45 Year Old Retirements

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SW Financial Literacy

45 Year Old Retirement

This isn’t a story of victory. No lottery was won.

It’s a difficult story of loss of focus, bad advice, and hopefully lessons learned for you. A story around operations who desperately just needed 1 good year to make the necessary upgrades their operation badly needed. And then take advantage of an opportunity to grow that comes once in a lifetime. And to enjoy life and time with your family. And to repay your spouse after all the tough financial years you have experienced.

These are all natural human emotions. Many of us would do the exact same thing in their positions. These farmers weren’t wrong to feel this. Yet, there have been many 45-year old’s having retirement land and equipment sales this year. And the kicker is, they may still have $4M of equity on their balance sheet.

But I was challenged on X.com this week to explain myself. How are operations with $4M in equity going out of business? There is $4M free-and-clear. It makes no sense that they would hang it up. They can just take a loan out against the equity and keep farming.

The knee-jerk reaction to term it out may be one of the worse decisions they can make.

I’m going to detail out exactly what is happening and why this may be the wrong choice. The right choice may have been to ‘retire’ and get a job in town.

The Balance Sheet

Here is our “story’s” balance sheet as of 12/31/2025:

This is the balance sheet the decision to ‘retire’ was based on. This is a row crop operation farming 1200 acres with minimal non-farm income from the spouse. Grain inventory consists of 80,000 bu valued at $4.00 at the date the balance sheet was created.

Here are the real estate details and other noncurrent assets:

Retirement account is from the spouse’s job. Equity in entity is ownership in a land holding family trust which they get little to no income from and really can’t do anything with it.

Here is what makes up the debt payments:

Ouch. A long line of debt payments to service with no debt payments rolling off until the 2028 crop year. There is no debt relief for the foreseeable future.

A few more things to point out:

• Working capital is negative $500/acre farmed.

• There are still payments due from a working capital injection loan that was put together some time before. They have been in a tight position previously.

• Tractor and combine leases belong on the balance sheet. These are contractual payments you cannot get out of. This farmer has a tractor lease.

• Equity/Asset % at 62.20% is strong. The operation has good equity for their size and it would appear from this ratio that they DO NOT have too much debt.

• $4,006,000 Net Worth. We would all be happy with this, right?

The Trend

Okay, we have seen the balance sheet. Now how did we get there? Bear with me as there are a lot of numbers and they don’t pull over as nicely.

How do we review this? The far left hand column with numbers is the balance sheet we reviewed, the 12/31/2025 statement. This is a 5-year trend. Each time we move to the right from our 2025 balance sheet, we are moving 1 year into the past until we see where we were on 12/31/2021, 5 years ago. Got it?

This trend tells a story, and it is one of my favorite things about my job. You can tell A LOT about their operation by reviewing their balance sheets in this manner. Let’s start at the beginning, in chronological order with 2021.

In 2021 the operation was sitting in a fine position. Working capital at $284/acre with a current ratio of 1.55:1. Both of these would get you approved for financing and are a decent spot to be in after the tough 2015-2019 years. The operation has a net worth of $3.7M and Equity/Asset % of 74.06%. All these things are good! They have just $1.3M in total debt and are comfortable.

Record 2022 profits come storming in. Look where the operation skyrockets to! Working capital is up to a whopping $635/a and a total of $762,000 against just $1,092,000 in total debt. Another year like 2022 and the operation can pay off all debt and coast with their farming career to the finish line. Total equity is up to $4.2M with EA% at 79.55%, which rivals established operators of 40+ years.

This is perfect timing, because your landlord just offered to sell you their 120 acres. You snatch this up and use a lot of cash ($500,000 to be exact) for the purchase because 8% interest rates are unfathomable after seeing 4% or lower in 2020.

Something weird happened right before the end of 2022 and through 2023. MAJOR TAX PROBLEM. You must spend money fast or you will have a $300k income tax bill and your private health insurance rate will go through the roof. The operation quickly upgrades the combine and tractor (lease) to get ahead of their tax problems. They also have been working out of a cold shed for equipment work in the winter for many years and the skid steer has completely broken down. The CPA says it is okay because they can write it off. The banker says it is okay because they are in the strongest position they have ever been in. The bulk of these are financed because you just used $500,000 of your cash on the land purchase.

All that happened before your 2023 balance sheet was put together. Let’s review the position now. Somehow, we lost $757,200 in working capital this past year. What?! Remember…. $500,000 cash for a land purchase with an additional $83,000 in term debt payments (not including the interest portion of those payments). Commodity prices falling make up the rest of the working capital loss. Current ratio is now 1.01:1.

In 2024 we start to see the large inflation of inputs. The operation doesn’t make a single equipment purchase in 2024, but higher input prices combined with swelling debt payments put on in 2022-2023 makes the operation lose $229 working capital/acre. This doesn’t look good, so a $100,000 capital injection loan is put on the books.

2025 is here, and this is what happened. Personal vehicles were updated and that is it! Inputs are still higher, yields are down, prices are down. Somehow the operation lost another $275 working capital/acre. REMINDER: This is after they were given a $100,000 capital injection loan, so losses were actually deeper than this.

