On its surface, Social Security seems like a fairly straightforward program. You and your employer pay a tax based on your earnings while you work. When you retire, you get a lifelong income stream that's somewhat tied to how much you paid into the system.

Yet that apparent simplicity papers over what in reality is an incredibly complex system with a lot of moving parts. Nuances in both the way the program is designed and the way people choose to collect from it mean that is possible to make mistakes that could wind up with you losing a lot of money. Indeed, these five Social Security oversights could cost you thousands over the course of your retirement.

Senior man holding a piggy bank tightly

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1. Claiming early while still working

You can claim your Social Security retirement benefit starting as young as age 62, but your benefits will be permanently reduced vs. what you'd get by waiting until your full retirement age. On top of that permanent reduction, Social Security charges a penalty if you continue to work while collecting benefits if you're below your full retirement age.

In 2021, that penalty is $1 for every $2 you earn over $18,960 -- unless you're reaching your full retirement age in 2021. If that's the case, then the penalty is a mere $1 for every $3 you earn above $50,250. 

That penalty can very well be a double-whammy. Not only do you face a permanent reduction because you claimed early, but you also won't even be getting the full amount of that reduced benefit thanks to your salary. Social Security will begin paying you back the money it withheld via those penalties once you reach full retirement age , but you'll still face the permanent reduction for claiming early.

2. Not claiming by your 70th birthday

Once you reach age 62, your benefit increases the longer you wait to start claiming, up until you reach age 70. You are not required to claim your benefit by your 70th birthday, but there is no longer any benefit for waiting past that point. Indeed, the longer you wait past age 70, the more checks you will miss out on, causing permanent and irreplaceable loss of income that could easily be in the thousands of dollars per month.

If you're past age 70 and haven't yet claimed your benefit, there is something of a silver lining available to you. Social Security will let you go back and claim as many as six months of benefits retroactively as long as you're filing after your full retirement age. So if your 70th birthday has come and gone and you haven't claimed, you can get some of that missing money back.

3. Waiting past full retirement age to claim spousal benefits

If you're claiming Social Security benefits based on your own income record, it may make sense to wait past your full retirement age to start taking benefits. If, on the other hand, you're claiming based on your spouse's benefits, you get no benefit for waiting beyond your full retirement age to claim. 

This causes married couples of similar ages who have vastly different earned incomes to face a potential quandary. In order for you to claim spousal benefits, your spouse also has to have begun claiming benefits based on his or her own earnings record. This combination makes it less worthwhile for the primary breadwinner spouse to wait to collect benefits if the spouse is expecting to take spousal benefits.

4. Taxes on Social Security benefits are not inflation adjusted

chart with the word inflation on it.

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Originally, Social Security benefits were not taxed. That changed in 1984, when a 1983 law went into effect that began taxing Social Security benefits once an individual's combined income passed $25,000. Fast forward to 2021, and the income level where Social Security starts to get taxed remains the same $25,000.

If that $25,000 level had been adjusted for inflation, you could have a smidge above $64,000 in 2021 income and still not see your Social Security benefits taxed.  Instead, not adjusting those brackets for inflation puts far more people's Social Security income in the path of taxes. That oversight easily costs even moderate income retirees thousands of dollars of spendable income over the course of their retirements.

5. Even "tax free" income counts toward making Social Security taxable

Even traditionally tax-free sources of income like the interest from in-state municipal bonds is included in the equation that is used to determine how much of your Social Security will be considered taxable. As a result, seniors who own tax free municipal bonds as part of their retirement portfolio may be surprised to find that owning those bonds is what is causing their Social Security to be taxed.

Seniors who find themselves in that situation may wish to rethink their choice to be invested in those tax free municipal bonds. After all, the trade-off for investors is that they usually get lower interest rate on those tax free municipal bonds than they would get from owning taxable bonds of similar risk profiles.  If that benefit is reduced due to those bonds driving taxes on their Social Security income, those seniors may discover they're better off with higher interest rate bonds even if they're fully taxable.

Go in eyes wide open when making your Social Security choices

Social Security plays a key role in most Americans' retirement plans. Despite how simple it may seem on the surface, as these five situations show, nuances in the way the program is designed could drive thousands of dollars of difference to what you take home from it.

So go in eyes wide open when you're planning around your Social Security benefit. You may not be able to avoid all of them if they affect you, but you should at least be able to see them coming before they do. With a solid overall plan in place and Social Security playing its role in that plan, you can face these factors and still have a great chance at financial comfort in your golden years.