By Kent E. Barber, CFP
Are you saving for retirement? Or is it a far off dream.. both saving and retirement?
Many ministers are perplexed because they haven’t been able to start saving for retirement….and frustrated too by wanting to be a good financial steward. Far too often, ministers expect social security to be their primary source of retirement income – instead of a supplement.
How much will you need to accumulate to be able to retire?
Here is how to figure it:
* Your retirement fund. You should have at least ten times your projected retirement cost of living in income-producing assets. This will vary with the type of investments you choose to use and their rates of return. More money will be required for lower rates of return.
* Social security. Are you paying into social security? Many ministers have opted out of social security – mostly for invalid reasons – and will have no social security or Medicare benefits at retirement. If you will not have social security coverage at retirement, you need to replace that income plus provide extra funds for medical care that would have been paid under Medicare.
* Church-paid pension. Have the local churches you have served paid into a denominational pension plan? If you lived in church-provided parsonages, were the pension contributions based on cash salary plus the fair rental value of the housing? You need to estimate your benefits from your pension plan.
* Adjust for inflation. Assuming you have 20 years left to save for retirement, you should plan for your retirement cost of living to be at least double what the cost would be today, adjusting for the current rate of inflation of about 3.5%. (At 5% inflation, your retirement cost of living would be about 2.5 times in 20 years).
So if you would need $1,000 each month from your savings (not including pensions or social security) to retire today, in 20 years you would need $2,000 monthly (adjusted for 3.5% inflation) and at least $250,000 accumulated in investment accounts. This would be an absolute minimum.
How can you accumulate a $250,000 nest egg over the next 20 years? The type of investments you use will depend on the level of risk you are willing to assume and the rate of return you can expect on your investment. Risk is the amount of short-term fluctuations in value due to market factors.
If you use credit union accounts, CD’s, or U.S. savings bond type of investments, you will need to save about $700 monthly. That’s a lot of money. If you use life insurance company annuities, or pension guaranteed accounts, you would need to save about $550 monthly.
If you use income mutual funds, you would need to save about $325 monthly. Or, if you use well-managed growth mutual funds or variable annuities growth accounts, you could accomplish your goal by saving about $200 monthly. If you have 25 years to save, you can cut the monthly savings using these funds to about $100 monthly.
Growth mutual funds and variable annuities have more risk than the others mentioned. But consider the risk you take if you cannot reach your goal – that is also quite a risk.
How do you get started? First, decide to do it. Make a positive commitment. The sooner you can get started, the better retirement income you will have.
Most churches are willing to help you build an adequate retirement fund. That’s a bonus you’ll want to take advantage of. Here are the most common ways they can help:
* Denominational pension plans. Local churches should make the maximum contribution into a denominational plan. This is tax-deferred and may qualify as tax-free money to provide housing in retirement.
* TSA programs sponsored by denominations. Many denominations offer Tax-Sheltered Annuity (TSA) programs whereby the church can deduct an amount (pre-tax) from the minister’s salary and then remit the funds to the TSA.
Handled through a denomination, TSA money may also be tax-free housing money at retirement. The church may match a portion of your savings as an incentive for you to build your retirement fund.
The key to success in a retirement savings program is the consistency of an automatic salary savings program. In addition to helping you with pension and TSA contributions, the church can withhold money from your paycheck and deposit it in an investment you select. Since this is money you never see, you don’t have to make a conscious decision each month to make the investment. It doesn’t hurt so much, and in fact it really feels good to know you ‘re putting some money away. This is how retirement funds have been accumulated by many individuals over the last 25 years.
Because of changing tax laws, consider placing part of your retirement savings outside of a retirement plan (IRA, Keogh, TSA, SEP). It will be easier to pass on money to your children with funds held outside of retirement plans.
What is the ultimate retirement savings vehicle (after church pension contributions have been made)? Fund a tax-deductible TSA using a growth mutual fund or variable annuity. In selecting the fund, it should have a track record of at least 13% annual growth for the last 5 years. Use an automatic monthly bank draft or salary reduction. The maximum annual deductible TSA contribution is 15% of income up to a maximum annual contribution of $9,500 for 1993.
What if you don’t have any extra money to save? If you will make a serious commitment to save, you will find the money. Start small, but just start. Start with $25 monthly, then increase that with money from different sources.
Invest your tax refund, extra money earned from weddings or other special services, or part-time income earned by either spouse. Increase your savings as often as you can. Delay consumer spending for a while. Make it a challenge to save as much as possible.
After paying your tithe, pay yourself next. Pretty soon it will become second nature to you. Save often and save early. Remember, you are investing in your future. You can do it and you will be glad you did.