Horse Economics. Catherine E O'Brien

on a personal horse owner’s liability policy with your desired limits of coverage, as well as equine mortality/theft and medical/surgical insurance. Premiums for these types of coverage depend upon the insurer’s underwriting guidelines, which may include the breed, age, sex, use, and purchase price of the horse, and your location. I’ve included information to help you locate equine insurance providers on p. 219.

      Finally, read every policy thoroughly upon receipt and understand the terms and conditions contained therein. If there is anything that you don’t understand, it is important to call the insurer or agent with any questions before you have an event that could result in a claim. There are responsibilities the insured—you—must fulfill in order to maintain coverage.

Part II

       RETIREMENT, INVESTMENTS, AND TAX PLANNING

       RETIREMENT PLANNING

       Social Security

      Creating your own plan for retirement is prudent, especially if you are now in your twenties or thirties. Unless substantial changes—other than privatization—are made to the system, it appears as though Social Security will not sustain future retirees at the benefit levels we currently expect.

      The Social Security Administration estimates that by 2018 it will begin to pay out more than is collected in taxes, and by 2042 it will have exhausted its reserves. The reasons given for this long-range financing problem are that people are living longer and the birth rate is lower: in 2008, 79 million “baby boomers” will begin retiring, and by 2030, there will be nearly twice as many older Americans as there are today, while at the same time, the number of workers paying into Social Security per beneficiary will drop from 3.3 to approximately 2.

      As a general rule, financial analysts estimate that most people require at least 70 percent of their pre-retirement income in order to live comfortably; however, with today’s rising health care costs, 80 to 90 percent is now often required by retirees. Social Security benefits are supposed to replace 40 percent of this and the balance comes from pensions, individual savings, and investments. Because of the looming problems with the Social Security System, it now appears that pensions, savings, and investments may become the mainstay of retirement income (for more information, see Resources, p. 220).

Pensions and Savings

      As you can see, you need to save for your retirement, and the earlier you start the better. For example, if you invest an initial lump sum of $3,000 in a retirement account that earns interest at a rate of 7.5 percent, compounded annually, and you continue to contribute the same amount each year, in 44 years, your account will reach $1,000,000! And, your actual cash outlay was only about $132,000—this shows the “power” of compound interest and is a good example of the “time value” of money.

      Compound interest occurs when interest paid on an investment is added to the principal, so interest is earned on an increasingly larger sum. Interest can be compounded annually, semi-annually, monthly, weekly, or daily. The more compounding periods per year, the more your money will earn.

      Obviously, the higher the interest rate, the more your investment will accrue. For example, let’s say Allison Smith wants to retire in 35 years with $750,000 in savings. In order to achieve this with an account that earns 6 percent interest annually, she will have to put in approximately $6,730 per year. In this case, her total cash outlay will be around $235,550. However, if her account earns 9 percent interest annually, she will only need to deposit $3,477 each year, and her total cash outlay will be much less—around $121,695.

       SO YOU KNOW…

♦ Vested benefits are guaranteed to an employee, even if the employee leaves the company. Usually, pension benefits are based on contributions from both the employee and the company. If the employee resigns, he only keeps the portion he contributed. However, after working at a company for a designated period of time, the employee also keeps the contribution the employer makes—the benefits are vested.

       Employer Sponsored Retirement Plans

If you have a retirement plan, such as a 401(k) through your place of employment, and you are vested^♦ in that plan, it is wise to make the maximum contributions that your employer will match. Although it often requires additional budget planning to enable you to set aside large amounts of your income, it is worth the effort: usually, the money you contribute is tax-deductible and grows tax-free until it is withdrawn.

       Individual Retirement Accounts

      If you are eligible, you can open an individual retirement account (IRA) at a financial institution, brokerage firm, or directly with a mutual fund. The amount you can contribute, and subsequently deduct, for a traditional IRA depends on various factors, such as your age, filing status, and modified adjusted gross income. For 2005, if you are under the age of 50, the maximum contribution to an IRA is $4,000 for a single contribution or $8,000 for a combined contribution (i.e., you and your spouse). If you are 50 or older, the maximum single contribution is $4,500—or $9,000 combined.

      There are two types of IRAs, the Traditional and the Roth. The Internal Revenue Service (IRS) gives you a tax break on both. With a Traditional, the tax break is up front: you can use your contributions as a tax deduction. However, when you retire and start drawing money out of the account, it will be taxed as income. There are also rules about receiving the distributions^♦: you are penalized for early withdrawals, and you must begin receiving required minimum amounts by April 1 of the year following the year you reach 70½. When you begin receiving the required withdrawals, you can no longer make contributions.

      Roth IRAs allow you to contribute to the account using “take-home” pay, and the interest earned on your investment is not taxed as income when you retire and receive distributions—as long as you satisfy all the IRS requirements. Contributions can be made to a Roth IRA regardless of your age, you can leave amounts in the account as long as you want, and upon your death, your beneficiaries may receive distributions income-tax-free. The IRS does impose limits on the amount you can contribute, depending on various factors such as your filing status and modified adjusted gross income.