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How Churches and Pastors Should Think About Retirement

By Raul Rivera

Planning for retirement can essentially be encapsulated by a simple sentence: "I choose to live with less comfort today so that I can enjoy greater comfort during retirement." It requires disciplined, methodical steps and planning. It has become evident through my observations that many pastors and leaders begin to feel the looming pressure of retirement planning encroaching upon them in the 3rd quarter of their most productive years. I want to share that even if you are late to the game, it’s never a bad idea to enter anyway.

Let me describe a common situation I encounter when discussing retirement with pastors approaching that phase of life. Often, a pastor will depart a secular occupation in their thirties or forties to dedicate themselves to ministry, trusting the Lord for divine provision for their welfare. Then, as they reach their mid to late fifties, they start to ponder what their future holds, usually within a 10 to 20-year horizon. That's when the urgency of retirement planning strikes. They consider questions like, "Have I prepared sufficiently for retirement?", "Can I continue pastoring into my eighties?” and "Is my church adequately arranging a retirement plan for me?" These concerns are not abstract; they are the day-to-day realities confronting churches and ministers alike.

Let’s Get Personal

Discussions about retirement often stir mixed emotions, as they remind us of not just the financial implications post-59 and a half but also the reality of our advancing years, the prospect of an empty nest, and the inevitable question: what next? I frequently share with my wife how our life's journey began as just the two of us, brimming with joy. We've nurtured a family, and now, as they stand on the brink of adulthood, our future still holds much promise. We believe that with God, we don't 'retire' but 'refire.' The anticipation of what's beyond the horizon fills us with excitement. The younger generation of believers will look to us, having paved the way, wondering if they possess the resilience to endure. We will be their support. To fulfill this role, we must be disciplined now, planning diligently for our golden years to ensure we have the freedom and choices to embrace life to the fullest. Let me share four plans you can utilize as retirement vehicles for your golden years.

Four Retirement Vehicles for Your Golden Years

  1. Roth IRA: The Roth IRA presents a valuable opportunity for ministers who have chosen not to pay self-employment taxes. Without the burden of the 15.3% self-employment tax—where deductions are not applicable—ministers enjoy an increase in their take-home pay. It is prudent to invest a portion of this additional income, ideally at least half of the tax savings, into a Roth IRA. This approach harnesses the benefit of investing already taxed income into an investment vehicle promising tax-free growth. Over the years, this strategic investment accumulates, and when the time for withdrawal arrives, the distributions are tax-free, thereby offering a fiscally sound retirement strategy for ministers.

    The Roth IRA benefits one-income families because the minister and spouse can contribute to their own Roth IRAs, even if the spouse does not have earned income and is a one-income household. This is possible through what's known as a "spousal IRA.” A spousal IRA allows a working spouse to contribute to an IRA on behalf of a non-working spouse. This is an excellent way for couples with one income to save for retirement in both spouses' names. For 2023, each spouse can contribute up to $6,500 to their respective Roth IRAs for a total of $13,000.00. Let me share the math with you. If you contribute $13,000 a year into your Roth IRA for 20 years with an average annual return of 6%, the principal balance at the end of the 20 years would be approximately $478,212.69. The Roth IRA should be one of ministers' many retirement planning strategies.
  2. 403-B: A 403(b) plan is a type of retirement savings plan similar to a 401(k)-plan used by for-profit organizations but specifically designed for certain public school employees, tax-exempt organizations, and ministers. Ministers can contribute to a 403(b) plan on a pre-tax basis through salary deferrals. This means the contributions are deducted from their paycheck. In some cases, employers can contribute to their employees' 403(b) plans through matching contributions or discretionary contributions. The earnings on investments in a 403(b) plan grow tax-deferred. Participants do not pay taxes on the investment gains until they withdraw the money, typically after they retire.
  3. Deferred Compensation Plan:  Let me explain by giving a real-life example of a church and pastor.  Both the husband and wife were employed by the church.  When it came time to give them a raise, they opted to have all the salary increase placed into a deferred compensation plan.  Here is how it works.  Instead of the pastors receiving the raise, the church put it into a conservative investment account.  The IRS does not treat this money as taxable income but as church property. When the time comes for the pastors to retire, the church can pay it out to them over many years.  What is best is that because it is considered income earned for ministerial services, the pastors can get it paid out as housing allowance, keeping it tax-free. Let me give you a few details:

    The plan is set up under Section 3(33)(A) of ERISA: Generally, this section provides that the plan is established and maintained by a church or a convention or association of churches which is exempt from tax under the Internal Revenue Code. These plans are typically exempt from many of the regulatory requirements of ERISA, which apply to secular employee benefit plans. To be more specific, this provision exempts qualified church plans from certain administrative and fiduciary requirements. This means that such plans do not need to meet the same reporting, disclosure, participation, and vesting requirements as other retirement plans covered under ERISA.

    The church must be a tax-exempt organization under Section 501(c)(3): For the plan to work, the church must be qualified as a tax-exempt
    organization under Section 501(c)(3). If your church has not applied for its 501(c)(3), our StartRIGHT Service has helped thousands of churches obtain 501(c)(3) tax-exempt status and establish a strong foundation that protects what God has given them to lead.

    Like all investments, there are some risks: For the plan to qualify as tax-exempt, there must be a “substantial risk of forfeiture” provision. This term refers to the conditions the pastor must meet for the plan to remain tax-exempt. 
    1. Performance Conditions: The pastor might need to stay with the employer for a certain number of years (the vesting period).
    2. Risk of Loss: If the employee fails to meet the agreed-upon performance goals, they forfeit the right to the deferred compensation.
    3. Investment not protected if the church files for bankruptcy: The investment is subject to creditors if a church fails to meet its financial obligations. If a church were to file for bankruptcy, the pastor's deferred compensation could be at risk because those assets would likely become part of the bankruptcy estate subject to the claims of creditors.

Personal Diversified Investments: This strategy holds a special place in my preferences, though it may not suit everyone. I'll offer a brief rundown without delving too deep. Spreading your investments across varied asset categories such as stocks, bonds, and real estate can balance risk and possibly enhance long-term gains. I constantly remind myself of the importance of selecting an investment blend that matches my risk tolerance and the timeframe for retirement. My initial investment of choice was in real estate. Again, I recognize that while it is a compelling and legitimate strategy, it is only for some.

Consider the significant impact for pastors retiring with even one rental property, which could generate an additional $1,500 monthly. Another asset class I focus on is stocks. When I invest in stocks, my goal isn't to chase short-term market trends but to truly understand the company I'm investing in. Rather than trading stocks, I see it as investing in a business. A favored approach of mine is to invest in companies that pay dividends. Choosing a solid company mitigates worry about short-term stock price fluctuations, as the dividends continue to pay out regardless.

In Closing

The journey to a well-deserved retirement is not a sprint but a marathon that requires foresight and consistent effort. As we've explored, there are several vehicles through which pastors can secure their financial future. Remember, retirement planning is not merely about ensuring financial stability; it's about stewarding the gifts God has given us so that we may serve Him and others for as long as possible. It's never too late to start. A Chinese proverb says, “The best time to plant a tree was twenty years ago. The second-best time is now.” So, let us embrace the discipline of planning with the same zeal with which we embrace our calling. May we all look towards our golden years not with trepidation but with the hopeful anticipation of new opportunities to 'refire' our passion for ministry, secure in the knowledge that we have prepared well, both spiritually and financially.

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