I recently went to the Social Security retirement website and did some pro-formas for a client for his Cafeteria Plan, using the IRS Quick Calculator I was shocked to see that the reduction in Social Security benefits at retirement was much more than expected. The assumptions I used were as follows: dob: 07/14/61; annual salary; $40,000; retirement age: 68; I then ran the same scenario with a reduction of $5,000 a year and was shocked to see that the reduction in monthly income from Social Security was $134.00 per month or $1,608.00 per year at age 68. The savings (on the $5,000 salary reduction) assuming a 30% combined tax bracket was only $1,500.00 per year?? I realize that the Quick Calculator is only an estmate, but this is much more of an issue than I ever thought. Anyone have any ideas if this is correct or not and how do we handle this objection to participating in salary reduction plans?

At $40K, the $5K reduction is in the 32% bracket for calculating SS benefits. 32% of $5000 is $1600, so your $1608 sounds right.

Has your analysis included any impact of state taxes?

Not that I know how you could quantify it, but wouldn't you also need to consider increased savings from having the $1500 in saved taxes now, and compounded through all of the years until retirement, versus getting it as benefits later.

ETA: And what about the number of years? Current age of 48, retirement age of 68, so 20 years of saving 1500 a year = 30k. Will they be receiving benefits for 20 years and living to 88? No way to know that, of course, but statistically? I don't know, just some thoughts.

Oriecat: Thanks for your suggestion--that makes sense and we will proceed and see where that takes us.
Joe Gaither