Retirement is the last thing on the minds of most equine small business owners. If they’ve thought about it at all, it’s with a vague sense that they’ll die with their boots on. They love the horse business and can’t imagine ever leading a life without horses. Why, they say, would they ever plan to retire and leave what they love?

That’s the line they’ll give you if you ask. Meanwhile their conscience may be nagging them because they realize they haven’t done enough—or anything—to ensure a secure retirement. They may feel clueless about how to plan for their financial future. Or they really don’t want to know the awful truth about what their financial future will be like if they keep their heads in the sand.

Whether you plan for it in advance or not, retirement will eventually happen if you live long enough. A life event, a health crisis, the physical wear and tear of years or mental burnout can slow you down or stop you in your tracks. At that point, you will have a finite amount of resources to carry you for life. At that point, wishing you had more won’t make it so. To have what you wish to have when you retire, you have to plan. Starting now.

If you’ve never thought much about retirement, start planning by asking yourself three basic questions:

1) How much monthly or annual income will I need in retirement?

2) What assets do I currently have to help fund that retirement income?

3) How do I make up any shortfall between what I need and what I have?

HOW MUCH YOU’LL NEED

Common wisdom holds that most retirees will need about 70 percent of their last salary in retirement in order to maintain their lifestyle. That rule of thumb may not work well for many horse business owners.

If you are a sole proprietor whose business and personal expenses tend to overlap (the business leases the truck; clients pay for dinner when you go to shows; your old show horse gets fed from the same bin as all of the client’s horses), you may not have a realistic picture of either your living expenses or your true income from the business (the salary you take plus these benefits). Carry a notebook with you for a month or two and jot down these subsidized expenses. Similarly, an employee whose employment package includes housing or the use of a vehicle needs to consider what it’s going to cost when these expenses are coming out of his or her own pocket in retirement.

A more realistic way to calculate your retirement income needs may be to look at your current living expenses. If you’re happy with your current lifestyle, total up all of your living expenses including housing, utilities, food, transportation, health care, insurance, clothing, personal care items, entertainment, travel, taxes (see sidebar for helpful websites).

Then you need to think about how your current expenses will change when you retire. You may move to a smaller home or even another state with a lower tax rate. Your health care costs will change once you are eligible for Medicare. If you’d like a different standard of living when you retire, run a budget based on expenditures that would enable you to achieve it. While inflation will affect actual expenses in your retirement years, this still gives you a good starting point.

TAKING STOCK OF YOUR ASSETS

Now you have to think about where this money is going to come from. Social Security provides a basic guaranteed monthly income based on how long you’ve worked and how much you earned. Depending on your employment history, you may also have a pension that will add to your guaranteed income. When you die, these assets disappear.

An investment portfolio funded by personal savings and by employer contributions to various types of retirement savings accounts provides a level of income that will fluctuate depending on market conditions. Unlike fixed payments from Social Security or a pension, income from a portfolio has the potential to increase as the market goes up to keep pace with or even beat inflation. It also carries the potential for loss if the market goes down. Your tolerance for risk will determine how you manage your portfolio as you build your nest egg.

A volatile portfolio is not a huge problem in pre-retirement years. A down market actually can be an advantage as you are able to accumulate assets at discount prices. Once you retire, however, your portfolio must generate income. A stable portfolio becomes important. If you need to make large withdrawals for living expenses from a portfolio that has lost capital in a down market you will destroy your nest egg, leaving you with less retirement income than you planned.

Complex projections of market behavior known as Monte Carlo simulations suggest that if you withdraw 4 to 5 percent of your portfolio each year in retirement, you have a 90 percent chance of not running out of money before you die. When you die, any remaining amount will be available to your heirs.

Real estate may be a significant part of your business assets. If it is currently generating rental or other income, you need to decide if you want that income to be part of your available monthly funds or whether you want to liquidate this asset and put the funds into other income-producing investments. You may have significant cash tied up in other hard assets including machinery, trucks, trailers, tack and horses which you can liquidate to help build your retirement portfolio. Finally, you need to consider whether an inheritance may affect the amount of personal savings you need to accumulate to meet your retirement goals.

