Last week we focused upon the basic question anyone needs to ask about retirement. “What income will I need when I cannot, or will not, be involved in full time work?” Everyone will come to a point in time when the skills and abilities diminish to a point others may do our job better. No one escapes the aging process, and some will experience this earlier and more substantially than others. We may be able to handle a lighter load, but our income will diminish accordingly.
We MUST prepare a plan for our post 65-70 years. We MUST gather information about how much income we will need on a monthly basis to live. For most, Social Security will not be sufficient to meet all our needs. This week we will look at popular ministry saving and retirement planning options that will provide for those years.
Retirement Plans Focused Upon Providing Monthly Income
For many decades, the gold standard in retirement plans for American Industry was the Defined Benefit Pension Plan. People were loyal to their employer and their union, because they were promised a monthly income for life that was attractive. These plans have become difficult to find, because businesses found the promises too expensive to fund. Thankfully, there are pension plan options available for ministry servants that are solidly funded.
The Christian Churches Pension Plan was begin by members and congregations among the Independent Christian Churches and Churches of Christ nearly 50 years ago. It is a plan designed to work with Social Security. It is a simple, affordable plan that requires a minimum annual contribution of $750. It is also flexible, allowing someone to increase their retirement contributions as their income allows. Monthly retirement income depends upon what age an individual begins to contribute and add additional contributions. The Pension Fund of the Christian Church (Disciples of Christ) was begun at a time when ministers were not included in Social Security. The annual contributions to this plan closely reflect the normal contributions to Social Security.
Contributions to a Pension Plan are excluded from taxable income. Ordained individuals may also receive their monthly pension income partially or entirely tax exempt under currently approved housing allowance regulations by the IRS.
Tax Deferred Options Designed to Accumulate Wealth
IRAs and 403(b) accounts are available from many financial institutions, insurance companies, brokerage and financial planning firms, and mutual fund companies. A 403(b) plan is very much like the 401(k) available from many employers. The basic difference is that the Internal Revenue Code 403(b) specifically applies to nonprofit organizations and public educational institutions.
Both the IRA and 403(b) provide sheltering of contributions from annual income. The growth of the assets are dependent upon the returns provided by the investment choice(s). Some options provide lower potential returns but are accompanied by a guarantee (if from a bank or insurance company) of no fluctuation of principal invested. IRA and 403(b) accounts are popular due to the fact they provide current cash value that shows up on an individual’s balance sheet. Retirement income may be derived from interest or dividends generated within the account or liquidation of assets and is taxable when received.
Roth IRAs are also available from many different financial institutions. As mentioned above, investment types are available from guaranteed principal to high growth possibilities with accompanying greater risk. A Roth is attractive not due to the ability to deduct contributions from current income, but from the ability to withdraw funds tax free in retirement. Like the 403(b) and IRA accounts, income may be derived from interest, dividends or the sale of assets within the account.
Non-Qualified Deferred Compensation Plans
These plans are popular with highly compensated individuals but available to all. The employee agrees to defer a portion of their annual income, and the church or nonprofit ministry promises to pay the employee at some point in the future. Under a non-qualified deferred compensation plan, assets belong to the church or nonprofit organization and nothing is taxed until paid to the employee. This type of compensation deferral should be examined and discussed with a tax professional prior to implementation.
Regular Accounts with Savings or Investment Institutions
Such accounts range from a savings account at a bank or credit union to a margin account with a brokerage firm. The funds deposited into these accounts are taxed annually as are all of the interest, dividends, and or capital gains received.
The basic savings account may offer little interest at the time of this writing, but is one of the better places to start building a fund to meet the emergencies that come to all our lives. Once there is a balance sufficient for 90 to 180 days of expenses, one may consider options offering greater interest or returns.
As you can see there are all sorts of options for saving for future emergencies and retirement. Remember, the key question to ask is not, “How big does my account need to be before I can retire?” Instead it is, “Will the options I have chosen provide the income I need when full time pay is not available?” Happy planning!