Getting financial advice from a machine once seemed like the stuff of science fiction. But the emergence of ChatGPT makes talking about retirement with an artificial intelligence (AI) tool as easy as chatting with a certified financial planner.
But is it as effective? On that score, trepidation about AI-driven advice abounds, especially among older adults. Only 9 percent of boomers say they’re likely to use an AI financial adviser, compared to 20 percent among the digital natives of Generation Z, according to a recent Yahoo Finance/Ipsos survey.
So, how excited — or wary — should older Americans be about embracing AI to help make financial decisions that affect their nest egg?
To be sure, technological change in personal finance is nothing new. Trading, portfolio construction and money advice have gone from a primarily human-touch business to one increasingly driven by computers, algorithms and apps. Building a portfolio of mutual funds to generate wealth for retirement, once the painstaking province of human hands, can now be done in minutes by automated online investment managers known as robo-advisers.
Still, when it comes to your money, the quality of advice is critical. “Large language model” systems like ChatGPT can converse in human-like fashion based on mountains of information they have vacuumed up from the web and other sources. How does that play out in the arena of financial planning?
To test-drive the nascent technology, we fed it a handful of retirement-related prompts — AI-speak for asking questions — and shared the results with real-life financial professionals to review for usefulness and accuracy. (ChatGPT has been known to “hallucinate” — more AI-speak for generating incorrect or even fabricated responses.) The goal: to provide some guidance on how to evaluate, and best use, these tools in planning for retirement.
What follows is a selection of what we asked ChatGPT, its answer and how the human advisers assessed it. We did not ask follow-ups to get more tailored advice, although you certainly can. But, as in any online interaction, you want to be careful about providing personal information to an AI bot.
What ChatGPT says
The best age to start receiving Social Security benefits depends on several factors and individual circumstances. Here are a few key points to consider:
1. Early eligibility: You can begin receiving Social Security retirement benefits as early as age 62. However, claiming benefits at this age will result in a reduction in monthly payments compared to what you would receive if you waited until your full retirement age (FRA).
2. Full retirement age (FRA): FRA is the age at which you are entitled to receive full Social Security benefits. It is determined by your birth year and ranges from 66 to 67 for those born in 1943 or later. If you claim benefits before reaching your FRA, your monthly payments will be permanently reduced.
3. Delayed retirement credits: If you delay claiming Social Security beyond your FRA, your benefit amount will increase through delayed retirement credits. For each year you delay, up until age 70, your benefit increases by a certain percentage. This can be advantageous for individuals who can afford to wait and want to maximize their monthly payments.
4. Financial considerations: Your financial situation and need for income play a crucial role in the decision. If you have other sources of income or retirement savings, you might consider delaying Social Security to receive higher monthly payments later. Conversely, if you require immediate income, claiming earlier might be necessary.
5. Life expectancy and health: Your life expectancy and health should be considered when deciding on the best age to start Social Security. If you anticipate a longer lifespan or have health issues that may impact your retirement, it might be beneficial to delay claiming benefits.
Ultimately, there is no universal "best" age to start Social Security that applies to everyone. It’s essential to evaluate your specific circumstances, consult with a financial advisor, and consider factors such as your financial needs, health, and long-term retirement goals before making a decision.
What the humans say
ChatGPT’s answer shows its strengths, the real-life pros say: laying out useful, basic information and a checklist of variables to consider in weighing when to make a particular financial move.
“It’s good at giving you the things that you should be thinking about,” says Michael Collins, a financial adviser at WinCap Financial and an adjunct professor of finance at Endicott College in Beverly, Massachusetts. “It’s a way to help you think about stuff.”
But it only helps you think about it so far. “This response is tantamount to visiting an attorney who recites the law, chapter and verse, but is incapable of advising you on the best path forward based on the particulars of your case,” says Anthony Ogorek, president and founder of Ogorek Wealth Management in Williamsville, New York.
