Should You Let AI Manage Your Retirement Plan?

There’s a familiar refrain on Wall Street that “the trend is your friend,” meaning go with the herd and stick with the status quo.

Accurate or not, that sentiment is clearly in play as artificial intelligence becomes more prevalent in the financial sector.

A recent Mercer survey of U.S. investment management companies showed that 90% of firm decision-makers are currently using AI in their role or plan to do so.

What does the burgeoning use of artificial intelligence by professional money managers mean for U.S. workers and their retirement funds? Plenty, it turns out.

Here’s what you need to know about AI and your retirement plan:

— The current role of AI in financial planning

— How AI helps retirement savers

— Factoring in the human element

— Creating an AI-based retirement plan

— The collaborative future of retirement planning

The Current Role of AI in Financial Planning

AI is especially useful in analyzing vast amounts of data that informs its tailored retirement planning strategies. “AI can already forecast future financial scenarios, optimize retirement investment portfolios, automate portfolio monitoring and provide ongoing customer support,” said David Donovan, head of financial services at Boston-based Publicis Sapient, a consultancy that helps financial institutions adopt digital-based money management services, in an email. “AI’s versatility allows it to comprehensively address various aspects of retirement planning, catering to individual needs and adapting to changing circumstances.”

While AI is good at analyzing data and identifying opportunities, it shouldn’t be a sole source of financial planning because it is unable to effectively act as a personalized problem solver, said Chris Martin, senior wealth manager at Fairway Wealth Management LLC, Independence, Ohio, in an email.

“It cannot provide personalized financial advice that incorporates your values, emotions and personal circumstances,” Martin said. “Additionally, AI is not a reliable tool for answering questions like … how do I balance living for today and saving for tomorrow practically? How much should I save in a 529 plan for a specific child?”

“Answers to those questions involve personal and relational nuance that cannot be input into a software,” he added.

[READ: Is a 60/40 Portfolio Appropriate for Retirees?]

How AI Helps Retirement Savers

While AI is being used in myriad retirement investment planning areas, some are a bigger priority than others.

Financial services firms are using AI to break down a wide range of variables unique to an individual’s financial situation and preferences. This approach considers risk tolerance, time horizons and financial goals. But there are limitations.

“Money can be a very emotional subject, and many financial decisions are not made in a spreadsheet,” said Mark Johnson, an investments and portfolio management fellow and professor at Wake Forest University School of Business in Winston-Salem, North Carolina, in an email. “AI can help make more objective financial decisions, but technology will not be able to apply a one-size-fits-all approach to financial planning because one-size-fits-all ends up fitting no one just right.”

While investment experts widely view artificial intelligence as a game changer, retirement savers should weigh the pros and cons of using the technology, said David Reyes, founder of Reyes Financial Architecture Inc. in San Diego, in an email.

Pros of AI Retirement Planning

Accessibility. AI tools can make retirement planning more accessible and affordable for everyone, not just high-net-worth individuals.

Efficiency. Faster analysis and data-driven recommendations lead to better decision-making.

Objectivity. AI removes emotional bias from the equation.

Cons of AI Retirement Planning

Overreliance. While AI is a powerful tool, it shouldn’t replace human judgment. Complex situations or unforeseen events might require a human advisor’s expertise.

Data security. Protecting sensitive financial information entrusted to AI systems is important.

Algorithmic bias. AI algorithms can perpetuate biases present in the data they’re trained on, leading to unfair recommendations for certain demographics.

Factoring in the Human Element

Financial advisory experts say companies are already demonstrating to customers that AI can be used in a wide range of personal finance services, from a bank recommending the best certificate of deposit to an insurance company using AI to create the best auto insurance policy for a client’s unique household needs.

“Artificial intelligence is not going anywhere and can help with not just retirement planning but also personal finance before retirement,” Johnson said.

Johnson sees artificial intelligence helping to recommend asset allocations for clients based on their risk tolerance, age, income needs and other factors that influence retirement planning decisions.

“This could include mutual fund and exchange-traded fund recommendations based on goals, as well as which accounts to draw from in retirement recommendations, for example, IRAs versus 401(k) versus savings,” he said. “Hopefully, having technology to assist with financial planning could lower client costs in the long run.”

That does not mean human financial advisors are going away.

“There most likely will still be a need for a point of contact, i.e., an advisor, to communicate AI’s recommendations to a client and verify that it is the best path forward for the client,” Johnson noted. “AI-based retirement planning could incorporate client-specific data into the planning process, like life expectancy, annual spending needs, risk tolerance, inflation expectations, other sources of income and estimated taxes, to name a few retirement planning components.”

[Read: What Is a Good Monthly Retirement Income?]

Creating an AI-Based Retirement Plan

The “doing it” part of AI-powered retirement planning starts with creating a framework that maximizes artificial intelligence capabilities.

“Several companies and platforms, including Betterment, Wealthfront, Personal Capital, Schwab Intelligent Portfolios and Vanguard Personal Advisor Services, utilize AI to assist with retirement planning,” Donovan said. “These platforms offer various features, such as automated portfolio management, personalized advice, tax optimization and access to human advisors.”

Retirement savers can gain the best of both worlds when working in tandem with a human financial advisor. “AI integration helps make retirement planning more accessible, efficient and effective by leveraging technology to automate processes and provide personalized recommendations,” Donovan noted.

If you’re just getting started immersing AI into your retirement plan experience, prioritize the practical benefits you can get right away and then grow as the technology evolves.

“Retirement planning is a prime area for AI to shine,” Reyes said. Focus on these checklist items when you’re just starting.

Goal setting and tracking. AI can analyze income, expenses and savings patterns to set realistic retirement goals and track progress toward them.

Scenario planning. Running simulations based on different market conditions and longevity estimates allows for a more robust retirement plan.

Risk management. Use AI to identify potential risks like health care costs or inflation and suggest adjustments to the plan.

Data gathering. Securely collect financial data (income, expenses, investments) and user-defined goals (desired retirement age, lifestyle expectations).

AI analysis. Leverage AI to analyze critical data to create a personalized retirement plan.

Interactive interface. Users should interact with the AI, asking questions and making adjustments to the plan based on their risk tolerance and preferences.

Continuous monitoring. AI continuously monitors progress, suggesting adjustments as circumstances change (for example, job changes or market fluctuations), and retirement investors should make good use of those tools.

[What Is the Average Retirement Savings Balance by Age?]

The Collaborative Future of Retirement Planning

While AI offers tremendous potential, it’s important to remember it’s a tool, not a replacement for human financial advisors.

“The ideal scenario is a collaborative approach where AI empowers advisors to deliver a superior client experience with more personalized and data-driven financial planning, particularly in retirement planning,” Reyes said. “By embracing AI, the financial planning industry enhances retirement outcomes, prioritizing transparency and ethical considerations. It’s crucial to navigate risks while maximizing AI’s benefits for all stakeholders.”

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