Most think that a retirement dollar saved is expected to just earn a ‘return’ in the market. However, with a Servant Solutions retirement account, your dollars can do much more!
Contributions to your account are not subject to federal, state, local, or social security taxes (important for ministers considered self-employed by Social Security). This lowers your current tax burden, as your income will be reduced by the amount you contribute.
Let’s demonstrate the effect of before tax savings on your take-home pay. Pre-tax savings can be an important tool in your retirement savings plan. You can leverage your dollars by saving more to your account than is reflected by a decrease in take-home pay. Let’s assume you have salary of $50,000 paid every two weeks, and you are saving 10% toward retirement:
Gross Pay Per Pay Period ($50k/26 pays): $1,923.08
Pre-tax Savings Amount (10%): ($192.31)
Taxable Income Per Pay Period: $1,730.77
FICA (Social Security and Medicare)15.3%: ($294.24)
Federal Income Tax (10.58%): ($174.52)
State Income Tax (3%): ($51.92)
Your Net Pay Amount: $1,210.09
Tax savings you gain each pay period by saving pre-tax dollars $34.62
Assuming the above scenario: If you did not save the 10%, your Net Pay Amount would have been $1,367.78, which is a difference of $157.69 from the example above of $1,210.09. By choosing to save 10% ($192.31), it only costs you $157.69…a $34.62 Tax Savings due to the dynamic of before-tax savings! This is an immediate “return” of 22% on each dollar invested. In other words, each taxable dollar saved that is saved pre-tax immediately becomes $1.22 once it enters your retirement account!!*
*The above example is for educational purposes only. Your actual circumstances may vary.
In addition to the tax advantages above, even small amounts of money, when left to compound over time, can grow into much larger amounts. The dividends, interest, and capital gains within your account – and not immediately taxed by the government – can compound for years, until you are ready to withdraw the money. This tax-deferred compounding can really add up over time.
If Ordained, Even More Savings
As an ordained minister, professor, missionary, chaplain, etc., you are eligible for the housing allowance exclusion in retirement. Income distributed to you from the Servant Solutions Retirement Plan can be excluded from taxable income as a Housing Allowance subject to IRS rules and regulations. This is a HUGE advantage over other ‘non-church’ retirement plans, as retirement dollars have the opportunity to bypass taxes altogether.
Is it Time to Make a Commitment to Save More?
You may read the above and be really impressed by the power of a dollar saved. But, what do you do next? Here are some Action Points to consider:
1. Decide How Much to Save.
How much money will you need for retirement? Financial experts suggest living on about 80% of your pre-retirement income when you retire. Others suggest you will need at least 10x your annual income (you and spouse) before considering retirement. We have the tools to help you find out what amount you will need. Let’s talk.
2. Decide Where to Invest.
Your contributions are invested according to your instructions, chosen from the investment options available. Options include diversified LifeFunds and individual mutual funds that focus on different asset classes/sectors in the market. We can help you determine an investment strategy – then help you stick to it.
3. Commit to Saving Systematically.
Because our retirement plan has the option of contributions being systematically taken from your paycheck, you regularly invest the same dollar amount regardless of fluctuations in market prices. In effect, you are practicing “dollar-cost averaging”, a simple and effective approach to investing. When the price of a fund rises, you’ll buy fewer shares, and when the price dips, you’ll buy more. This approach takes the emotion out of investing and can help lower your cost-per-share in the long run.
Contribution Rate vs. Rate of Return – Which has more POWER?
In our discussions with Servant Solutions participants, we have found there is a very high concern about market returns. However, studies have determined that a participant’s ‘contribution rate’ is more of a determinant to reach retirement goals than one’s ‘market rate of return’.
As you can see from the above, every dollar you contribute has the power and potential to substantially increase your account balance so you can meet your retirement goals. Please make a commitment to increase your contribution rate. There is Power in a Dollar Saved with Servant Solutions!
Director of Financial Planning, Servant Solutions