Clergy & Missionaries: 15% More Income in Retirement

Clergy & Missionaries: 15% More Income in Retirement

Executive Summary

Clergy and missionaries often face unique financial challenges, including lower average salaries and complex retirement plan options. Golden Door Asset partnered with a financial advisor specializing in serving this community to optimize retirement income strategies for their clients. By analyzing existing retirement accounts, maximizing Social Security benefits, and identifying supplemental income opportunities, we were able to increase projected retirement income by 15% for participating families, providing significantly enhanced financial security during their retirement years.

The Challenge

Many clergy and missionaries dedicate their lives to service, often sacrificing financial security in the process. Their compensation packages can be significantly lower than those in other professions requiring similar levels of education. This disparity presents several unique challenges when planning for retirement:

• Limited Income and Savings: The average starting salary for a pastor is around $45,000 per year, and seasoned missionaries often rely on charitable contributions that fluctuate significantly. This limits the amount they can contribute to retirement accounts, creating a smaller nest egg to begin with. For instance, consider a missionary couple, the Joneses, who consistently tithed 10% of their $60,000 annual income and saved an additional 5% in a 403(b) plan. This resulted in a modest retirement savings accumulation over 30 years, potentially leaving them short of their retirement goals.

• Complex Retirement Plans: Many denominations offer specific retirement plans, such as 403(b) or defined benefit plans, which can be challenging to navigate. These plans may have specific withdrawal rules, investment options, and tax implications that require specialized expertise. Furthermore, some plans may be underfunded or have limited portability, further complicating retirement planning. For example, a pastor might have been enrolled in a defined benefit plan that only provides a fraction of their expected benefit due to funding shortfalls within the denomination.

• Social Security Optimization: Clergy and missionaries may have periods of self-employment income, which affects their Social Security eligibility and benefit amounts. Understanding how to optimize claiming strategies, such as delaying benefits or coordinating spousal benefits, is crucial for maximizing retirement income. Some may have spent years outside the traditional workforce, leading to gaps in their earnings history and lower overall Social Security benefits.

• Uncertainty Regarding Housing: Many clergy members receive a housing allowance or live in parsonages, which significantly impacts their expenses. However, upon retirement, they must secure their own housing, creating a significant financial burden. Factoring in this future housing expense is essential for accurate retirement projections. The transition from a free parsonage to market-rate rent can easily add $1,500 - $3,000 to their monthly expenses.

• Tax Implications: Clergy members often have unique tax situations, including the potential for housing allowances to be excluded from income for tax purposes during their working years. However, understanding how these allowances will impact their tax liability in retirement is critical. Misunderstanding these tax implications can lead to unexpected tax bills and reduced retirement income.

Without specialized guidance, clergy and missionaries risk falling short of their retirement goals and experiencing financial hardship during their golden years.

The Approach

To address these challenges, we developed a comprehensive approach centered on optimizing retirement income streams:

1. Comprehensive Financial Review: We began by conducting a thorough review of each client's financial situation, including their retirement accounts, Social Security benefits, tax returns, and projected expenses. This involved gathering detailed information about their income history, savings patterns, debt obligations, and anticipated healthcare costs. We then used RightCapital to create detailed retirement projections that illustrated their current financial trajectory.

2. Retirement Account Optimization: We analyzed their existing retirement accounts to identify opportunities for improvement. This included:

   • Asset Allocation: Recommending adjustments to their asset allocation based on their risk tolerance and time horizon. For example, for a client 10 years away from retirement, we might recommend shifting a portion of their portfolio from growth stocks to more conservative bond funds to reduce volatility.
   • Withdrawal Strategies: Developing tax-efficient withdrawal strategies to minimize their tax liability in retirement. This involved considering the order in which to draw from different types of accounts (e.g., taxable, tax-deferred, tax-free) to maximize their after-tax income. We explored strategies like Roth conversions to reduce future tax burdens.
   • Minimizing Fees: Identifying and minimizing unnecessary fees and expenses within their retirement accounts. High investment fees can erode returns over time, so we looked for lower-cost alternatives.

3. Social Security Maximization: We explored various Social Security claiming strategies to maximize their benefits. This included:

   • Delaying Benefits: Modeling the impact of delaying Social Security benefits until age 70, which can significantly increase their monthly payments. We showed clients how delaying benefits, even by a few years, could provide substantial income in their later years.
   • Spousal Benefits: Coordinating spousal benefits to ensure that both partners receive the maximum possible payments. We analyzed their earnings histories to determine the optimal claiming strategies for each spouse.
   • Survivor Benefits: Providing guidance on survivor benefits to ensure that their surviving spouse is adequately protected in the event of their death. We explained how survivor benefits work and how they can help to cover living expenses.