It takes a great deal of careful research and thought to factor in all of the variables that can affect your retirement plans. A number of sites on the World Wide Web offer retirement calculators to help you crunch the numbers more easily (see sidebar). While the assumptions they use about life expectancy and rates of return on investments may not always be pertinent to your particular situation, if you plug your numbers into several of them, you will begin to get a picture of the amount you need to have available to support you in your golden years. As a quick rule of thumb, consider that if you plan to draw 5 percent off a portfolio annually, you will need to save $500,000 to generate $25,000 in income. If you want $50,000 annually, you need to save a cool million. Buying lotto tickets does not constitute a sound financial plan for getting there.

MAKING UP THE DIFFERENCE

Many people think of saving as something to do with “surplus” money. Instead, says David Chilton, author of “The Wealthy Barber,” a book which describes how average Joes and Janes can accumulate that million, they should pay themselves first—make savings your top financial priority, not the last. Many people don’t feel they can control their expenses but spending is simply a matter of daily, weekly and monthly choices. It’s the choice between the generic brand and the name brand at the grocery store. It’s the choice between eating with your wealthy clients at the French restaurant or eating with other trainers at the diner. It’s the choice of buying new equipment when leasing or buying used or making do with what you have might make more financial sense. It’s putting some of the windfall profits from that big horse sale into your retirement plan before they all disappear into the business.

If you are projecting a significant shortfall between retirement needs and retirement savings, you need to find more ways to save regardless of your age. As an employer or employee, research the tax-advantaged retirement savings plans that are available to you including IRAs, Roth IRAs, SIMPLE IRAs, Keogh Plans, SEPs and 401(k) plans. For example, tax law changes in 2001 now make it possible for solo business owners to put away substantially more in a 401(k) plan than they previously could and with minimal paperwork. The 2001 changes allow those over 50 to put an additional amount into tax-deferred accounts, a big help for late savers.

Tax savings when the money goes into these retirement savings plans plus growth in a tax-free environment gives them a great advantage over taxable investments. Money growing in these retirement savings plans works the magic of compounding much faster than the same amount invested at the same time in a taxable account. Also, when you begin withdrawals in retirement, you may be in a lower tax bracket than you were during the years you earned the funds.

Another option is to plan to work longer. This works in your favor two ways. First, if you continue working until age 70 or 75, the additional 5 to 10 years of savings can help you make up a considerable amount of the shortfall. Second, the time you continue working means that your nest egg will have to support you for fewer years in retirement. Besides paring expenses and scaling back your lifestyle in order to save more, consider retiring to a less expensive region of the country where the costs of living and taxes may be lower.

IT’S ALL IN THE TIMING

The sooner you start saving for retirement, the better off you are going to be. Young singles with no children to provide for have greater flexibility to control their expenses and boost their savings rate. Given the leverage of compounding, that gives them an unbeatable investment advantage over those who wait until their 40s or 50s to begin thinking about retirement savings (see table).

Even though they are not your peak earning years, plan to save as much in your 20s and 30s as you can. This is a time in your life when it is the easiest to control expenses, so make the most of it. Develop good lifetime spending habits and an aversion to credit card debt.

In your 30s and 40s, maximize your deposits to a 401(k) plan if one is available to you. Research and make the most of other tax-sheltered retirement savings plans that are available to you as an individual or an employee. As a rule of thumb, financial advisors recommend a goal of saving 15 to 20 percent of your pre-tax dollars for retirement each year.

In your 50s and 60s, if you haven’t saved enough to retire, you’re going to have a rough road ahead. Find ways to cut your current living expenses and increase your savings. When you finally retire, consider buying your own pension by shifting some of your portfolio assets into immediate fixed annuities to increase your guaranteed cash flow and reduce the risk of losing what you have. Even then, you may be looking at a lower standard of living in retirement. Catching up is hard to do.