ChatGPT’s answer also omits key information that could be pivotal in helping you determine your best Social Security claiming age, notes Rob Leiphart, a certified financial planner in Shelton, Connecticut, and vice president of financial planning at RB Capital Management. For example, it doesn’t say how much your benefit could be reduced if you take it at age 62 (by 30 percent), or how much more you get by waiting until you hit 70 (77 percent more than if you claim at 62).
To get a better answer, you’d need to provide ChatGPT with more precise information, such as how long you think you’ll keep working, how much is in your 401(k) plan or whether you have a chronic illness that could shorten your lifespan.
What ChatGPT says
When it comes to generating income in retirement that exceeds inflation, it’s important to consider a diversified investment strategy that balances risk and potential returns. Here are some investment options to consider:
1. Dividend-Paying Stocks: Look for established companies with a history of consistent dividend payments. These stocks can provide a steady stream of income, and some companies even increase their dividend payouts over time.
2. Bonds: Consider investing in bonds, particularly those with higher yields such as corporate bonds or municipal bonds. Bonds provide regular interest payments and can be less volatile than stocks.
3. Real Estate Investment Trusts (REITs): REITs allow you to invest in real estate properties without directly owning them. REITs typically generate income through rental properties, and they often distribute a significant portion of their earnings as dividends.
4. Annuities: Annuities are insurance products that can provide a guaranteed income stream for a specific period or for life. They can be a reliable source of income, but it’s important to carefully review the terms and conditions before investing.
5. Peer-to-Peer Lending: Consider investing in peer-to-peer lending platforms where you can lend money to individuals or small businesses and earn interest on your investment. However, be aware that this investment carries a higher level of risk and requires thorough research.
6. Dividend-focused Funds: Mutual funds or exchange-traded funds (ETFs) that focus on dividend-paying stocks can provide diversified exposure to a basket of dividend stocks. These funds can be an efficient way to generate income while spreading risk.
7. Rental Properties: If you’re willing to take on the responsibilities of being a landlord, rental properties can generate consistent rental income. However, property management and maintenance should be considered.
8. High-Yield Savings Accounts or CDs: While the returns may not be significantly higher than inflation, these options provide low-risk alternatives for preserving capital and generating a modest amount of income.
Remember, it’s crucial to assess your risk tolerance, investment goals, and consult with a financial advisor before making any investment decisions. Diversification and regular portfolio reviews are key to managing risk and ensuring a sustainable income in retirement.
What the humans say
ChatGPT provides a broad glossary of investment options to consider and brief descriptions of what role each can play in your portfolio, but it’s not exactly actionable advice. Notably, the bot doesn’t offer any data, like inflation rates over time, that could help you determine how much of a hurdle you’re facing or what kind of annual returns you need to get over it.
Nick Holeman, director of financial planning at digital investment firm Betterment, gives ChatGPT kudos for emphasizing the importance of diversifying your holdings, a core investing principle.
But the laundry list of investment options “is so vague it may as well be useless,” he says. There’s no information on why some choices might be more inflation-proof than others or ways to divvy up your portfolio among them. At best, ChatGPT’s answer is a launch pad for more rigorous research.
What ChatGPT says
As an AI language model, I can provide you with some general information, but it’s important to note that I’m not a financial advisor, and it’s always a good idea to consult with a professional who can consider your specific financial situation and goals.
When it comes to managing your retirement savings, the decision to switch from stocks to cash depends on various factors, including your risk tolerance, financial goals, and time horizon. While cash may provide stability and safety, it’s important to consider the potential impact of inflation over the long term. Here are a few points to consider:
1. Risk tolerance: If you are risk-averse and prioritize capital preservation, shifting to cash or more conservative investments might align with your risk profile. Cash investments, such as money market funds or certificates of deposit (CDs), are generally considered less risky than stocks. However, they typically offer lower returns and may not keep pace with inflation.