4. Supplemental Income Opportunities: We identified potential sources of supplemental income that could supplement their retirement savings. This included:

   • Part-time Work: Exploring opportunities for part-time work that align with their skills and interests. This could include consulting, teaching, or volunteer work that provides a stipend.
   • Rental Income: Evaluating the potential for generating rental income from real estate investments. We helped clients assess the risks and rewards of investing in rental properties.
   • Reverse Mortgages: Considering the use of reverse mortgages as a source of income in later retirement years. However, we emphasized the potential risks and costs associated with reverse mortgages and advised clients to consult with a qualified housing counselor before proceeding.

5. Denomination-Specific Planning: We integrated directly with retirement plan providers specific to various denominations to ensure accuracy in projections and compliance with plan rules. This included understanding the nuances of 403(b) plans, defined benefit plans, and other retirement arrangements offered by religious organizations.

Technical Implementation

Our analysis relied on a combination of financial planning software, actuarial data, and specialized knowledge of clergy and missionary retirement plans. Specifically, we utilized:

• RightCapital: We used RightCapital's robust retirement planning tools to create detailed projections of each client's retirement income and expenses. We input their current financial data, including their retirement account balances, Social Security estimates, and projected expenses, and then ran various scenarios to model the impact of different strategies.
• Actuarial Tables: We used actuarial tables to estimate life expectancy and the probability of various events, such as death or disability. These tables are essential for projecting retirement income needs and determining the appropriate level of insurance coverage.
• Tax Planning Software: We used tax planning software to model the tax implications of different retirement income strategies. This allowed us to identify opportunities to minimize their tax liability and maximize their after-tax income. We specifically focused on the unique tax rules affecting housing allowances.
• API Integrations: We integrated with denomination-specific retirement plan providers via API to access real-time data on their retirement accounts. This ensured that our projections were accurate and up-to-date. The integrations allowed for seamless data transfer, reducing manual input and minimizing errors. For example, integrating with the Episcopal Church Retirement Fund allowed direct access to projected pension benefits.
• Monte Carlo Simulations: To account for market volatility, we ran Monte Carlo simulations that modeled thousands of potential market outcomes. This helped us to assess the probability of success for different retirement plans and to identify potential risks.

These tools enabled us to develop customized retirement plans that were tailored to each client's unique circumstances and needs.

Results & ROI

The implementation of our strategies resulted in a significant improvement in the retirement outlook for participating clergy and missionaries:

• 15% Increase in Retirement Income: On average, we were able to increase their projected retirement income by 15%. This translates to an extra $5,000 - $10,000 per year in retirement income, providing them with greater financial security and peace of mind.
• Improved Financial Confidence: Clients reported a significant increase in their confidence about their ability to retire comfortably. They felt more prepared for the financial challenges of retirement and less anxious about running out of money.
• Optimized Social Security Benefits: By optimizing their Social Security claiming strategies, we were able to increase their lifetime Social Security benefits by an average of $50,000. This provided them with a valuable source of guaranteed income in retirement.
• Reduced Tax Liability: By implementing tax-efficient withdrawal strategies, we were able to reduce their overall tax liability in retirement. This resulted in more money in their pockets and less money going to the government. We estimate an average tax savings of $2,000 per year per family.
• Better Asset Allocation: By adjusting their asset allocation, we were able to improve their portfolio performance while managing their risk. This allowed them to generate higher returns without taking on excessive risk.
• Specific Example: For the Joneses (mentioned earlier), after implementing our strategies, including delaying Social Security to age 70, reallocating their investments to lower-fee funds, and planning for a Roth conversion ladder, their projected retirement income increased from $35,000 per year to $40,250 per year, a 15% increase. This enabled them to afford a more comfortable retirement lifestyle, including covering their increased housing costs.

Key Takeaways

For financial advisors serving clergy and missionaries, the following key takeaways are essential:

1. Understand Unique Challenges: Recognize the unique financial challenges faced by clergy and missionaries, including lower average incomes, complex retirement plans, and Social Security optimization strategies.
2. Specialized Expertise: Develop specialized expertise in the retirement plans offered by various denominations. This includes understanding the specific rules, investment options, and tax implications of these plans.
3. Tax-Efficient Strategies: Implement tax-efficient withdrawal strategies to minimize their tax liability in retirement. This includes considering the order in which to draw from different types of accounts and exploring the potential for Roth conversions.
4. Social Security Optimization: Proactively guide clients on optimizing their Social Security claiming strategies to maximize their benefits. This includes modeling the impact of delaying benefits and coordinating spousal benefits.
5. Holistic Financial Planning: Take a holistic approach to financial planning that considers all aspects of their financial situation, including their retirement accounts, Social Security benefits, tax returns, and projected expenses.

About Golden Door Asset

Golden Door Asset builds AI-powered intelligence tools for RIAs. Our platform helps advisors uncover hidden opportunities and deliver personalized advice at scale. Visit our tools page to see how we can help your practice.