How Much is Enough? Websites Can Help

The following chart assumes a retirement age of 65 and a 6% annual return on invested funds.

Age Start Saving 25 Monthly Savings $269 Annual Savings $3,231

Age Start Saving 40 Monthly savings $759 Annual Savings $9,113

Age Start Saving 55 Monthly savings $3,116 Annual Savings $37,934

These numbers assume that these amounts are put aside monthly without fail and invested to take advantage of compounding. In reality, people’s savings rates are likely to fluctuate. They may save regularly until a job loss or health crisis or college-bound youngsters make it harder to put money aside. The earlier you save and the more you can put aside, the better off you are going to be in retirement should other financial needs interrupt your retirement savings program.

But, for a general picture, it seems like anyone hawking financial products on the web has a retirement calculator of some sort to help scare you into saving more. Some are relatively crude estimates; others get into quite a bit of detail. One of the problems with many retirement calculations is that they are based on linear projections. The formulas assume that you are going to save the same amount on a monthly or annual basis for a long period of years. Or they assume that the rate of return on invested savings will hold steady over a long period of years. Consider any calculator just a rough estimate of your retirement situation.

• http://smartmoney.com/retirement gives a clear explanation of qualified retirement plans and possibilities for small business owners and sole proprietors; simplified worksheets explain how much you need to save for retirement and how long your money will last.

• www.kiplinger.com/tools/retcalc2.html has a simple calculator for those in a hurry.

• www.statefarm.com/cgi-bin/calculator3.cgi#calc has a very simple calculator that will do rough calculations to compare three different retirement scenarios for you; it allows you to modify the calculator to figure the annual deposit you need to make to reach the income goal you’ve specified, how much income your current savings rate will generate, or what your current savings should be to generate the level of retirement income you want.

• www.usnews.com/usnews/nycu/money/moretcal.htm supplies a more in-depth retirement calculator that accounts for retirement health care costs and allows you to adjust your personal situation for factors including life expectancy, return on investment, changes in Medicare benefits, changes in Social Security benefits, and changes in future tax rates.

• www.quicken.com/retirement/planner can be tweaked to make it more useful for couples; it makes assumptions about future income tax and inflation rates based on the state where you plan to retire; after it calculates your results, it ends with an action plan for saving to meet your retirement goals.

• www.calcbuilder.com/cgi-bin/calcs/RET2.cgi/usatoday provides a detailed calculator that allows you to answer specific questions including what your retirement income will be given your current savings, whether you are saving enough for the income you would like to have, what happens if you increase your savings by various increments, what happens if there are changes in Social Security, or what happens if you underestimate your retirement expenses.

• Lastly, www.troweprice.com (go to the homepage, click on the link to its tools and calculators section, then on retirement tools) offers some tools specific to businesses with sole proprietors and allows those with some retirement funds to invest to explore their options.

Will There be Social Security?

Depending on your age, you may not feel very secure about Social Security. Many financial calculators factor that uncertainty into their predictions. In the meantime, you can find out what your future benefits are likely to be under current laws by turning your mouse to www.ssa.gov and following the links to print out form SSA-7050-FA, Request for Social Security Earnings Information. Mail it in and the Social Security Administration will send back a history of your employment and earnings. You will learn if you have worked enough calendar quarters to qualify for Social Security and get an estimate of your future benefits should you retire early at age 62, at the normal retirement age of 66 or wait until you are 70. If you feel comfortable that your computer is secure, you can request the information online at www.ssa.gov/statement.

For More Info...

Basic budget planners at these sites can help you estimate retirement living expenses:

• www.parenting.com (click on “family finance,” then on the checklist under tools)

• www.miserlymoms.com/MOMbudget.htm (follow budget link)

• http://members.aol.com/Moneymstr/step1.htm

• http://moneycentral.msn.com/investor/calcs/n_

retireq/main.asp (has a calculator that compares current living expenses to likely retirement expenses and calculates the difference)

Robert P. Kreitler