What can AI teach ordinary people about investing for retirement?
If you use ChatGPT to compose emails, create a new resume, or get movie recommendations, what about stock tips and investment strategies?
Financial professionals are increasingly turning to artificial intelligence in their day-to-day work to conduct investment research and run future portfolio scenarios and potential returns. Leveraging technology to condense vast amounts of financial data into easy-to-understand summaries and then use that knowledge to help clients create retirement plans can save significant amounts of time.
But just because finance professionals are exploring AI at this level doesn’t mean it’s ready for you or me yet.
The idea of amateur investors or ordinary workers putting real money into financial advice from bots is something I highly doubt — after all, generative AI is still in its infancy, and its errors can be terrible.
I decided to test ChatGPT myself and get some expert input on how AI can help (or hurt) the average person’s retirement planning.
“AI has the potential to drive better outcomes and improved access to financial advice for consumers saving for retirement,” David Knox, senior partner at Mercer, told Yahoo Finance.
Read more: Retirement Planning: A Step-by-Step Guide
Support and investment
As I began using ChatGPT and exploring how it could help me manage my retirement planning and savings, I found that it performed best in a support role.
Knox agreed.
“It could support educational tools and personalized 'robo-advice' to help savers make more informed decisions,” he said.
On the positive side, I was amazed at the amount of information provided and how easily the answers were answered.
It correctly answered my first three questions: how much of my retirement savings should I invest in stocks, what are target-date funds, and when should I start taking Social Security?
Read more: How to start investing: A step-by-step guide
ChatGPT performed well in a supporting role in answering questions about leaving. (Getty Creative) (hirun via Getty Images)
The answers came quickly and were insightful.
For example, the answer to a question about stock holdings might read: “The percentage of your portfolio that should be invested in stocks during retirement depends on several factors, including your risk tolerance, retirement goals, and overall financial situation. However, a general rule of thumb is the 'rule of 100,' which suggests that you should subtract your age from 100 to determine the percentage of your portfolio that should be in stocks, with the remainder in more conservative investments such as bonds or cash. However, this is only a general guideline and your specific situation may call for a different allocation.”
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Personally, I would recommend 110 minus your age, but this is standard feedback and isn't wrong.
The reply also mentioned other things to consider: “If you are comfortable with market fluctuations and have a long-term perspective, you might choose to hold more stocks. If you are risk averse, a more conservative approach might be better. If you rely heavily on your portfolio for income, you may want to be more conservative to avoid having to sell stocks during a downturn.”
“If you have other sources of income, such as Social Security, a pension or rental income, you may be able to take on more risk with your investments,” he added.
Wisely, he suggested I take my health and life expectancy into account: “If you expect to live a long time in retirement, holding more stocks will help your savings last longer.”
Finally, I was pleased to read the final guidance from the ChatGPT pilot: “Given the importance of this decision, it may be advisable to speak to a financial advisor who can tailor advice to your specific situation.”
absolutely.
For me, working with a financial advisor is a confidence builder. She helps me set goals and envision what kind of life I want to live now and in the future. She's my rock to bounce investment ideas off and keep my mind calm when the stock market gets shaky. Importantly, she holds me accountable to continue saving and investing, and helps me execute on my choices, especially when it comes to rebalancing my investment portfolio. But I pay an annual fee for that expert advice and assistance.
This basic information is free and can be a good starting point for those looking for some direction or guidance, but don't expect personalized recommendations such as specific investments to buy.
Dreaming of a trip to St. Barthélemy isn't something an AI would include in its retirement plans. (Getty Creative) (daniloforcellini via Getty Images)
“There are many limitations to relying on AI.”
To get a deeper perspective on AI and retirement planning, I reached out to a few experts to get their thoughts on the pros and cons at the moment.
“AI may be useful in identifying investors' blind spots when it comes to some financial literacy, but it's not useful for recommending specific assets or funds,” Mark Johnson, a professor and research fellow in investment and portfolio management at Wake Forest University, told Yahoo Finance.
“For example, you can use ChatGPT to ask, 'What are the characteristics of a good mutual fund?' and it will give you some good suggestions on what to look out for,” he says. “But there are many limitations to relying on AI for investment management, because one size does not fit all.
Johnson added that money is emotional and personal, and AI cannot understand that.
“AI cannot provide specific advice that takes into account each of our unique financial situations, objectives and constraints, so I would not rely solely on AI to manage my retirement accounts, but would use it as a supplement to my information gathering and general high-level investment advice,” he said.
Don't judge
Improving financial literacy.
“AI is great for its simplicity and directness and doing the initial research,” Dan Egan, vice president of behavioral finance and investing at Betterment, told Yahoo Finance. “Right now, AI is a good advising aid that won't criticize you if you ask a stupid question, but you want an accountability partner, an actual human being to be your co-pilot.”
For example, you might not necessarily want to discuss with your financial advisor the definition of catch-up retirement contributions or the difference between a Roth IRA and a traditional IRA. “You want to spend time with her going over as much substance as possible,” he told me.
The human touch in retirement planning remains an important factor for many savers. (Getty Creative) (SDI Productions via Getty Images)
Even AI makes mistakes
According to a new report from BlackRock, AI's ability to analyze vast amounts of data can provide information on market trends and “potentially lead to more customized, resilient portfolios that can adapt to different conditions.”
However, this does not mean that we are prepared to advise you on specific investments for your account.
“If you want to use AI to help you brainstorm how to create a budget, then by all means, do so,” Jacob Channell, a senior economist at LendingTree, told me. “You probably shouldn't use AI for anything more than that. AI can make a lot of mistakes and can lead you down a path that isn't the outcome you want.”
But “AI is often bad at math,” he said, “so if you're using it to calculate how much you need to save to retire comfortably, it could easily go astray.”
I asked ChatGPT to calculate how much a 50-year-old Gen Xer with $178,500 saved today would need to save each year to reach $1 million by the time they turn 65, which is the average account balance of Gen X Fidelity customers, according to a recent report.
The answer is, “To reach $1 million by age 65, with current savings of $178,500, you would need to save about $27,757 each year for the next 15 years, assuming a 5% annual return on your investments.”
It also comes with this encouraging message: “This savings goal may be achievable through a combination of consistent savings and sound investment choices. If you'd like to explore different yields and strategies, feel free to contact us.”
“What a machine tells you is likely nowhere near correct,” Channell said. “We have a long way to go before machines can provide the same level of nuanced expertise as a competent human.”
“ChatGPT can make mistakes. Check important information.” (Getty Creative) (Laurence Dutton via Getty Images)
Have a question about retirement, personal finance or even career-related? Click here to send a message to Kerry Hannon.
To be fair, there is a disclaimer in faint type at the bottom of the screen page that reads, “ChatGPT may make mistakes. Please review important information.”
Accuracy is key when it comes to any major life choice or investment, so you should never base your retirement plan on incomplete or inaccurate information.
Proper retirement planning is much more than a general answer: Interest rates change, markets crash, and laws change.
And there's no substitute for a relationship between two people who can dream about their goals, what they'll regret if they don't achieve them, what they value, and what they envision their retirement life to be like.
“Artificial intelligence isn't designed to be a retirement advisor or partner,” Bradley Shulman, author of “The Super Age,” told Yahoo Finance. “AI provides a great starting point, but it doesn't have the emotional intelligence needed to help individuals in the long term.”
Kelly Hannon is a senior columnist for Yahoo Finance. She's an expert on career and retirement strategy and the author of 14 books, including “In Control at 50+: How to Succeed in The New World of Work” and “Never Too Old to Get Rich.” Follow her at X. Kelly Hannon.
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