Welcome to How to Retire On Time, a show that answers your retirement questions. Say goodbye to the oversimplified advice that you've heard hundreds of times. This show is all about the nitty gritty. As always, this is just a show, not financial advice, but you can text your questions to (913) 363-1234, and we'll feature them right here. David, what do we got today?

Hey, Mike. Can I use AI to build my retirement plan? Sure. Nothing stopping you. Yeah.

Would that be wise at this point?

Yeah. It's such a great question because it's such a great tool.

What makes it a great tool in your experience?

AI is like having a PhD in your pocket. You can ask it anything, and it's gonna give you pretty good answers. But the problem is AI, which is a large language model, is going to be influenced by bias. What's the most popular or common strategies that are out there? I think a lot of it's more focused on product pitches or kind of set it and forget it ideology to simplify things, trying to do you a service, but it may do you more harm.

And there's a confirmation bias that's a build in based on how you ask the questions. If you ask neutral questions, if you say, what's wrong with x y z? It's gonna give you all reasons we should hate x y z.

Okay.

Why should I get this? All the reasons why you should get that. So now you did tell me that the this question was coming beforehand. Uh-huh. So I did a little preparation.

Okay.

This is gonna be kind of fun. So I've got an AI. I don't wanna say who, because I don't wanna get sued. It's a brand new account. I've never chatted with it before.

Okay. So it has no history to go on and Yeah. Maybe influence it.

So I'm literally typing real time right now, hey, I'm looking to retire next year. I have 1,000,000 in my four zero one k and no debt. Plan my retirement for me with a focus on maximum income. Now I have never tested this before. I have no idea what it's gonna say.

Okay. Alright. So here we go. It's thinking. Drum roll.

Alright. And I'm gonna paraphrase this because this is it's gonna be long winded, but appreciating you sharing your financial situation. However, I should mention upfront that I'm not a financial adviser. Okay. So I can't make specific recommendations on what you should do.

But you know what's funny about that is it's the disclaimer that everyone ignores. Uh-huh. You know, like iTunes? Has anyone ever read the disclaimer for iTunes?

Yeah. Or any Terms

and conditions or whatever? Yeah. I mean, really? Who's reading all that? So people say, oh, yeah.

But, you know, it's pretty much what you're gonna get here. So that said, I can walk you through some things. So you agreed lifespan, common strategies, 4% rule, annuities that provide guaranteed lifetime income, dividend focused income, bond ladder income, combination strategies, balancing growth and income, critical considerations, tax efficiency, health care, inflation, market risk. So all it did was it just gave you a a bunch of broad jargon that you may not fully understand. So let's say, which is the best for income?

And it's thinking, I can't tell you objectively which is best. Oh, that's good. So here we go. So immediate annuities often provide the highest guaranteed income stream. Now this is not a product pitch, so don't think this is true.

Potentially, five to 7% annually from the million dollars depending on your age and current rate. However, you're giving up control of your principal liquidity and any inheritance to your heirs, which is true. What it's not telling you though, it didn't mention inflation risk. So let's say you put in a million dollars and you got, according to this, $70,000 guaranteed for life. That would be a flat it it's not saying flat, but it's gonna be flat.

So every ten years, around 25% of your buying power is going to erode. After twenty years, it's like 43% or something like that. Assuming a 3% inflation. So that's not disclosed at all. And unless you knew the question to ask, you knew the risks associated with it, you might be swayed and say, well, shoot.

Everyone says the 4% rule. I'll get the 7% rule here and just sign up for this, and I'm all set. I have no market risk. It's perfect. Do you see how it's any tool can be used for good or bad.

It depends on the handler of it.

Mhmm.

Like, I think cellos are the most beautiful instrument. Mhmm. But if you hand me a cello, it's gonna sound like the worst instrument you've ever heard. Right. Dividend portfolio can generate three to 5% yield with keeping your principal invested and growing.

