5 Ways to Opt-Out of Your Default Financial Plan

We tend to talk with our clients about “creating a financial plan” on a regular basis. But in truth, everyone already has financial plan, full of default choices. Deciding to create a personal financial plan is really choosing to opt-out of the defaults.

Most people don’t like to think about financial decisions, which is why there are government (federal and state) defaults for retirement, insurance and estate planning. The default options aren’t attractive (often amounting to less than the bare-minimum of people’s needs).

Listed below are some of the default offerings that will affect various parts of our financial life, and some pro-active alternatives worth considering:

Estate Planning: The default estate plan is known as probate. Anyone who dies without a valid will or trust has assets frozen, while the court assigns representatives to decide who receives the assets. It can take 6-24 months before an estate is wrapped up, in California the fee starts at 8% of all asset values, and the court records are public.

Opt-Out: An estate attorney can help design a living trust where you decide who receives what and when. Your estate plan can also include guardianship of minors, healthcare directives and powers of attorney for incapacitation.

Retirement Planning: Social Security offers monthly income for people who have paid into the system through taxes. The average benefit for a 66-year-old is $1,333 monthly[1], which is below the California poverty line. Social Security was and is designed to be a supplement to your retirement income – not a benefit to replace income in retirement.

Opt-Out: There are multiple ways to save for retirement, but some of the most popular tax-deferred options are 401(k)’s and IRA’s (individual retirement accounts). If you don’t have retirement savings, start saving today. Online tools and professional advice is readily available. Saving a little can add up over the long run, so consult with us or your advisors on your options.

College Planning: Student loans are the most common (and available) funding method for college when there’s no money set aside ahead of time. The average 2016 college grad has over $36,000 in student loan debt (New York Federal Reserve). In total, Americans owe over 1.4 Trillion in student loans.

Opt-Out: 529 College savings accounts are simple to set up, and allow parents to save money for future college-related expenses. Unlike savings accounts, a 529 account can be invested in mutual funds, and any gains are tax free. Distributions are tax free when used for tuition, books, housing costs, food and even laptops.

Budgeting: Most Americans are living paycheck-to-paycheck, and can’t afford a $500 surprise expense (according to a recent bankrate.com survey).

Opt-Out: Starting a rainy-day fund isn’t exciting, but it’s recommended that most people have 3-6 months of expenses put aside for emergencies. Although savings accounts yield nearly nothing, having a separate account can help mentally. Try using your checking account for all short-term needs. Open a savings account start consistently saving a percentage of your income (1% - 10%) for emergencies. It’s a basic idea which few people implement.

Credit Cards: Minimum payments are the absolute smallest amount you’re permitted to pay on your credit card balance each month. They’re designed to keep you paying interest for a long time. One credit card statement I’ve seen had the minimum payment at $50… and it would take 10 years to pay off the full balance! Increasing that payment to just $75 had the balance paid off in only 3 years.

Opt-Out: Try to pay off as much debt as possible (ideally the full balance) every month, and/or lower your credit limit to ensure you never get in over your head. Credit card debt is routinely 12-25% in interest annually, so keeping the amount low will save big interest charges later.

[1] SSA.gov