5 Steps to a Minister's Retirement Plan

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. 

While most people know this information, they don't apply the knowledge they have been given. I'm guilty of this myself! 

When I was in school, my professor told the class, "If you put away $5,000 this year, by the time you're ready to retire, you will have over three million dollars in the bank saved, and you can live your best life."

 Of course, my fellow classmates and I were excited about the numbers! But in a class of around 30 students, only a handful of us took that advice to heart and applied it. 

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

So how many churches actually build a retirement plan into their minister's compensation package? 

When I started doing research on the topic, the information I found was shocking! In this blog, I'd like to share beneficial resources that could make a world of difference for anyone in ministry who plans to retire one day.

My challenge to you is not only to read this blog but to apply it. In 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

The work pastors do is priceless—but many do not get paid what they are worth. While not every church can afford to pay its pastor their fair value, they can still set them up for success during and after their tenure. Ministers should have peace of mind knowing their families will be taken care of no matter what life may bring. 

Here are five steps to consider taking to create a retirement plan for a clergyman:

1. Create a 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

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 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
• 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 contains the right language. 

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

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 commonly found in 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"

2. Calculate the Retirement Fund Annual and End-Goal

"Write the vision; make it plain on tablets, so he may run who reads it." - Habakkuk 2:2

The next step is to calculate the retirement fund annual and end goal. However, 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 without the major expenditures of a five-bedroom house.

Here's 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 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. Now, inflation does play a role in determining a retirement plan. Still, 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.

3. Self-employment Tax Exemption and Housing Allowance

Apply for Self-employment Taxes

If the salary for a pastor is $100,000 per year, the self-employment taxes paid on that income are $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? 

Here is an example 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. In 40 years, they would have saved over $1.1 million. 

For 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 correctly made, 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. 

Edward Jones Retirement Calculator

Dave Ramsey Retirement Calculator

Implement a Housing Allowance

The second biggest money-saver is approving a housing allowance for your pastor. I like to call the self-employment tax exemption and the housing allowance the "dynamic duo." Together they can make a pastor go from one of the highest-taxed individuals to one of the least taxed individuals. 

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. However, if the pastor had a housing allowance, 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 a 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 merely a calculation to be used as a "tax benefit" when annual tax returns are completed. The savings from implementing a housing allowance can greatly benefit your pastor and supply more money to their 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.

4. Assess Current Investments

Many pastors in the 21st century are bi-vocational with the 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 essential to assess the plans your pastor is currently enrolled in to properly evaluate their portfolio moving forward. In short, you want to know what shoes are in your closet, so you don't rebuy the same pair. The key to a successful retirement plan is variety!

If your pastor has a 401k offered through their marketplace job, then a Roth IRA may be worth looking into. Your pastor can manage that account independently and contribute up to $5,000 in it per year. 

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

I encourage you to set an appointment with a financial advisor and discuss your plans for your pastor and yourself. It will significantly benefit you—trust me!

5. Execute the Plan

It is an excellent idea to start a retirement plan for your pastor when first planting a church. After all, it is honoring to show the church's plans to provide financial security to your pastor and their family.

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. 

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 their retirement plan. That may not sound like much initially, but what would the pastor have without a retirement plan a place?

If the church is not able to set aside money for retirement at this point, ask yourself this question: are you at least covering your pastor with life insurance? 

If you have more questions or answered "no" to any of the questions I've asked, StartCHURCH recommends a company to help. If you're interested in learning more, give us a call at 877-494-4655.

A Stable and Secure Future

At this point, you should have a plan on paper that you can present to the board of directors for your pastor's retirement. We want you to call us at 877-494-4655 and let us help you implement all of the steps that you've learned today.

I encourage you to have your pastor review their compensation agreement to ensure everything is up-to-date. 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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