by Ashley
As I’m thinking about things like the possibility of an early retirement (or not – see my last blog post), it’s gotten me thinking more earnestly about where all of our assets are located and whether we’re adequately diversifying our portfolio. For most of my working life, my investments have been categorized as “aggressive” which can be great for rate of return, but also leaves me open to increased vulnerability from market dips. And with the goal of retiring early (in what….10ish years? 15?) it’s made me think about getting more conservative with our investments. So…I turned to AI.
Image credit: Pixabay/Mohamed_hassan
Incorporating AI into Financial Planning
I asked ChatGPT to tell me a recommended breakdown of what percentages I should be targeting in various savings and investment vehicles. I gave it categories of: retirement account, home equity, high yield savings account (HYSA), taxable brokerage account, and cash/checking account. *I forgot to include my Health Savings Account, which is technically an asset, so that’s not included below*
Here’s what it told me and how I matched up:
- Retirement – AI recommended 50-55%. I’m at 63%.
- Home Equity – AI recommended 25-30%. I’m only at 12%
- HYSA – AI recommended 10-15%. I’m at 19%
- Taxable Brokerage – AI recommended 10-15%. I’m only at 4%
- Cash/Checking – AI recommended 1-2%. I’m at 2%.
My Thoughts and Reflections
I’m going to work from the assumption that AI gave me some pretty good recommended guidelines. It pulls from allllllll the internet, so it’s taking into consideration all kinds of financial experts’ opinions and advice. But that’s definitely an assumption and I’m genuinely curious how others feel about the recommended guidelines.
Assuming these are good goals to shoot for, two things really stand out to me. First, I have way less in home equity than is recommended. Unfortunately, there’s not a lot I can do to change that percentage (except potentially purchasing additional real estate….which we’ve talked about in the past but have not made movements on yet). So let’s say that is relatively “fixed” and it is what it is.
The second thing to jump out at me is that I am way under-funded in taxable brokerage accounts. This makes sense. I’ve always prioritized retirement funding (especially since I get a company match!) and have had less leftover for brokerage. ChatGPT explained to me that “taxable brokerage is your ‘bridge money’ during early retirement” since most people won’t dip into traditional retirement accounts until age 59.5 due to the possibility of early withdrawal penalties.
Chat also didn’t love that I have 21% of our entire assets in lower-yielding accounts (a checking account + HYSA). That doesn’t bother me too much though. I’m fiscally conservative. And I feel like the market is scary right now. I like the psychological safety of having a good sized cushion extremely liquid and safe from market volatility.
What do you think? Do you agree with the percentage breakdown from AI? What do you think about my percentages? What type of rebalancing would you recommend (knowing our goal is early retirement – so although we’re in our low 40’s, we don’t want to work another 20+ years)?
Hi, I’m Ashley! Arizonan on paper, Texan at heart. Lover of running, blogging, and all things cheeeeese. Early 40s, married mother of two, working in academia. Trying to finally (finally!) pay off that ridiculous 6-digit student loan debt!
There are a lot of considerations. Here are a couple of things I’ve found valuable. One – Roth’s are your friend. You can always take out the original contribution so its like a savings account as well as retirement. Two – I like regular brokerage accounts. Did you know you can take about over $100K for a couple in dividends and long term gains from these tax free? I think your combined income needs to be under around $95 AGI, so thats like $110K total if thats your only income(assuming the standard deduction). Third – I’ve found if you get your house and cars paid off, whatever income you have will probably be just fine. I’m kind of early retired right now and its surprising how little I spend and how far it goes because of the two above things being paid for! Now I do have insurance through my wife, so having insurance is a big deal for early retirees. Good luck!
Hi JP – great insights! I did not know you can take out money from brokerage accounts (from dividends & gains) tax free! Great point, too, about how far your money goes when you don’t have a mortgage or car loans to cover. We own our current cars outright (and hope/plan to pay for future cars in cash). We are on track to have our home paid off in about 10 years, but could potentially speed it up to do it faster, too. I agree it would be GREAT to have it paid for by the time we plan to retire.
It’s hard to really understand the AI recommendations without more information about what your specific retirement/spending plans are.
I don’t particularly understand targeting a certain % of net worth in housing equity, as it relates to retirement planning. Especially if you plan to live in the house, why would it be preferable to have MORE of your net worth as home equity, which is illiquid? Your home equity could be a lower % of NW simply because you live in an area with relatively lower housing values. I don’t see what practical goal AI is trying to accomplish with that metric.
You mention “diversification” but then you mostly talk about asset allocation and placement across different types of accounts. Diversification has to do with how concentrated your investments are across different types of holdings. If you want diversification, more % in home equity is the opposite of that. Asset allocation should be a product of your risk tolerance. You can have a diversified portfolio at any level of risk.
In my mind, your focus needs to be less on general metrics and more on personalized modeling. Make some estimates of your annual spend in retirement, then model how you will source that spend each year from your portfolio. Then you will be able to figure targets for each type of account.
Great suggestion – that seems like a good way to go about it.