It happened so fast. Just 4 years ago they were in the best position they had ever been in over their career. Do we go forward and try to crawl our way out? When the operation hit their previous bottom in 2019, working capital was only a negative $100,000. How do you climb out of a negative $600,000 position?! BY THE WAY: Their 2026 income/expense projection shows they will lose another $250,000 in the upcoming year.

The Options: Plan A -Refinance

What if we just term out the losses?

Okay, let’s try it.

You can’t get out of the tractor lease, that one is untouchable. You also don’t want to do anything with the house, that is at 4.00%. Let’s see what refinancing the real estate debt does over a 30 year term:

WAIT A MINUTE, why a 7.50% interest rate?! You are out of working capital and suffering from large losses. You are now a high-risk account and don’t get the benefit of a premium rate.

Land and building into a new 7.50% loan reduces the payments from $79,000 per year to $65,000 per year. You shaved $14,000 off a projected $250,000 loss.

Now we term out the rest of the equipment and vehicles. These are depreciable assets and the bank doesn’t want to get upside-down, so the longest you are able to term them out is 10 years and you are securing it with real estate.

Payments of just $69,000. Not bad! Saving you $101,000 in payments. Except, not really. You are STILL projecting a $135,000 loss next year.

Also, if you could have waited 2 years (just 2 years!), you would have the combine and skid steer paid off, which would save you $120,000 per year in payments.

Why would we stretch those out and pay $218,000 in interest over the next 10 years to term this equipment out? Plus, you become upside-down on value. Terming out does not work.

The Options: Plan B -Sell Land

We can’t term out.

The bank won’t renew our operating note as is.

My bachelor uncle won’t die.

Time to sell something.

Let’s sell a farm. No problem.

You don’t want to go backward too far, so let’s just sell the 80a to make things right. Our working capital position is -$600,000. Sell the 80a worth $720,000 to get out of this mess. A few problems still….

You will have to pay $100,000 in capital gains tax with the sale, plus 8% commission fees. Not good.

You haven’t paid off a cent of term debt, so you will have fewer acres to farm and are still projecting a $250,000 loss for next year. It seems 80a isn’t enough, because if that happens you will just be in the same position next year, needing to sell ground.

Fine, sell the 160a for $1,600,000. After $200,000 capital gains tax and $128,000 in sales commission you have $1,272,000 left to pay down the operating note and get Working Capital 1:1. $1,272,000 - $601,900 working capital leaves you with = $670,100.

The projection IS STILL negative, but now it is -$290,000 because you just gave up paid off ground that was your most profitable asset. You just made your margins worse and your operation is down to 1,040 acres. Is this what you want? To farm at a bigger loss than what you were experiencing before?

The Options: Plan C -Sell Equipment

What if we sell other things?

You have $600,000 in negative working capital to make up. Let’s see how we can get there:

Selling all current assets doesn’t move the needle 1 centimeter, because that is a part of your working capital calculation. We need to go to the bottom of the balance sheet to try to correct this.

Let’s cash out the spouse’s retirement account of $100,000 = -$500,000 WC

Let’s sell our new vehicles and drive old farm trucks: $150,000 worth of vehicles sold but there is $130,000 of debt against it, only improving WC by $37,200 = -$462,800 WC (Projection is now = -$225,000 with debt paydown.)

Now what? We use everything else to farm. We can’t touch the equity in the trust. The building won’t sell, it is on our acreage. Here are the remaining options:

Sell M&E/Titled vehicles (excluding older personal vehicles) valued at $1,270,000 (you still can’t sell the leased tractor). After sales commission and taxes you get $860,000. Of the $860,000, $340,000 goes toward paying down term debt. $860,000 - $340,000 = $520,000.

$520,000 – your negative working capital of $500,000 leaves you with $20,000 left over.

You can sell all your current assets, cash out the retirement account, sell all your equipment, and sell all but your two old vehicles to have $20,000 left over.

At this point you rent out your owned farm ground of 360 acres to the neighbor for $280/acre for a total of = $100,800. $14,000 goes to taxes. $110,000 goes to land, building, and house debt leaving you with $100,800 - $14,000 - $110,000 = -$23,200 to cover with your new job.

The Options: Plan D -Combination

Sell the equipment, sell all vehicles except your preferred personal vehicle, sell 80a of land. This is the retirement sales that you may be seeing. Equipment sale + 1 land sale. You pay off all term debt and the building loan. You get $78,400 every year in cash rent of 280a at $280/a - $10,000 taxes – land and house payments leaving you with = -$14,600 in payments every single year to cover. But you also have a bundle of cash to live off of for the next few decades as you get a job in town.

Summary

Some of you are probably saying, easy choice, Option B. That may be the case in this scenario, but what if the operation only owns 1 farm? What if they have more debt against the ground? What if they only farm 900 acres and the owned ground is 80a? What if the net worth is only $2,000,000 and not $4,000,000?

Every single situation is different. This farmer needs to choose between losing acres and worse margins, or stop banging their head against the wall and stabilize the operation while saving what they do have left.

Some operations, after everything is sold, might only have the house left. Would you go into 2026 with negative margins knowing your house was in jeopardy?

Difficult decisions. Terrible decisions to have to make. Anyone who is having to make these decisions and goes through with the early retirement may be making the right choice for their family. I wish them the best.

Anyone can be a few years away from going out of business. Stockpile cash when you can, and when others are being greedy, be weary.

Make it a great day.

Grant