This offers inflation protection flexibility, which is true, but the income isn't guaranteed, and you're exposed to the market risk. That's a pretty fair description. And then you got the 4% rule diversified portfolio with systematic withdrawals historically has a high success rate of lasting thirty plus years, but it's conservative, you might be able to withdraw more depending on market conditions and your timeline, which is true, but I don't think people fully understand the risk that they're taking. Then there's bond ladders, which typically give you three to five percent as well, but principal erodes as bond matures. So there's key trade offs, guaranteed income versus flexibility and growth potential, high current income versus inflation protection.

So they're alluding to certain things, but unless you connected the dots, you might not know. Many retirees use a combined approach, which is true. Since maximizing income offers means accepting certain risks and offering flexibility, okay, which is also true, but it'd be very normal to just be swayed towards the more sure higher payout. Our workbook has over 60 risks that we want people to at least address and understand before they make a decision. Okay.

That's not to say you have to go through every single one. Some may not be applicable, but you cannot be an informed buyer unless you understand the environment in which you're in. For example, 4% rule might give you a higher rate. I wrote a Kipling article on this, where it's one of the risks that many retirees don't know about, and I talk about the flat market cycle and the 4% rule. Now if you did this or even the 5% rule and you started in 2000 and went on or 1966 and went on or 1929 and went on or nineteen o six and you go on from there.

You're done in retirement.

Because you're taking money income from an account that's experiencing losses.

Yeah. So if your accounts are down, let's say 30%, let's be nice. Mhmm. So down 30%, that would be a 43% return to break even. If they're down 30% and then you take out 4% as income, you're now down 34%.

You need a 50% return to break even. So if your accounts are down 50% like they were in the culmination of two thousand o one and o two or the two thousand eight financial crisis, top to bottom, that was 50%. You need a 100% return to break even. So that's why you buy the annuity. No.

It's not why you buy the annuity. It's understanding that everything I just read here, bond ladders, 4% rule, dividend portfolio, all of these are product pitches. What's the 4% rule? It's a product pitch. Let's buy my portfolio of these diversified stocks and bond funds and equities, and I know equities and stocks are basically it's the same thing.

ETFs Mhmm. Mutual funds, whatever you want. I try to leave out the jargon. Appreciate it probably. Yeah.

Equities. Yeah. That means stocks. You can use them both ways. Yeah.

The point being is all of these are really products that you follow. Because nowhere is it here saying, well, you know, let's see. I'll say, what would happen with each strategy? It never even mentioned sequence of returns risk here. What would happen if the markets crashed next year?

Uh-huh. Let's see what it says.

Yeah. Well, you knew to ask this question, but other people may not even know.

I think a lot of people are inherently nervous. Mhmm. That's a critical question. Timing matters enormously. Well, that's panic stricken.

Timing matters. You gotta time your retirement. Oh. You've gotta retire not right before the markets crash, which no one can time.

No one knows.

And this is one of biggest risks. Oh, now it's bringing up because I asked the question. This is called sequence of returns risk.

You had to prod it, though, to get it to tell you about that.

Yeah. If you're heavily invested in stocks and withdrawal during a crash, which is not fully true, Bond funds can lose money. So let's say the markets drop 30% in year one. Your 1,000,000 becomes 700,000. If you withdraw 40,000 of living expenses, you're now down at 660,000.

When the market recovers, you will have far less principal to benefit from that recovery. This can significantly reduce how long your money lasts, potentially running out years earlier than if the same crash happened later in retirement. I mean, it's very articulate.

Yeah. It explained the sequence of returns risk pretty well there, I thought.

And then it says how different strategies would handle a crash. Immediate annuities unaffected. It's like this AI is trying to sell you an annuity. Stock heavy dividend portfolio. You'd see your account value drop 20 to 40%, and some companies may cut dividends.

Well, that's true. Double hit to your principal and your income. Bond heavy portfolio, much smaller, decline, assumed. You can't promise performance, and it's not trying to, but it's doing its best. Maybe five to 15%.

