25 Jul 2019

How to Finance Your Retirement Plan

Stevonne German

Having a retirement plan is nice in theory, but where do you get the money to fund it? 

I have been asking myself this question while trying to build a plan for months now. I’m sure if you read the first part of this blog, you were probably wondering the same thing. We are going to run through some scenarios, not to overwhelm you with information, but to show how simple it can be no matter how much money you have to put into the plan.

With that being said, are you ready to finance the retirement plan that you’ve been working on through this week’s blogs? Honestly, I am! After creating a vision board for my pastor, I started making one for my husband and myself, as well. It felt so good to have a plan in place. 

Knowing what is in store for your future and for your pastor’s future brings so much joy, it’s hard to keep it to yourself. This is going to be an eye-opener for us all. You are just one click away from making a game-changing plan! Let’s dig in!

In the first part of this blog, we covered how to plan for your retirement. If you missed it, you can catch up on the first two steps to creating a retirement fund by clicking here. 

Where do I put my retirement fund?

Now that you have a compensation agreement drafted and you know what your goal for the retirement plan is going to be, you need to devise a plan on how to accomplish this goal during the pastor’s active term. 

Let’s say my pastor is 40 years old when he starts in the ministry, and he wants to retire by the time he is 60. That gives him twenty years to save, invest, and execute the retirement plan we prepare for him. 

Before you can successfully open a retirement account (i.e., Roth IRA, 403b, etc.), you MUST have money to invest. But where does the money come from? Many of you by now have had that question pop in your head at least one time. The answer is actually not as complicated as it may seem. You can use the money saved from your housing allowance and self-employment tax exemption.

3. Implement a housing allowance and apply for self-employment tax exemption 

Self-employment taxes

If the salary for a pastor is $100,000 per year, the self-employment taxes that will be paid on that income is $15,300 (15.3% of 100,000). 

Would you rather pay the IRS that money or pay your pastor and show honor by putting it away for safekeeping in a retirement fund? 

Now, this blog is not going to be a detailed lesson in all the different types of retirement plans, but just know that $15,300 goes a long way. 

According to The 2019 Church and Clergy Tax Guide by Richard Hammar, if someone contributed $3,000 per year for 20 years at a 9% interest rate, that individual could have saved $167,294 in tax-deductible contributions and tax-deferred earnings. If that same individual had saved for 30 years, this amount accrued would be $445,726. And in 40 years, they would have saved over $1.1 million. 

For the purposes of this example, I used a retirement calculator to see how much could possibly be saved if a pastor put away that same $15,300 annually for fifteen years. 

Let’s say a pastor is 50 years old but has never put money aside for retirement. Better to start later than never. If the pastor retires in 15 years at the age of 65, and investments were done properly, the pastor could still save almost $450,000 in just 15 years at a 9% interest rate.

Remember, it is never too late to start saving and planning for your future. I encourage you to check out some of the retirement calculators below to see what kind of difference you could be making in your pastor’s future, as well as your own. 

Edward Jones Retirement Calculator

Dave Ramsey Retirement Calculator

Housing Allowance

The second biggest money-saving option is going to be approving a housing allowance for your pastor. I like to call the self-employment tax exemption and the housing allowance the “dynamic duo” because together they can make a pastor go from one of the highest-taxed individuals to one of the least taxed individuals. Federal income taxes vary, so it is not as easy to calculate as we were able to do with self-employment taxes in the previous example.

However, it is important to know that if the same pastor from the example above is receiving $100,000 annually and does not have a housing allowance, the pastor will have to pay federal income taxes on the full amount. If the pastor had a housing allowance in place, he would only pay taxes on the amount not excluded for housing expenses.

Here’s an example: Pastor Floyd calls StartCHURCH and purchases our Compensation Bundle. He completes the questionnaire, and we calculate his housing expenses to be $50,000. His board of directors approves the amount. When tax season rolls around, his Form W-2 will have $50,000 as taxable income in box 1, and box 14 will have $50,000 as housing allowance. If he only has to pay taxes on $50,000 instead of $100,000, the savings can be invested into a retirement fund.

It is worth mentioning that the housing allowance is not an amount that is physically paid to the pastor. It is simply a calculation to be used as a “tax benefit” when the annual tax returns are completed. The savings that come from implementing a housing allowance can greatly benefit your pastor and feed more money into the Retirement Fund.  

If you have questions about how to implement a housing allowance, give us a call at 877-494-4655. A church planting specialist is standing by to answer your questions.

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4. Assess current investments

Many pastors in the 21st century are bi-vocational with a goal of eventually solely operating in the ministry full-time. These bi-vocational pastors may be employed by companies that offer 401k plans or pension plans. It is important to assess what plans your pastor is currently enrolled in, if any, so you can properly evaluate his or her portfolio moving forward. In short, you want to know what shoes you have in the closet so you don’t buy the same pair. The key to a successful retirement plan is variety!

If your pastor has a 401k offered through his or her marketplace job, then a Roth IRA may be worth looking into because your pastor can manage that account on their own and can put up to $5,000 in that account per year. 

In this scenario, the pastor now has two different retirement funds working on his or her behalf. 

I recently was introduced to a financial expert who handles these decisions, and I am a firm believer in letting the experts do what they are great at. I encourage you to set an appointment and have a discussion about your plans for your pastor and for yourself. It will greatly benefit you, trust me!

5. Execute the plan

Now that we have our checklist completely marked off, it’s time to execute the plan.

It is an excellent idea to start planning for retirement for a pastor at the beginning of starting a church. After all, it is honoring to the pastor to show the church plans to financially take care of him or her, and it is ensuring to the pastor’s family for their security.

As mentioned above, our compensation agreements have a benefit line for retirement. If a pastor is paid $2,000 a month, which comes out to $24,000 a year, the board of directors may want to set aside 10% for the pastor’s retirement in a year, which will come out to $2,400. 

Now, can you imagine if I called a financial expert and asked him to invest that $2,400 per year for 10-years on behalf of my pastor yielding a 12% interest rate? At the end of that 10-year timeframe, the pastor could have a good amount of funds in his or her retirement plan. That may not sound like much in the beginning, but what would the pastor have had without a retirement plan a place?

If the church is not in a position to set aside money for retirement at this point, then ask yourself this question, are you at least covering your pastor with life insurance? If you have more questions or you answered “no” to a lot of the questions that I've listed so far, StartCHURCH recommends a company for help. If you’re interested in learning more about this company, give us a call at 877-494-4655 to get this information.

Honoring our pastors

When it comes time for your pastor to retire, would you rather present him with a $50 gift card and say, “Thank you, pastor, for your service, and thank you for your time.” Or would you rather hand your pastor a card that has the banking information with all of his or her retirement account information in it?

You don't have to be a big name and have millions of dollars in your bank account in order to set up a retirement plan for your pastor or yourself.  All you need is the will and desire to honor him and his family and think about his family the way he would want someone to think about yours. There are so many different options available you can find something that works for your organization, but I encourage you to truly look into options that work for you and benefit your clergyman for the long term. It is the best gift you can give your pastor and yourself for the long haul.

Remember, my challenge to you as a reader is not to just read this blog, but to apply it. Afterward, email us and tell us what you did to put these words into action. Now that you know how to put this plan into action, give us a call at 877-494-4655, and we can help you get your compensation plan set up today!

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Please feel free to comment. We always appreciate good dialogue. However, we do moderate each comment to ensure that it is on topic and not derogatory to other participants. We ask that you keep your comments brief and pertinent to the topic so that others may benefit.

Blessings,
Raul Rivera


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