Retirement planning is stressful. With so many expenses to consider, including housing, healthcare, and living expenses, there never seems to be an easy way to plan. It can be even more stressful for someone who has spent their life in the ministry, pouring themselves out for the sake of others, planning for the church, but oftentimes not for themselves personally. Oftentimes retirement planning can be avoided or ignored by those in ministry for the simple reason that their finances are so limited, they are working month-to-month on a limited income that saving for the future, let alone retirement years away can be too much. Except for a few, most vocational pastors generally have a limited income. It is safe to say that most people don’t go into the ministry for the money. So, while saving for retirement is a concern, it is rarely the most pressing financial concern of the month; that is, until you realize just how quickly the years are going by. In addition to limited income, there are many other factors unique to a pastor in setting themselves up for retirement, including how a significant portion of a pastor’s monthly compensation may have been designated as a housing allowance. This means they have been receiving a significant nontaxable benefit, that portion of their compensation is not cash compensation they can put into a retirement savings account. Similarly, many pastors opted out of social security, leading to a lack of government retirement funds, and even Medicare upon retirement. Additionally, small churches may not have provided a retirement matching benefit for 403b retirement plans, or any health insurance. Finally, strict IRS rules on nonprofit compensation may limit last minute retirement gifts.
Clearly, there are a lot of significant hurdles pastors face when it comes to being financially prepared to retire. With so many factors, is there anything that can be done?
The first step is to take stock of the financial assets you do have. Do you have any 401k or 403b plans that are not being managed? (If you are unfamiliar with 403b plans, they are similar to 401k plans, but for certain types of nonprofits.) Or savings that is sitting in a bank account not earning anything in the market? Take an inventory of what you do have. Once you understand what you have, or don’t have, find a professional and licensed advisor to assist you. It may be surprising to learn that many great investment advisors will work with small savings. Don’t let the amount of your savings stop you from getting help from an individual well-versed in financial matters.
Once you take stock of your funds, and put them to work, make a list of the benefits you receive from your employment position, if any. Is a cell phone or phone stipend provided? Is a car, parsonage, healthcare plan, or a retirement fund match provided? If so, you will need to make a plan as to how you will pay for these items in your retirement. Seeing these allotments added up can be overwhelming but an investment advisor can help you assess your lifestyle and help you build a savings and retirement plan.
In addition, we recommend pastors take a few minutes to review their status with the Social Security Administration. Opting out of social security, isn’t just about the money, it also impacts healthcare benefits by eliminating Medicare. Even if pastors opted out of social security upon entering the ministry, they may have qualified for social security and Medicare benefits with prior, non-ministerial jobs. To check your status with the Social Security Administration, visit: https://www.ssa.gov/apply/check-application-or-appeal-status.
If a pastor has opted out of social security, healthcare planning is a must, and should even include long term care insurance. Without Medicare, healthcare after age 65 can be expensive. Oftentimes, people over 65 are forced to spend their assets so that they can qualify for Medicaid, the states’ safety net for healthcare. In fact, some estate planning attorneys say the number one question by clients, is “How can I qualify for Medicaid?” If healthcare insurance cannot be obtained, and state funded Medicaid appears to be the only option for a pastor, they should consult with an estate planning attorney as soon as possible, as certain trusts are available to assist in the Medicaid planning process, so that not all assets must be sold and/or used up.
Retirement funding/benefits is also going to be greatly impacted by what the employer, most likely a church, has been able to provide the pastor through the years. There are a variety of retirement planning tools in addition to the 403b plan (the typical retirement plan for a nonprofit). These tools include non-qualified deferred Compensation Plans (i.e. Rabbi Trust), annuities, insurance products, and retirement gifts.
If a pastor is able to participate in a 403b plan through a church, retirement disbursements can be made as a housing allowance. This allows the disbursement to be made tax-free, and used for the pastor’s housing, just as they would with a portion of their salary that is designated as a housing allowance. If you are unfamiliar with this option, please contact your retirement plan administrator, CPA, or attorney immediately. This is one of the primary advantages of a church 403b plan and should be carefully considered in retirement planning, under the counsel of an experienced advisor to ensure the plan and disbursements are structured properly.
Although fewer churches are providing parsonages these days, a parsonage remains a wonderful blessing to a pastor. However, many people rely on the sale of their home to fund their retirement. If a pastor is in a parsonage, it is important to review the parsonage agreement, to understand what happens to the parsonage home and the pastor’s occupancy of such home upon retirement. There needs to be a clear plan and process in place, both for the sake of the church and the pastor and family, related to the use and occupancy of the parsonage upon the pastor’s retirement. We have assisted clients in complex and difficult circumstances where an elderly pastor, with little to no retirement, refused to leave the parsonage upon retirement because he had no where to move to and no finances to support such move. It was a difficult scenario for both the church, the congregation and the pastor and his family and one that could have been avoided with advanced planning from both the church and the pastor.
It is also important to assess additional streams of income: rental property, book or music royalties, and speaking fees, all of which can be used to supplement income.
Every pastor should start the process of retirement planning as soon as possible. Unlike other professions, there are fewer opportunities for large jumps in income. Retirement planning must be done consistently throughout a pastor’s life, if possible. Second, take stock of the current savings and retirement funds. It is important to know where you are starting. Third, assess your social security and Medicare eligibility. Fourth, consider your alternative funding. And finally, look at hiring a wealth advisor to assist in starting a plan. There are many advisors who will gladly help estates of all sizes. Their expertise can be pivotal in helping plan for retirement. While advisers must be licensed, and chosen carefully, choosing the right one can help set a retirement plan up for success.
Every situation is unique, but the benefits of consistence retirement planning are obvious:
1. Planning for you and your loved ones, and
2. Successful succession planning for your church.
It is no surprise that a failure to plan for retirement affects more than just the individual and their spouse. Ultimately, it has a significant impact on the church as the pastor will not be able to help his church transition leadership to the next generation if they are unable to retire in some meaningful way. Most succession planning failures our firm has seen is due to the lack of planning and funds available to the pastor for retirement.
If you have questions about retirement planning, reach out to your wealth advisor today. If you don’t have one, we are happy to assist you in finding one that fits your needs.
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. 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 located in both Dallas/Fort Worth and Georgetown, Texas 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 incorporations, governance, employment, policies and procedures, taxes, succession planning, real estate development and much more. For more information visit our website at www.thenonprofitteam.com.
