Cath Brown and Don Te Kahu
Don is a dairy farmer and Cath also works on the farm. The farm had been a sheep and beef one, but two years ago they borrowed heavily to convert to dairy. With the recent fall in the milk payout, 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.
While they have life insurance on Don to cover the mortgage, they realise 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. As a result, Luke has taken his full student loan entitlement.
Don and Cath have written wills, but they are very old and date from the time they were just married before having children.
Longer term, Don would like to retire when he is 65 as farm work is physically demanding. With Cath being much younger than Don, they have concerns about entitlements to NZ Superannuation.
Issues for the family
The following section sets out some of the main issues for each of the families that would need to be discussed with a financial adviser and some of the possible solutions or options to be considered. Specific solutions would require much more detailed knowledge of each family’s finances as well as discussions about their goals and priorities. Even so, this shows just how many issues there are to be considered and where the advice of experts may be helpful.As dairy farmers, Cath and Don are very much affected by the downturn in income from the fall in the milk payout. Farmers are often asset rich but income poor. But Cath and Don did the conversion from sheep and beef to dairy only two years ago. They borrowed to fund this and farm values have been falling.
What might be Cath and Don’s goals?
- To repay/reduce debt.
- To protect our current equity in the farm.
- To be financially independent in our retirement.
- To financially support our children with their education if at all possible.
A fundamental issue is whether or not the farm is an economic unit at current milk prices and mortgage interest rates. They may need to know the answer to this, before setting other long term plans. If the farm is not economic, they might have to make the hard decision to sell the farm now, as continuing to run at a loss may just eat up any equity they have.
So the issues they need to consider include:
- 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 employment rather than working on the farm.
- Protect the present farm equity if possible.
- Focus on themselves first, and the children second. Luke may need to support himself through university through student loans and holiday employment.
- Complete an estate planning/asset protection exercise, e.g. review wills, EPA’s etc.
- Join Kiwisaver, as they will get the $1,000 kick-start.
In terms of the “what ifs”, they need to consider:
- A farm is a business so they really need an expert to advise on what insurance cover is required.
- Who would run the farm if don had an accident or became ill?
- If they need more life insurance, then Cath will be cheaper to insure as she is much younger than Don.
As for planning for retirement, with a 12 year difference in ages, Don will reach NZ Superannuation entitlement age before Cath. Since Don is already 60, there is only a short time to prepare for retirement. For many farmers, the equity in their farm is their retirement saving, but with the current economic downturn, there may not be much equity.
In a potentially difficult position, Cath and Don need expert advice.
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