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Retirement Planning for Clergy

By Stevonne German

Everyone understands the concept of retirement on a general level: you save money while you are working, and when you turn 65, you stop working and have money in the bank to live off of until you are called to heaven. 

The reality though looks much different. Most people know this information, but they don’t apply the knowledge they have been given. I’m guilty of it myself! 

When I was in school, my professor told the class, “If you put away $5,000 this year, by the time you reach retirement age, you will have over three million dollars in the bank saved for retirement, and you can live your best life.” Of course, my fellow classmates and I were excited about the numbers, but in a class of maybe 30 students, only one or two of us actually took that knowledge to heart and applied it. 

From my experience speaking with hundreds of pastors, I know many pastors do not have a retirement plan in place. Most churches only pay the operational expenses which may include a salary for the pastor and ministerial staff. But how many churches actually build a retirement plan into those compensation packages? 

Lately, I have been contemplating how to set up a retirement plan for my pastor because it’s a benefit plan our church has yet to implement. In my research, I learned very quickly that there are many intricate details and options to consider. 

I started doing some research and found some shocking information as well as some beneficial resources that could make a world of difference for anyone who plans to retire.

My challenge to you as a reader not only to read this blog but to apply it. Afterward, email us and tell us what you did to put these words into action. At the end, we will show you how to get this plan started. Are you ready to change your future? Great! Let’s dig in.

5 steps to a successful retirement plan

Pastors work many hours and do not get paid what they are worth. The work they do is priceless. Though not every church can afford to pay its pastor for what he or she is worth, they should at least set them up for success during their tenure and after. Pastors should have peace of mind knowing their families will be taken care of if anything were to happen. Here are a few items to consider when thinking about a retirement plan for a clergyman:

  1. Compensation agreement 
  2. Calculate the retirement fund annual and end goal
  3. Implement housing allowance and apply for self-employment tax exemption
  4. Assess current investments 
  5. Execute the plan

Step 1. Create a compensation agreement

A compensation agreement is a contract between the pastor and the church. A retirement plan is put in place within this contract which must be signed before any of the other items can go into effect.

The first important item to consider is whether or not your pastor has a compensation agreement as of today. If you answered no, don’t worry. You can call us at StartCHURCH at 877-494-4655 and our specialists can create one for your pastor. If you answered yes, congratulations, you can check one item off your list. 

In the compensation agreements that we create at StartCHURCH, several benefits are reviewed, including:

  • Cafeteria plans,
  • Time off,
  • Taxable and non-taxable fringe benefits,
  • Educational assistance,
  • Dependent care assistance,
  • Insurance and medical reimbursement, and
  • Housing allowance.

Our compensation agreement service also covers retirement, succession, and even death plans. We cannot tell you what to do as it pertains specifically to your situation, but we can guide you on how to ensure the agreement encompasses the right language. 

To avoid a conflict of interest, it is best practice for a nonprofit to select a group of people outside of the board of directors to create compensation packages to be voted on. This committee is typically comprised of individuals who have sound financial background and are comfortable comparing data that proves the salary is reasonable. The compensation committee is given the document and will determine what benefits the church can provide to the pastor at the time. 

Once the document is ready, it will be voted on by the board of directors. The data provided has already been compared to other important key indicators to ensure the pastor will not be receiving any excess benefits. The agreement is also recommended to be reviewed on an annual basis so that as the church grows, these benefits can change for the benefit of the pastor. So, if you are pastoring a new church that doesn’t have many resources right now, it’s okay because as long as you have a plan in place.

Not long ago, a pastor called me and said, “I have been diagnosed with cancer, and I need to make sure I have a plan in place so that my church doesn’t run into the ground if I’m gone.”

As shocked and saddened as I was by this news, I felt honored that she could call us and get a succession plan set up with ease. 

If a pastor is married, we will automatically include a line in the agreement that discusses how much the spouse will be paid and for how long after the pastor’s passing. This also includes both an amount and duration for health insurance, as well. Why? Because that is an opportunity to honor your pastor. The peace of mind that comes with knowing your family is protected is priceless, and the Bible tells us to take care of the widow and widower. So, it is recommended to include such language in a compensation agreement, as well.

The compensation agreement also includes a table that will break down all of the benefits that will be provided to the pastor. The one line we are going to really dissect is the retirement plans (403(b), 457, SIP, or IRA, etc.) 

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Types of retirement plans

There are many types of retirement plans that are popular among church employees. We will not go into great depth, but listed below are a few that are common in many financial portfolios:

  • IRAs
  • SEPs
  • Non-qualified deferred compensation plans
  • Tax-sheltered annuities (403(b) plans)
  • Church retirement income accounts
  • Qualified pension plans
  • 401(k) plans
  • “Rabbi trusts”

Step 2. “Write the vision and make it plain”

Retirement income is not taxed until it is actually in a bank account and ready for use. So, how do you calculate the amount of money someone needs for retirement? The short answer is: you can’t really know how much someone will need for retirement. The good news, though, is you can predict how much they will need. 

My pastor has a large family. Theoretically, when he turns 65, all of his children will be out of his home, and it will just be him and his wife. There will be fewer expenses for them at the age of 65 than if he were to retire at 50. When he turns 65, my pastor and his wife could live in a two-bedroom home and be comfortable and safe without the big expenditures that come with a five-bedroom home. 

However, as an example, let’s say a five-bedroom home, two vehicles, and all of his typical expenses add up to $5,000 per month. If I were planning a retirement fund for my pastor, I would want to make sure we budget a plan for at least $60,000 per year. We want our pastor to live long, so we take that $60,000 and multiply it by 20 years to get a goal that we can set by the time he retires. In this case, $1.2 million should cover him for 20 years. That’s pretty good. I think the pastor and his wife would be very comfortable IF it were just the two of them. Now, inflation does play a role in determining a retirement plan, but at least at this point, you have figured out a baseline goal for what your pastor needs annually. You have now laid the foundation and can build from there.

Please keep in mind this is just an example. If you really want to know how to determine the best retirement plan for yourself, please seek the advice of a financial expert. You can also reach out to a lawyer through the StartCHURCH Attorney Network, and they can provide some legal expertise.

A stable and secure future

At this juncture, you should have a plan on paper that you can present to the board of directors for your pastor’s retirement.

If you're wondering about the next three steps, keep an eye out for our next blog that will wrap up the rest of the five steps in creating a retirement plan. I will also discuss where you can get the money to fund the plan you have written out. Remember, by the end of our next blog, we want you to call us at 877-494-4655 and let us help you implement all of the steps that you’ve learned.

Until then, I encourage you to have your pastor review his or her compensation agreement to make sure everything is up to date. And, if your pastor doesn’t have a compensation agreement, give us a call today at 877-494-4655 to learn how we can help you create one that includes a plan for a stable retirement and a secure future.

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