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I'm a financial planner, and there are 2 common pieces of money advice I tell my clients to ignore

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The author, financial planner Malik S. Lee. Courtesy Malik S. Lee

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  • As a financial planner, my clients come to me with questions about all kinds of money advice they've read about online. There are two common tips I tell them to ignore.
  • The first is that everyone should have a revocable living trust. This is a good idea for some people, but not all. That's why it's called personal finance — blanket financial advice usually doesn't make sense for everyone.
  • The second piece of advice I tell clients to ignore is that target-date funds are the best way to save for retirement. Depending on when you plan to retire, they might not make sense for you.
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Being born into — and helping to usher in — the Information Era is one of the big perks of being a millennial. Between social media, YouTube, and online publications, answers to almost any question you can think of tend to be a click or Google search away. 

The downside of access to all this data? Not all information is useful information ... or even accurate. 

My primary job as a financial planner is to give my clients financial advice. But when I sit down with clients, I often find myself explaining the need to ignore a few common pieces of bad advice that's based on incomplete or inaccurate information.

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1. Everyone should have a revocable living trust 

Taking financial advice not tailored to your specific situation can be detrimental. There's a reason it's called personal finance. 

Realize that everyone's situation is different. Things such as risk tolerance, income, budget, goals, taxes, and even the time horizon you have to work with can make generic, one-size-fits-all financial advice invalid for your particular situation. 

A common blanket recommendation I find myself debunking over and over again is the claim that everyone should get a revocable living trust. While a revocable living trust is excellent for some individuals, it's unnecessary for others — and not establishing a trust when you don't need one can save you thousands of dollars.

Suze Orman, one big proponent of this type of trust, says getting a revocable trust lets your estate avoid probate if you die, and gives you and your loved ones more control over your assets if you were incapacitated. 

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This isn't wrong, but it might be overkill for your specific situation. Both court filing fees and attorney fees vary by state. Depending on where you live, the cost of probate could actually be less than the expense of setting up a trust.

Your assets may not even need to go through probate at all. If most of your wealth would be payable on death to a listed beneficiary, those assets will bypass the probate process whether you have a trust or not. That includes taxable accounts with listed beneficiaries, IRAs, and 401(k)s, which, for many people, are where the bulk of their financial assets live. 

Finally, if your main concern is protecting yourself or your finances if you're incapacitated, then you may simply need to establish a durable power of attorney (not necessarily an entire trust). The living trust will let you make financial decisions on the assets held within the trust, while the financial power of attorney is more all-encompassing and can let your designee make financial decisions in more situations. 

2. Target-date funds are the best way to save for retirement 

Target-date funds are mutual funds commonly available within your 401(k) or other employer-sponsored plans that typically coincide with the year you plan to retire. 

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If you are 40 years old in 2020 and plan to retire at age 65, you could select a 2045 target-date fund for your investments. As you get closer to your planned retirement date in 2045, the fund automatically adjusts its allocation to reduce equity exposure (and, therefore, the risk you take).

While I do believe that using target-date funds presents a better option than selecting nothing and letting your account contributions sit in cash, which some investors do by failing to select an investment option within their 401(k), I think they should be used more as a placeholder rather than a "set-it-and-forget-it" strategy.    

Target-date funds force you to invest based on the age at which you think you'll want to start accessing your money. Even if that age is 40 or 50 years into the future, most target-date funds don't offer an option to invest 100% in equities — which, depending on your specific situation, might be exactly what you need to do to generate enough returns to meet your goals.

This could be true even if you're closer to retirement. Most Americans have not saved enough for retirement (or, at the very least, feel as though they haven't). If you're currently 50 and want to retire at 65, the Vanguard Target Retirement 2035 Fund will start you off with an allocation that's 73.51% in equities (as of October 31, 2020). But if you got a late start to saving, then you may need to take more risks in order to secure higher returns to catch up before retirement. 

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Target-date funds can also give investors a false sense of security. Some people may feel the ongoing reduction of equity exposure makes the funds somehow safer than other options. But during the Great Recession in 2008 and 2009, some target-date funds were down as much as 20% to 40% in their scheduled retirement year. 

There is no single best option when it comes to investing, and I don't believe a set-it-and-forget-it strategy is ideal for most people trying to save for retirement. Most employer-sponsored plans typically have limited investment options because they have already screened thousands of funds to select what they perceive to be the best options for your plan. 

For more investment-savvy individuals, this can give you the added confidence needed to select the investment strategy that you feel is best for you. In contrast, if you feel that more guidance is needed, you should seek additional help from a financial planner.

As America continues to empower us with all the information we could ever want at our fingertips, I caution you to take heed and ensure that you're following advice that is right for your personalized situation. 

Editorial Note: Any opinions, analyses, reviews, or recommendations expressed in this article are the author’s alone, and have not been reviewed, approved, or otherwise endorsed by any card issuer. Read our editorial standards.

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