance on Don to cover the mortgage. They realize that they need to consider what other insurance cover they should have, but worry about whether they can afford it. They had intended to support Luke through university, but didn’t have the cash this year, so he has taken his full student loan entitlement.

Don would like to retire as soon as he turns 65. He is finding the farm work to be physically demanding. With Cath being much younger than Don, they have concerns about entitlements to NZ Superannuation and how they will survive on it, especially if they end up with a mortgagee sale.

We need to consider what might be Cath and Don’s goals? They may be some of the following:

• To repay/reduce debt.
• To protect their current equity in the farm.
• To be financially independent in their retirement.
• To financially support their children’s education if at all possible.

They may need  to consider some of the following issues:

• Review/reassess farm viability and seek independent/specialist farm management/ownership advice.
• If the farm is not viable, then investigate alternative employment/income opportunities. This might include Cath seeking off farm employment.
• Protect the present farm equity if possible as it represents not only their life savings but also their home.

They need to focus on themselves first, and the children second. Luke may need to support himself through university through student loans and holiday employment. They need to complete an estate planning/asset protection exercise, e.g. review wills, Enduring Power of Attorneys etc., so should consult with both legal and insurance professionals. They should also join Kiwisaver, as they will get the $1,000 kick-start.

Their farm is their business. They need to consider who would run the farm if Don or Cath had an accident or became ill? Appropriate insurance cover could meet the costs involved. If they need more life insurance cover, it would probably be cheaper to be on Cath as she is much younger than Don.

Retirement planning is a real issue for them. Don is planning on retiring in five years time at the age of 65, whereas, Cath has another 17 years before she would be eligible for full NZ Super. It could even be longer if the government increases the retirement age.

Effectively the Browns’ farm, or what equity they still have in it, is their retirement and house savings. What they decide to do now, will have a marked impact on their financial health in retirement. They really need to seek professional investment and estate planning advice to make the most out of what currently is not a good position to be in.