15 years ago, succession planning in churches was unheard of. Now, many people and organizations make a serious imprint on the business of succession planning. However, we are already seeing major shifts in the focus of succession planning. The focus has typically been on who the replacement would be and what the church’s bylaws say about electing a new pastor.

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We have found that the most important question is: Can the pastor afford to retire?

No one likes to talk about their personal finances, especially a pastor in a boardroom full of people who likely out-earn them by multiple times. But the question must be asked: can the pastor afford to retire? With many pastors having opted out of social security, the question is even relevant for medical care.

When not properly planned for, retirement and succession can get messy. We have seen:

1. Pastor holds the church hostage,

2. Pastor negotiates emeritus status;

3. Pastor begs for money, and

4. Pastor retires and immediately starts a new church.

Succession planning isn’t only about ensuring the future of the church; it’s also about making sure the retiring pastor has the financial security to transition smoothly into the next chapter of their life.

As pastors approach the later stages of their careers, the importance of financial and retirement planning becomes even more crucial. With retirement on the horizon, this phase in life requires careful consideration to ensure a smooth transition from full-time ministry to retirement. It’s also a time to review your financial health, plan for your future living expenses, and ensure your legacy.

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How to Review Your Financial Situation Before Retirement as a Pastor

Before diving into retirement specifics, take a moment to assess where you stand financially. 

Consider:

Retirement savings: How much have you saved in your 403(b), IRA, and other retirement accounts? Is it enough to meet your retirement goals?

Debts: Do you have any remaining debts, such as a mortgage, student loans, or credit card balances? Plan to pay down high-interest debt as quickly as possible.

Income sources: Apart from your salary, do you have other sources of income in retirement, such as books or other IP, rental properties, or investments? If you didn't opt out of Social Security, take that into consideration too.  By reviewing these areas, you’ll be able to gauge whether you need to adjust your savings strategy in your final years of full-time ministry.

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Maximizing Retirement Contributions for Pastors: Boost Your Savings in Your Final Years

At this stage in your career, maximizing your retirement contributions is vital to closing any gaps in your retirement savings. Here are a few strategies:

Catch-Up Contributions: If you're 50 or older, you can make catch-up contributions to your retirement accounts. This allows you to contribute more to your 403(b) and IRA than the standard limit, giving your savings an extra boost in the final years before retirement.

Consider Roth IRA Conversions: If you have traditional retirement accounts, consider converting some of those funds to a Roth IRA. While you’ll pay taxes now, Roth IRAs provide tax-free growth and withdrawals, which can be beneficial in retirement.

Review Your Investment Strategy: Now that you're closer to retirement, it's important to shift to a more conservative investment strategy. Consider reallocating your assets to balance risk and preservation of capital, ensuring that your savings are protected as you transition into retirement.

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What Pastors and Boards Need to Know About Retirement Gifts and Tax Implications 

Are you going to give a retirement gift to the pastor? Many consultants rely on IRS Publication 55-422*. This Publication helps ensure that gifts are seen as voluntary and personal, not as taxable income.” The factors the IRS considers in determining whether a retirement gift is truly a gift are as follows: 

• "The payments were not made in accordance with any enforceable agreement, established plan, or past practice." 

• The minister "did not undertake to perform any further services for the congregation and was not expected to do so" following his retirement

• "There was a far closer personal relationship between the [minister] and the

congregation than is found in lay employment relationships," and 

• "The available evidence indicated that the amount paid was determined in light of the financial position of the congregation and the needs of the recipient, who had been adequately compensated for his past services.”

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*Every case this opinion is based on is regarding retirement gifts totaling under $30,000 per year, adjusted for inflation. 

Healthcare Planning for Retirement

Healthcare is one of the biggest expenses in retirement, especially for pastors who may not have access to employer-sponsored health insurance once they retire. Planning ahead for these costs is essential.

If the pastor has opted out of Social Security, they may lose access to the Medicare healthcare safety net. However, even if a pastor receives Medicare benefits, certain long-term healthcare coverage may not be available, such as long-term skilled nursing care. The number one question elder law attorneys hear is: How do I spend all my money to qualify for Medicaid? Long-term care insurance can be a useful tool in planning for retirement.

Medicare: Understand how Medicare works and when to enroll. Most people become eligible for Medicare at age 65, but you need to sign up within a specific window to avoid penalties. 

Health Savings Accounts (HSAs): If you’re eligible, consider contributing to an HSA. This tax-advantaged account allows you to save money for medical expenses in retirement. It’s especially useful if you plan to retire before reaching Medicare eligibility or if you opted out of Social Security.

Note for Boards: Consider the self-employment status of your ministerial staff, and if they have not opted out of social security, consider an additional 7.65% (2023 rate) increase to assist in paying the traditional employer’s side of FICA. For an annual salary of $50,000, a 7.65% increase would result in $3,825 per year. While taxable, this increase would help offset the FICA responsibility the pastor carries on their own.

Estate Planning: Protecting Your Family and Legacy

A key part of your financial plan as you near retirement is ensuring that your estate is in order. Estate planning can provide peace of mind knowing that your assets will be handled according to your wishes.

Create or Update Your Will: Make sure that your will clearly outlines how your assets will be distributed. This includes property, savings, and other assets you want to leave behind for your family or ministry.

Power of Attorney & Health Care Directives: Set up a durable power of attorney for financial decisions and a healthcare power of attorney for medical decisions in case you become unable to make those decisions for yourself.

Charitable Giving: Many pastors feel called to leave a portion of their estate to a church or ministry. If this is part of your plan, make sure that it’s clearly stated in your will and that your family is aware of your wishes.

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Whether you are a board helping a pastor/church in this transition or you are the transitioning pastor yourself, having trusted legal counsel is essential. If you or your organization does not have legal counsel to help guide you through this time, please reach out to us. 

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The information provided in this article does not, and is not intended to, constitute legal advice or investment advice; instead, all information, content, and materials available in this article are for general informational purposes only.  The information contained in this article may not constitute the most up-to-date legal or other information.  This article contains links to other third-party websites.  Such links are only for the convenience of the reader, user, or browser; the author does not recommend or endorse the contents of the third-party sites.

Readers of this article should contact their attorney to obtain advice with respect to any particular legal matter.

Anthony & Sparkman, PLLC is a law firm with attorneys located in both Dallas/Fort Worth and Kalispell, Montana, that provides legal counsel to both churches and nonprofits around the world. John Anthony & Michele Sparkman have spent over a decade providing general counsel to churches and nonprofits on issues ranging from incorporation, governance, employment, policies and procedures, taxes, succession planning, real estate development, and much more. For more information, visit our website at www.thenonprofitteam.com.

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