It's not always easy navigating the ever-changing Social Security landscape. It's unfortunate considering how essential Social Security is in many people's lives, but that's currently the reality of it. Before diving into the complexities of Social Security, it's sometimes best to look at the big picture and focus on what you can do to make it easier on yourself. Often, that's avoiding crucial mistakes.

Here are three you want to avoid at all costs. Doing so can save you headaches (and potentially money) and help you better plan your retirement finances.

Two people holding ice cream cones and taking a selfie.

Image source: Getty Images.

1. Not knowing how your benefits are affected if you claim early or late

When you claim Social Security directly affects how much you receive, and it revolves around your full retirement age (FRA). Your FRA is when you're eligible to receive your full benefit, but you can claim benefits before or after that.

Chart showing Social Security full retirement ages by birth year.

Image source: Getty Images.

You can claim benefits as early as age 62, but your monthly payout will be reduced. How much it's reduced depends on how far away you are from your FRA. If you're within 36 months of your FRA, each month out will reduce benefits by five-ninths of 1%. Any additional month past 36 will reduce benefits by five-twelfths of 1%.

If your FRA is 67, claiming benefits at 64 would reduce them by 20%, and claiming at 62 would reduce them by 30%. 

Delaying benefits past your FRA will increase them by two-thirds of 1% each month until you reach 70. No increases happen after 70, so there's no real reason to delay past that point. If your FRA is 67 and you delay benefits until 70, they'll increase by 24%.

A large part of retirement planning is knowing how much money you'll have coming in. That's why it's crucial to understand how when you claim Social Security will affect your monthly benefit. You don't want a situation where you claim early, and your monthly benefit is lower than expected -- or where you delay benefits and realize the years of missed payments weren't worth the increase.

2. Earning too much while claiming benefits early

The good news is that you don't have to quit working if you claim Social Security early. The not-as-good news is that you'll need to monitor how much you earn. People claiming Social Security benefits early in 2023 can earn up to $21,240 a year. People set to reach their full retirement age in 2023 can earn up to $56,520 in the months leading up to it.

Earning over the limit will trigger Social Security's Retirement Earnings Test (RET), which temporarily reduces your benefits until you reach your FRA, then adjusts them to incrementally pay back the withheld amount over time.

For example, imagine your FRA is 67 and you take benefits at 65 while earning more than the limit. If the RET lowers your yearly benefits by $2,500, Social Security would withhold $5,000 over the two years until you reach age 67. Once you reach 67, Social Security will recalculate your monthly payments, increasing them in a way that gradually repays your $5,000.

3. Not knowing how taxes may affect your benefits

As with regular income, you could potentially owe taxes on your Social Security benefits. How much your benefits are taxed federally depends on your provisional income, which is your adjusted gross income (AGI) plus half of your annual Social Security benefit and all nontaxable interest.

Percentage of Benefits Taxable Single Filer Married, Filing Jointly

0%

Less than $25,000

Less than $32,000

Up to 50%

$25,000 to $34,000

$32,000 to $44,000

Up to 85%

More than $34,000

More than $44,00

Data source: Social Security Administration.

The percentages in the chart aren't how much your benefits will be taxed -- it's how much is eligible to be taxed. For instance, you don't have to worry about paying up to 85% tax on your benefits, but up to 85% will be eligible to be taxed at your normal tax rate.

States have their own respective Social Security tax rules. Currently, there are 12 states that could tax your Social Security benefits under certain circumstances:

  • Colorado
  • Connecticut
  • Kansas
  • Minnesota
  • Missouri
  • Montana
  • Nebraska
  • New Mexico
  • Rhode Island
  • Utah
  • Vermont
  • West Virginia

Which states tax, and how much they tax, can change from year to year, so make sure you're up to date on your state's policy. Not everyone collecting Social Security in these states will have to pay extra state income tax, but you don't want to be caught off guard with a lower monthly benefit because your state switched its tax rules without you knowing.