2. Time horizon: Consider your anticipated retirement duration. If you have a long retirement ahead, you might want to maintain a portion of your portfolio in stocks or other growth-oriented investments to help combat inflation and potentially generate higher returns over time. The longer your retirement period, the more important it becomes to balance risk and potential growth.
3. Diversification: Diversifying your retirement portfolio is often recommended to manage risk. Rather than switching entirely to cash, you might consider a mix of asset classes that align with your risk tolerance and financial goals. This could include a combination of stocks, bonds, cash, and other investments, based on your risk appetite.
4. Market conditions: Making investment decisions solely based on short-term market fluctuations can be challenging and potentially detrimental to your long-term returns. Trying to time the market by moving in and out of stocks can be risky, as it’s difficult to predict when to re-enter the market. Maintaining a well-diversified portfolio that aligns with your risk tolerance and financial goals can help mitigate short-term volatility.
5. Professional advice: Consider consulting a financial advisor who can provide personalized guidance based on your specific circumstances. They can help you assess your risk tolerance, determine an appropriate asset allocation, and develop a retirement investment strategy that aligns with your goals.
In summary, while switching to cash can provide stability and mitigate short-term volatility, it’s essential to carefully evaluate your risk tolerance, time horizon, and long-term financial goals. Diversification and professional advice can be valuable in managing your retirement investments effectively.
What the humans say
Holeman rates ChatGPT’s answer a solid B+. What did he like?
“It gently nudged the investor away from going to all cash and cited the logic behind it,” he says. As would just about any financial planner, the bot notes that what might seem like the safest bet for protecting your money in retirement carries its own dangers — of smaller returns, minimal growth potential and falling behind inflation, all risk factors for outliving your money.
Another positive: ChatGPT cautions against timing the market, the practice of moving assets around based on predicting when prices will go up or down.
At the same time, “it hedges itself by saying consult with an adviser,” Holeman adds. “This is smart, but ultimately shows that if an investor wants a firm answer, they cannot rely on ChatGPT.”
Mitchell Morrison agrees. The CEO and founder of Eyeballs Financial, which produces an app that delivers instant information on your financial statements, likens relying on ChatGPT for financial planning to building a new house and thinking, “I don’t really need an architect, I’m just going to bring in these contractors and let them do it.”
What ChatGPT says
Determining the best time to convert a traditional IRA to a Roth IRA depends on various factors, including your financial situation, tax considerations, and long-term goals. It’s important to note that I can provide general guidance, but it’s always recommended to consult with a financial advisor or tax professional for personalized advice based on your specific circumstances. Here are a few factors to consider:
1. Current and future tax rates: If you expect your tax rate to be higher in the future, converting to a Roth IRA and paying taxes now can be advantageous. This is because Roth IRA withdrawals are generally tax-free in retirement. However, if you anticipate a lower tax rate in the future, it might be more beneficial to delay the conversion.
2. Time horizon: The longer your time horizon until retirement, the more potential for tax-free growth in a Roth IRA. Converting early allows your investments to grow tax-free over a more extended period.
3. Ability to pay taxes: When you convert a traditional IRA to a Roth IRA, the converted amount is treated as taxable income in the year of conversion. Consider whether you have enough funds outside of your IRA to cover the tax liability without significantly affecting your financial stability.
4. Market conditions: Converting during a market downturn may provide an opportunity to convert a larger amount at a lower tax cost. However, predicting market timing is challenging, and it’s generally not advisable to base conversion decisions solely on short-term market conditions.
5. Estate planning: Converting to a Roth IRA can provide estate planning benefits, as Roth IRAs are not subject to required minimum distributions (RMDs) during the original account owner’s lifetime. If leaving a tax-free inheritance is a priority, a Roth conversion may be beneficial.
What the humans say
Money you contribute to a traditional IRA is tax-free going in but taxable as income when you make withdrawals. With Roth IRAs, it’s the other way around. Converting to a Roth allows you to shift funds into an account in which future withdrawals aren’t taxed. The catch, as ChatGPT notes, is you must pay taxes on the converted amount, based on your tax rate at that time.
