When it comes to retirement investments, there is no shortage of options. From traditional investments like stocks and bonds to alternatives like precious metals and real estate, a well-diversified retirement portfolio can feature many different asset classes.
If you’re entering retirement with a nest egg, it’s crucial to park that capital somewhere safe from downward forces like market volatility, inflation, and tax liability.
[ Note: You’re reading Part Two of a larger guide on farmland as a retirement investment. If you haven’t already, check out Part One here. ]
The consensus is that retirees should focus their portfolios on income and away from growth. This means divesting from assets with no coupon and towards steady returns. But where to look?
Farmland as an Asset Class
When it comes to retirement investments, farmland provides an opportunity to secure passive income in retirement as well as a real asset that can appreciate into posterity.
Parking your assets in farmland may allow buyers to reduce capital gains taxes in the long run, as farmland is often taxed at a lower rate.
(Disclaimer: No part of this document is intended to provide tax advice or any financial advice whatsoever. Always consult with your tax advisor before making any decisions.)
Real, income-generating assets can play a key role in your portfolio of retirement investments. Additionally, new avenues to farmland ownership can lower the ticket price of farmland.
Accessing Farmland for Retirement
If you’re looking to use farmland as a retirement vehicle, owning the land outright may cause more headaches than desired.
With direct, single-party ownership, investors must become much more involved in operations. Hiring a competent manager can be a daunting task, and the same is true for sales.
There are a variety of retirement investments that make use of farmland assets, and each have their own advantages and disadvantages.
Changes in global farmland value by region
Mutual funds: Mutual funds have a relatively poor track record in beating the market, especially during an economic crisis. Researchers at the Chicago Booth found that 60-80% of active fund managers lost money during recent crises.
Plus, if you want to go with a purer farmland investment, you’ll want to know that mutual funds can be made up of thousands of company investments, effectively diluting your exposure to farmland.
Mutual funds and other money managers are showing an increased interest in farmland as an asset class. But as an individual investor, there are better ways to access farmland.
Farmland delivers high returns with low volatility
Stocks: Publicly traded companies that manage farmland provide the option to buy stock. This can be an effective way of diversifying within the agricultural space by gaining exposure to other aspects of the industry, like ag tech, branding, and biotechnology.
However, investing in stocks of publicly traded companies exposes you to market volatility, eliminating one of the key benefits of farmland investing. Not to mention that most ag stocks don’t pay dividends.
Equities in the farmland space possess many of the problems that cause retirees to avoid the stock market in their later years. In general, alternative assets may be a better choice for those entering retirement.
REITs: REITs are a vehicle that offer exposure to real estate without the burdens of direct ownership and management. While most REITs focus on traditional real estate investments such as multi-family or commercial, there are farmland-focused REITs.
REITs provide the liquidity, diversification, and professional management that was once missing from farmland as an asset class. A consistent performer over the years, REITs can spread risk over a wide range of assets.
But REITs are not without their flaws. Transparency issues exist, and investors can never be sure which specific assets they own. Farmland REITs are also generally focused on low-margin row crops like soy, wheat, and corn.
Farmland returns, 1995-2015. Note the outsized returns in the permanent crop space (red).
Farmland Retirement Investments: An FAQ
How risky are farmland investments?
As with any investment, there is always some risk involved. Operational risk is always present, and to mitigate it, you’ll need to find an experienced, trustworthy farm manager.
Commercialization risk is also a factor. Even if you have a solid operator, you’ll need to be able to sell products effectively to generate consistent returns. Make sure that any potential farmland asset has a clear sales strategy in place.
Remember that you’re buying farmland with the bet that it will appreciate over time. You’re also committing to managing the farm operations so that you maintain a healthy return on investment.
Can I Invest in Farmland through my 401(k)?
Yes. Any type of self-directed retirement account can invest in alternative assets like farmland, including solo 401(k)s. With a solo 401(k), you retain complete checkbook control, allowing more freedom for diversification.
Checkbook control retirement plans allow individuals to branch out from traditional equities while preserving the tax-deferred status of their holdings.
The IRS recognizes solo 401(k)s are compliant retirement plans. As the plan trustee of your own retirement account, you decide how funds are invested. This means a greater ability to allocate to uncorrelated assets like farmland.
What about an IRA?
Another option is investing in farmland with a self-directed individual retirement account (IRA). The difference between an IRA and other retirement accounts is that you can diversify into assets beyond stocks and bonds, like farmland.
Adding farmland to an IRA can get complicated since you must follow strict guidelines to keep the IRS happy, and you’re expected to do your own taxes. You are also prohibited from making personal use or using it as collateral.
If you have a self-directed IRA, farmland assets can be a great way to generate income and realize appreciation over the long term. As more retirees look for alternative assets, expect farmland to make a big impact.
What about farmland investing in emerging economies?
Many areas of the planet are ripe for agricultural development, with proximity to rapidly growing population centers that promise an expanding market and healthy GDP projections.
Consider Latin America, where countries like Colombia rank 10th globally for precipitation, and arable land covers 40.3% of the total territory.
Having enough water is already a big deal in agriculture, and according to the global investment management firm Nuveen, areas with secure groundwater will rapidly appreciate in value.
Many countries have already seen serious booms in the agricultural sector, with land appreciation to match. Chile, Peru, and Argentina are clear examples; Colombia is soon to follow.
From indirect exposure to farmland via publicly traded companies and mutual funds to direct ownership via LOTs, there are several ways to include farmland in a retirement portfolio.
Farmland is an excellent way to diversify a retirement portfolio to protect yourself from market volatility while also providing a source of capital appreciation and passive income over the long term. To learn how you can purchase uncorrelated assets in emerging market farmland, click here.