Last fall, the artificial intelligence application ChatGPT was released to the masses. Soon after Google released its AI app, Bard and Microsoft made available similar features in its Bing application. I started testing the apps for travel first, helping to decide between destinations and putting together sample itineraries for a trip.
It got me thinking, how could an AI app be used for financial planning? The following is a recent chat between me and ChatGPT 4.0, which is the version that is actively learning and connected to the internet. It has been edited for clarity and brevity (ChapGPT can drone on!)
How do I know if I’m financially prepared to stop working? This is perhaps the most common question I hear from new clients. The AI app said that to assess your financial readiness for retirement or a work sabbatical, consider these key performance indicators: asset-liability matching, cash flow projections, investment portfolio diversification and solvency ratios.
ChatGPT listed 11 other considerations to answer this question. It helpfully concludes by saying, “Once these KPIs are favorably in alignment, you can confidently proceed with your decision to stop working.”
In my opinion, its answer was verbose and, for the most part, factually correct but in some ways was missing the benefit of some wisdom and experience. Certainly, you want to make sure your long-term assets do cover long-term liabilities, but how does one go about doing that? The portfolio diversification answer recommends minimal risk exposure, but in many cases, retirees should take some degree of risk by investing in stocks to ensure that they don’t outlive their money and are also able to keep up with inflation.
How do I come up with an appropriate investment strategy for me? ChatGPT suggested a 15-step process here, beginning by stating that “developing a personalized investment strategy entails multiple steps, from risk assessment to portfolio construction.” It recommended an objectives and constraints analysis, a risk profile assessment, benchmark selection and strategic and tactical asset allocation.
I agree that almost every financial plan should begin with an assessment of the current financial situation of a client as well as their goals. On the other hand, benchmark selection — picking a mix of indices to track portfolio performance — would be much further down on the list. Tactical asset allocation, purchasing or selling investments in your portfolio based upon insights into future market direction typically does not work for most investors (particularly those asking ChatGPT for help).
Should I use exchange-traded funds (ETFs) or mutual funds for my investments? Here, ChatGPT gives a good rundown on the pros and cons of using ETFs versus mutual funds. For ETFs, it says advantages are tax efficiency, intraday liquidity, generally lower expense rations and often no minimum investment level. For mutual funds, it cites active management as a positive (important to note that many mutual funds are passively managed), as well as being more convenient for automated investment programs and that it offers diversified investments (ETFs do this too).
If I have a Roth IRA, a pretax 401(k) and a taxable account, which account should I withdraw from first when I’m no longer working? ChatGPT responded that the optimal withdrawal sequence depends on various factors like your tax bracket, age and market conditions. A commonly advised approach involves depleting taxable accounts first, pre-tax accounts next and then finally Roth accounts. It also stated that you need to be mindful of RMDs that start at age 72 and early withdrawal penalties from 401(k)s if you’re under 59 1/2.
The withdrawal order is close to what many tax-focused financial advisors would recommend. Although, an important aspect of this strategy is performing Roth conversions on your pre-tax accounts in the same year you withdraw primarily from your taxable accounts. Also, the RMD start date age for retirees can be 70 1/2, 72, 73 or 75 depending on the year of birth — not just age 72. In addition, retirees in many cases can withdraw from 401(k)s at age 55 without penalty if they retired from the company at that age or later.
To summarize, ChatGPT gave some good general personal financial advice. Albeit, in many cases, its guidance would be hard to implement. Also, some findings reported as fact were not exactly true. For the many topics that I’ve used an AI app, perhaps the toughest adjustment is that it responds with the air and confidence of an expert. The issue is that it does not betray any ambivalence in its answers. In tone, the correct conclusions appear the same as the incorrect ones. You can learn from ChatGPT, but make sure you fact-check its apparently authoritative conclusions.
David Gardner is a Certified Financial Planner
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