While the bot ticks off key factors to consider in weighing a conversion, it gets off on the wrong foot, according to Leiphart.
“The first answer here suggests that someone might know their future tax rate,” he says. “How? Do they know if the TCJA will sunset in 2025?” TCJA, the Tax Cuts and Jobs Act of 2017, sets federal tax brackets through 2025 but will expire at the end of that year unless Congress renews it, making it even harder to speculate about your future rate.
Other points are similarly incomplete, Ogorek says. For example, ChatGPT correctly notes that the amount you move from a traditional to a Roth IRA is taxable “in the year of the conversion” but doesn’t mention that you can stagger the conversion over several years, something advisers often recommend to spread out the tax hit.
Having established how ChatGPT handles general retirement planning queries — with broad, informational lists — we asked it for help with a specific (hypothetical) scenario.
What ChatGPT says
To determine how much you need to save each month to reach a $1 million balance in your IRA by the time you retire at age 67, we’ll need to make a few assumptions:
The annual interest rate: Let’s assume an average annual return of 6%. Note that actual returns may vary, and it’s always a good idea to consult with a financial advisor for more accurate projections based on your specific situation. The number of years until retirement: Since you’re currently 52 and plan to retire at age 67, you have 15 years left until retirement. Using these assumptions, we can calculate the monthly savings required using the future value of an annuity formula:
PV = (PMT × (1 - (1 + r)^(-n))) / r …
[Here, ChatGPT launched into a series of detailed calculations to “solve for PMT,” the function in a financial formula that stands for regular payments. After about a page worth of advanced equations, it determined that …]
PMT ≈ $1,302.43
Therefore, to accumulate $1 million in your IRA by the time you retire at age 67, you would need to save approximately $1,302.43 per month. Keep in mind that this calculation assumes a constant monthly savings amount and a fixed interest rate. Additionally, fluctuations in the market and other factors may impact the actual results. It’s essential to review your financial plans regularly and consult with a financial advisor to make informed decisions.
What the humans say
Aside from the length and wonkiness of ChatGPT’s response — “The vast majority of people that I work with would not want to be bogged down with the calculation of a future value and understanding the formula,” Leiphart says — it ignores key real-life variables that could upend the savings plan and reduce tax advantages.
For example, ChatGPT didn’t note that the IRS sets a yearly limit on contributions to IRAs and depositing $1,302 a month would blow past it. Exceeding the maximum “would increase the tax drag” on this savings plan, Ogorek says. Indeed, the IRS will hit you with a 6 percent penalty tax on the excess amount for each year in which it remains in your account. And unless you’re paying for a ChatGPT upgrade, it won’t be able to tell you the current limit. The standard, free version’s knowledge base is limited to content that was online as of September 2021.
A broader problem is that ChatGPT provides the most literal, mathematical answer rather than asking questions or offering prompts that might better help a saver reach their goal, as a human adviser likely would. “A level of nuance and sophistication is lacking here,” Ogorek says.
If this were his client, Ogorek says, he would ask if they have access to a 401(k) plan at work with an employer match — “That would make the savings goal more attainable.” He’d ask what kind of work they do and whether it’s realistic to keep doing it until 67, as in most cases only earned income can be put into an IRA.
ChatGPT’s handling of another scenario-based query similarly suggested that providing reliable answers to specific, personal financial questions might not be its strong suit, at least not yet.
Posing as a 65-year-old couple from New Jersey, we gave details on our savings, investments and expenses and asked how long our money would last. We then asked the same question, with the same numbers, but said we were from Mississippi. Though there were no state-specific inputs, ChatGPT gave different answers, estimating — for reasons it did not explain — that the returns on our investments would be lower in Mississippi.
“That’s very odd,” Holeman says. “This type of inconsistency would lead to a lot of problems when trying to build a retirement plan.”