Retirement and financial planning might not be the first thing you think about when starting your ministry, but taking the time to build a solid foundation will pay off in the long run. Decisions made in early career can have a profound impact on a minister, their family, and the church they serve. 

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Financial Planning

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What should pastors include in their financial planning? As a pastor, your financial planning must account for both personal expenses and ministry-related responsibilities. Early career financial planning should focus on key areas such as budgeting, debt management, savings, and retirement planning.

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• Budgeting: Tracking your monthly income and expenses helps you understand where your money goes and how much you can save or invest.
• Emergency Fund: Having a safety net of 3-6 months of living expenses will give you peace of mind and financial security during unpredictable times.
• Debt Management: Creating a debt repayment plan is crucial, especially if you have student loans or credit card debt. Consider using the snowball or avalanche method to pay off high-interest debt first.

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Saving for Retirement

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Planning for retirement may not be top of mind early in your ministry, but the earlier you start saving, the more prepared you’ll be. How can pastors save for retirement? There are a few specific options to consider:

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• 403(b) or 401(k) Plans: Traditionally, 401(k) plans are for for-profit businesses, whereas 403(b) plans are for nonprofits. We are seeing increased interest in churches using 401k plans. Part of this is due to the church board members' understanding of 401(k) plans vs 403(b) plans. 401(k) plans can offer a wider range of investment options, but 403(b) plans still offer mutual funds and annuities. Distributions from a 403(b) plan can be designated as housing allowance, allowance contributions, and distributions to be tax-free. This housing allowance benefit is by far a favorite benefit of the 403(b) plan. 

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• Rabbi Trust: Or, as tax professionals may call it, the Non-Qualified Deferred Compensation Plan. This retirement mechanism is used by many types of 501(c)(3) organizations, including churches. The Rabbi Trust is something called a “grantor trust,” meaning the funds stay the assets of the grantor until certain conditions are met. For example, as part of the retirement package for a senior pastor, a church opens a Rabbi Trust and invests $10,000 per year. The senior pastor’s interest is not vested; the investment account belongs to the church until retirement. At that time, the funds are paid out according to a schedule of installments or all at once.

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CAUTION: Do not attempt to establish a Rabbi Trust on your own. We have

seen cases where the pastor was liable for taxes on the entire amount without ever receiving the retirement funds.

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Start contributing regularly to your retirement fund, even if it’s a small amount. The earlier you begin, the more compound interest will work in your favor.

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Tax Benefits

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What tax benefits do pastors receive? The most well-known is the housing allowance, which allows you to exclude a portion of your income designated for housing from taxable income. This can significantly reduce your tax liability. Other common tax benefits and tips include:

• Self-Employment Tax Exemption: Pastors are considered self-employed for tax purposes, which means they may be able to claim deductions for business-related expenses.
• Itemizing Deductions: If you itemize your deductions, you can deduct expenses related to your ministry work, such as mileage, office supplies, and charitable contributions.

It’s a good idea to consult with a tax professional who specializes in clergy taxes to ensure you're taking full advantage of all available deductions.

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 Building an Emergency Fund

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Building an emergency fund is one of the first steps in securing your financial future. An emergency fund provides a safety net for unexpected expenses, such as medical bills, car repairs, or job-related disruptions. Pastors traditionally earn lower incomes, and we are often asked, “How can pastors build an emergency fund?”

• Start Small: If saving three to six months of expenses seems overwhelming, start by saving a smaller amount. Set aside a fixed percentage of your income each month.
• Automatic Transfers: Set up automatic transfers to a separate savings account. This ensures that you are consistently saving and not tempted to spend the money elsewhere.

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An emergency fund can help bring peace of mind to the unpredictable nature of income in ministry.

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Social Security

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Opting out of social security isn’t just about a monthly check – it also opts a pastor out of Medicare. This leaves many pastors with the option of paying out of pocket for healthcare once they retire or spending down their assets to qualify for Medicaid. New pastors should have an honest conversation about Social Security before they opt out. 

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They need to understand two things about opting out of Social Security: 

1) You cannot opt back in for any ministerial work, and 2) you are opting out of Medicare. New ministers should also be aware that they will be taxed as self-employed, and choosing not to opt out of social security will result in an increased tax burden.

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 Insurance

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What types of insurance should pastors consider? Here are a few types of insurance each pastor needs to consider for themselves and their family:

• Health Insurance: Whether provided by your church or purchased independently, ensure that you and your family have health coverage to protect against medical expenses.
• Life Insurance: Life insurance is crucial for ensuring your loved ones are financially protected in the event of your death. Term life insurance is often more affordable and offers coverage for a set period of time.
• Disability Insurance: In the event that you are unable to work due to illness or injury, disability insurance can replace part of your income and help you stay financially stable.

Review your options and make sure you have sufficient coverage to safeguard against potential risks.

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Pay Off Debt 

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How can pastors pay off debt? Debt, especially student loan debt, is common among pastors. However, having a clear plan for repayment is essential to avoid carrying high-interest debt for years. Here are two strategies to pay off debt effectively:

• The Snowball Method: Pay off your smallest debts first, then move on to the next smallest. This strategy builds momentum as you pay off each balance.
• The Avalanche Method: Focus on paying off your highest-interest debts first. This method saves you the most money in interest over time, but may feel slower at first.

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Whatever method you choose, committing to a debt repayment plan will help you achieve financial freedom.

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Whether you are a pastor just starting out or an organization wanting to set up a good internal structure to secure your current and future staff members, 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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