Development salaries are not great but are getting better. The Association of Fundraising Professionals 2019 salary survey showed the average salary is about $84,000, and that’s a 7.7 percent improvement! The median—“most middle”—salary is $72,500. What are the proven methods to reach financial independence on a relatively modest salary?
Coming from a missionary family, I was shocked at the age of 16 to read a letter from my parents’ mission board that read, “Dear Missionaries, Due to adverse economic conditions, the funds in your retirement account are depleted.” That’s it. Good luck. I vowed that was never going to happen to me, and I spent most of my life working with missionaries, clergy, social workers and teachers who are ridiculously underpaid attain a dignified retirement.
Otto von Bismarck was chancellor of Germany in the late 1800s and is often credited with creating the concept of retirement by providing a state pension for anyone who reached the age of 70. Not many people took advantage of the program because the average life expectancy was only 43.5 years. Similarly, in the United States, Social Security was established in 1935 setting 65 as the “retirement age” when most Americans died between age 58 and 62. People now live to 79 or more on average.
Social Security was never designed to be your sole source of retirement income. If you retire earning $100,000, you can expect Social Security to pay you about $33,000 per year. If your goal is to have 90% income replacement in retirement, you’ll be $57,000 short. Where will the remainder of your income come from?
Pay Yourself First. Financial planning calculations show that a person under age 40 needs to save about 15% of their income to reach their retirement goal. Workers over 40, starting later, need to save upwards of 20%. Sounds impossible, right?
Please don’t wait to start saving for retirement until after ___________ (insert whatever financial needs you may think of: Paying off your school loan, completing your kids’ college fund, buying your first home, buying a car, etc.). I’ve seen way too many people who waited until they were in their 40s or 50s to get serious about retirement savings, and by then it’s too late.
Employer Plans. Long gone are the days when employers provided generous pensions. With very few exceptions, you are basically on your own. The best-case scenario for most fundraisers is their employer provides a 401(k) or 403(b) with some matching contribution—maybe 6%. If this is your situation, do not leave this money on the table. It’s FREE MONEY; it costs you nothing and goes straight in your retirement fund. Make sure you are contributing at least enough to receive the maximum match. If the match is dollar-for-dollar, you are already at 12%! And the money you contribute is exempt from payroll taxes. Giving up 6% of your pay takes some budgeting, but it’s worth the long-term investment. Believe me, the first step is about the only time you’ll feel pain.
Here’s a trick to increase your giving quickly. Say you start saving 6% at age 23. The next year, at age 24, you receive a 3% raise. Instead of spending all that raise, put half in your retirement savings. Your cash flow went up 1.5% but you are now saving 7.5%. You won’t miss that 1.5% because you never put it in your pocket. Do this year over year and by age 29 you are stuffing 15% into your retirement account, plus the 6% your employer is giving, putting you way ahead of the game.
Employee-Funded Plans. Whether you have an employer-provided plan or not, you should consider opening two IRAs—a Traditional IRA and a Roth IRA. Traditional IRAs are usually funded directly from your paycheck and the contributions are tax-deductible. Roth IRAs are usually funded from other sources like your checking account, and when you receive the money in retirement it will be tax-free. Use these to stash away any bonuses, honoraria, royalties, and gifts from Grandma.
You may want to set up a fixed amount from each paycheck to go into your IRAs. Even a tiny amount like $25 can add up. With 24 paychecks in a year, that’s $600 more than you’re saving right now.
Saving systematically like this also increases the power of your contributions by smoothing out the fluctuating cost of your investments over time. For example, you save $500 per quarter in an IRA. The first quarter the individual share price is $20, so you purchased 25 shares. The second quarter, the share price dropped to $12.50, so when your $500 hits the IRA, you purchased 40 shares. Third quarter, share price is $16.67, giving you 30 shares. Fourth quarter, the share price is up to $25, allowing you to purchase 20 shares. Over the year, you purchased 115 shares for $2,000, an average of $17.39 per share. But the actual average of $20, $12.50, $16.67 and $25 is $18.54. Magic? No. It’s called “dollar cost averaging;” it is like more FREE MONEY. And it avoids the temptation of trying to time the market, which is a psychological recipe for self-deception and financial failure.
