As soon as they are licensed, many pastors jump at the chance to opt out of Social Security. Social Security taxes total 15.3% of a pastor’s salary, so opting out represents significant savings. However, there are certain benefits that Social Security provides that must be replaced if you opt out.
Most people think of Social Security as retirement income. But it’s more than that. A lot more. This is what Social Security is comprised of:
This is the obvious one. Social Security makes up almost 40% of the income of the elderly. If you are not a part of the Social Security system you will be responsible for 100% of your retirement income. That means you need to start saving and start saving now. You should be saving 15-20% of your income for retirement or you could end up dependent on your family.
Social Security also pays benefits in the event that you become disabled and cannot work. In fact, by the end of 2015, over 8.9 million people were receiving Social Security disability benefits. Once you opt out of Social Security it is your responsibility to purchase disability insurance so that you can keep the lights on even if something happens to you.
If you die under the Social Security program, your survivors receive benefits. As of April 2016, the average benefit for a widow(er) was $1,290 and for a child was $835. If you’re not a part of the Social Security program, they don’t get that. You need to make other arrangements or your family will be left to fend for themselves once you are gone.
To replace the Social Security survivor benefits you need to purchase life insurance. You should buy term life insurance for as long as you have people financially dependent on you. If you don’t have a family or no one depends on your income then you don’t need life insurance.
The big surprise for most people opting out of self-employment taxes is Medicare. You can still get Medicare coverage if you opt out, but you will have to pay for it while everyone else gets it for free. In 2016 the cost of monthly premiums for Parts A & B totaled $532. This will increase your expenses during retirement, which means you’ll need to save even more for retirement than you previously thought.
I was going to do a comprehensive financial analysis with real numbers of the cost of opting out of self-employment taxes, but Devin over at SocialSecurityIntelligence.com already did an excellent one. You can see his analysis of the true cost and savings of opting out of Social Security here.
Now that you know what you’re missing out on by opting out of Social Security, you can take action to make up for it. If you have already opted out of Social Security, or plan on doing so, here is your to-do list:
- Begin saving for retirement. If you aren’t saving enough, start where you can and raise it by 1% every year until you meet your goal.
- Buy disability insurance.
- Buy term life insurance.
For more detailed information on each of these steps, stay tuned!
Now it’s your turn. Please tell me in the comments:
If you’ve opted out of Social Security, do you feel confident that you have self-insured to replace it? Was any of the above information new for you? If you haven’t completed the to-do list above, why not?