Well, that's that's a big ask. Cash buffer strategy. This is interesting. Many advisers recommend keeping one to three years of expenses in cash or bonds so you're not forced to sell stocks when they're going down. Now I am kind of in this camp.

We call it the bear market reserves, but they're saying cash or bonds. They're not talking about buffered ETFs, or they've never even mentioned a fixed index note at the five year period certain. I mean, there's so many other strategies that aren't even being mentioned here. The bucket approach, so dividing money into short term cash, medium term bonds, and long term stocks, that's not that bad of a strategy. It's not really a strategy.

It's just three products now that you're doing. Practical reality, the February saw retirement portfolios dropped 30 to 40%. Those who retired, that is true, assuming that it's a sixty forty split. If you were all in equities, you lost more than 30 to 40%. Sorry.

Stocks.

Yeah. So what are we learning here then?

So if you want to define something as is, I think AI is a great source. What is x? When or when would I use it, and when would I not use it? What are risks that I need to know? Be expansive.

Yeah. That's how you understand. It's kinda like saying, what is a hammer? What is a saw? Yeah.

What different types of hammers are there? When would I use the different types? So from an educational standpoint, I think it's one of the best tools to use to learn and define things as they are, because the reality is the financial services space really is divided into two camps. You got your securities folks. They wanna sell you a stock bond fund portfolio or a dividend portfolio or something like that.

Mhmm. And then you've got the insurance camp. They wanna sell you the annuity. Does that make one or the other right or wrong? No.

It just means you've got two different solutions that are at odds with each other because if you buy one, the other doesn't get paid.

Mhmm.

And that creates a lot of confusing content out there. So to kind of get through the the manipulative content, which it is manipulative, all marketing is manipulation, You can take AI and ask it more objective questions. You're seeking truth to understand, not financial advice or the application of it. You're trying to define things. I was on a call the other day, I said, hey.

Open your favorite AI. She says, great. Were going down the list of all the different things. I said, well, how do you feel about annuities? I'm just trying to understand her perspective.

Yeah. She says they're they're bad, aren't they? I said, well, what do you mean? Well, they're high fees. They're this.

I said, okay. Look. I don't think you need an annuity, but you need to understand how to define these. Mhmm. So multimillion dollar individual doesn't need that much income, does not need lifetime income at all.

But I had her open the AI. I said, alright. I want you to ask what different types of annuities are out there, and why are there so many horror stories about them? And she got the funnest answer. It defined fixed annuities, so MYGAs and SPIAs and so on, defined fixed indexed annuities, and then it defined variable annuities.

Okay.

And it gave definitions on when you would or wouldn't use each of these. And then they explained why people it's not they're bad, it's that they're sold with inappropriate expectations. And she goes, oh. I said, yeah. So do you care if you get a CD or a fixed annuity when they kinda do the same thing?

No. That works for me. I said, okay. So we'll look at the best rate in your timeline. Yeah.

Do you want one year? Do you want six months? Yeah. No problem with it because there wasn't fees, but she had this thing in her mind that was deliberately put there through someone else's marketing material, and I explained to you. She's always like hesitant.

Oh, well, are you sure? Are you sure? Look. Ask your AI. Mhmm.

I have no control over your AI. Just ask it open ended questions from a neutral position seeking to understand how things work. But strategy advice, in my opinion, you should work with someone that can help you understand the strategy, which is when you do something and when you don't do something. And as the economic environment shift, how are you shifting your strategies? In chess, you open up in one particular way.

As the game evolves, so do your strategies. The plan is to take the king. Mhmm. The strategy is how do you get there and how do you adjust along the way? Retirement planning is the exact same way.

You don't set it and forget it. You don't sign up for a product with rigidity. Go down that path. You gotta take a step back, define things as they are. You know, like in chess example, a pawn, it goes one thing forward.

You can cross over to kill, and on the first move, you can go twice. Those are its limitations. That's its purpose. You'll never think a pawn is as good as a queen, but a pawn can still win with checkmate Uh-huh. If used appropriately.

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