When you open your IRAs, you will be able to select different funds for investment. A smart and simple technique is to choose a “retirement target date fund.” Your investments will be gradually adjusted over time to maximize return and minimize risk. For example, if you plan to retire at age 67 and you are currently 27, then choose a “Retirement 2060” fund. There are limits and conditions for IRA, 401(k) and 403(b) contributions, so be sure and ask your IRA provider.
Time Is On Your Side. Start saving for retirement with your very first paycheck. The longer you wait, you’ll get hit twice—Once because you have fewer paychecks left, and Twice because what you could have saved could have been earning more money.
Meet Lori. She saves $2,500 per year in a 403(b) from age 25 to 35 then stops when she moves to a different employer. She earns an average of 8% per year in the 403(b). When she turns 65, that old account now has $393,588.
Meet Peter. He procrastinated until age 35 to begin saving for retirement. He also saved $2,500 per year and also earned an average of 8% all the way until he was age 65—thirty years! But his account has only $308,365.
Now, who do you want to be—Lori or Peter?
The One Time the IRS is Your Friend. Want to make someone laugh? Call the IRS and ask for the Department of Compassion and Understanding. However, the tax code is designed to actually reward you for saving for retirement. For every $100 you save in a qualified retirement plan, your taxes drop from $10 to $37, depending on your tax bracket. So if you save $10,000 for retirement and you are in the 22% tax bracket, your tax bill is lowered by $2,200. That gives you more FREE MONEY to squirrel into your retirement account!
How Much Will I Need to Retire? Create an Excel spreadsheet with your current age in the first column; now extrapolate that column all the way down to your full Social Security retirement age (for most of us, that’s 67). In the second column, put your current gross salary. Use a simple formula to add 3% for each year you expect to work; now you can see your future salary if you only experienced 3% average raises until you retire. Finally, in the third column, multiple your annual salary each year by 10. This is your ultimate goal—at least 10 times your annual salary saved up. Now, take a deep breath and tell yourself, “You can do this…”
If you start saving at least 15% of your salary at age 25 with 50% or more invested in stocks and earn an average return of 5% per year (that’s a lot of “ifs”), you should get there.
One way to gauge your progress is by benchmarking to your age: By age 40, you should have at least two times your annual salary saved for retirement. By age 50, four times your annual salary. By age 60, six times your salary and by age 67, eight times your annual salary. Ideally you will have a more positive investment experience allowing you to accumulate between ten times and sixteen times your annual salary by retirement age.
Helpful Resources. If you are early in your adult life, pick up a copy of Get a Financial Life by Beth Kobliner; follow every word of advice as quickly as you can. No matter what your age, subscribe to Kiplinger’s Personal Finance magazine; it contains very simple steps for financial security. And schedule a visit with a financial planner for a complete check-up. They usually charge a one-time fee that sounds like a lot of money ($300 to $1,500) but the advice will pay for itself. The Financial Planning Association’s PlannerSearch website will get you started.
Whatever your age or career stage, increase your savings for retirement now. You can go to the bank and get a loan for a car, a house, even a college education. But you can’t get a loan for retirement.
About the author: Rev. Dr. Z. Allen Abbott, CFRE, is president of the AFP of Collier & Lee Counties in Florida. He is a member of the Financial Planning Association, vice president of the Planned Giving Council of Lee County and a board member of the Greater Naples Area Planned Giving Council. In addition to a PhD, he earned the Certificate in Fund Raising Management and the Executive Certificate in Religious Fundraising from Indiana University, and the Certificate in Financial Planning from Emory University. He’s done post-doctoral study at Dartmouth College and Harvard Divinity School.