On Tithing and Retirement Income Planning
People of many faiths choose to pay a tithe to their place of worship for a multitude of reasons. The decision to tithe is a personal one, and a financial advisor should not dictate how someone calculates the amount of a spiritual offering. However, it is not uncommon for those who tithe a percentage of income during their careers to have questions when they enter retirement. Please consider the discussion below as food for thought. We acknowledge that paying a tithe is an act of faith. This discussion is not intended to replace prayerful consideration and personal decision-making, nor is it intended to create limitations or additional rules to a tithing process. Rather, it is intended to help investors plan for retirement and think about planning decisions that are oftentimes not considered until they are in retirement.
Social Security
Over the course of a career, workers contribute 6.2% of their income up to an annually determined earnings threshold to eventually receive a monthly Social Security benefit in retirement. Those who tithe may choose to make their calculation on a “pre-Social Security” or “post-Social Security” basis. If they made the decision to base their calculation on income after deducting Social Security taxes, all of the benefits at retirement could be considered an amount they want to continue paying tithes on. If, however, they chose to make their tithe on their gross income during their earning years, they may want to account for that when they tithe in retirement. One option is to determine a percentage of Social Security benefit that is a “return of initial contribution.” Another possibility is to estimate a number of months or years at the front end of retirement that Social Security benefits will not be tithed (while contributions to the program are returned).
Pension, 401(k), or 403(b)
Individuals saving for retirement often have tax-deferred savings plans available to them through their employers. They may be required to contribute to those plans, or contributions may be made on their behalf. If individuals tithe based on their gross income during their working years, they may want to track how much they contribute to those plans. Options include determining a percentage of distributions to tithe and determining a number of months/years to not tithe upfront.
Personal Residence
Typically, families move to larger and more costly homes over the course of their careers. Often, those homes are paid for over time through the use of mortgages. At or near retirement, the process sometimes reverses, and a smaller or less costly home is purchased. Individuals may look at the long-term appreciation in value on their home and wish to pay a tithe on that appreciation. For that reason, it may be a good idea to track how much has been paid into the home over time (via principal on mortgages and home improvements) to be able to make a calculation at the time of sale of how much to tithe. Over time, a significant portion of the home’s value has been created simply by shifting assets from one part of the balance sheet (savings account or investment portfolio) to another (property).
Small Business
A similar thought process applies to small business ownership. Calculating the amount that has been invested into the business over time may assist with determining how much to tithe at the time of the sale.
Taxable Investment Portfolio
Many investors who are saving for retirement in tax-deferred or tax-free retirement accounts and may also contribute to a taxable brokerage account (titled individually, jointly, or in a trust). Over time, investments are bought and sold within this portfolio – some at losses and others (hopefully) at gains. An investor may want to develop a methodology for tithing these gains each year. It’s best to discuss these strategies with a financial advisor and a tax professional regarding your unique situation.
For many, paying a tithe is an act of faith. The thoughts above are not intended to create limitations or additional rules to a tithing process. They are intended to help investors plan for retirement living expenses and consider planning decisions that are oftentimes not considered until they are in retirement.
Joel Cundick
Financial Advisor / Team Lead