Robo-advisers: Personalise your retirement strategy with AI

Artificial Intelligence

One area in which modern man must endeavour to stay literate is in Artificial Intelligence.

Photo credit: Courtesy | Reuters

Retirement planning can be intimidating. Faced with a mountain of data, complex calculations, and ever-shifting economic landscapes, many individuals struggle to chart a clear course towards a secure financial future. Hence, as the new wave of technology is sweeping through (and positively impacting) other aspects of our lives, we can’t help but wonder how Artificial Intelligence (AI) will alter the way we plan for retirement.

Technology and finance have been intertwined for a long time but their convergence has rapidly evolved in the last few years. The advent of mobile money transfer, particularly M-Pesa in 2007, made headlines for years. The concept itself was fascinating – and still is. Several years later, banks and other financial institutions began enabling transactions through mobile money which saw a reduction in brick-and-mortar branches and lengthy paperwork processes.

Mobile banking apps were introduced, allowing users to manage their accounts, transfer funds, and even access investment opportunities directly from their smartphones.

Today, the dawn of digital platforms and the widespread availability of smartphones have created new opportunities for individuals to manage their finances more efficiently, including savings and investment activities. In a 2023 research paper by Enwealth Financial Services titled, The Role of Technology in Savings and Investments in Kenya, over 63 percent of respondents indicated that technology had improved their savings and investment habits.

AI holds the promise to take things a notch higher. The technology has the potential to transform pension planning from a one-size-fits-all approach to a hyper-personalised experience. Imagine a world where AI acts as your personal retirement advisor, constantly monitoring your investment performance and overall financial health.

A virtual consultant who can analyse your income, expenses, debts, and assets, painting a clear picture of your current financial standing. Furthermore, a virtual advisor who can factor in external variables like inflation, market fluctuations, and potential healthcare costs, creating a dynamic model that evolves with your circumstances.

Take machine learning, for example. This is a powerful AI technique that allows algorithms to learn from data without explicit programming. In retirement planning, machine learning can be used to analyse vast amounts of financial data including your income, expenses, investments, debts, and even anonymised data from similar financial profiles.

By analysing these trends, the machine learning model can identify patterns and predict your future financial needs. Additionally, predictive analytics can also use historical data and current trends to estimate your future expenses with surprising accuracy. This includes everything from basic living costs to potential healthcare needs based on factors like family history and lifestyle choices.

Beyond prediction, machine learning algorithms can also consider your risk tolerance, life expectancy, and financial goals to recommend a withdrawal strategy that optimises your income stream throughout retirement. Traditional pension plans often offer a limited set of withdrawal options, failing to account for individual circumstances.

AI can tailor a withdrawal strategy that optimises your income stream based on your risk tolerance, life expectancy, and future financial goals. For instance, an AI advisor might recommend a conservative withdrawal strategy for an individual with a longer life expectancy and a limited appetite for risk. Conversely, a more aggressive approach might be suitable for someone with a shorter life expectancy or a desire to leave a financial legacy.

On paper, you might think of machine learning AI as an abstract concept but it is all around us. It may already be entrenched in your favourite social media app or search engine as special features which result in recommendations of certain products (in this case financial products) based on your internet activity.

Robo-advisors integrated with AI are another tool that would be useful in your retirement planning toolkit. These are automated investment platforms that use algorithms to manage your investments. AI can be integrated into robo-advisors to provide a more personalised experience for retirement planning.

For instance, AI can dynamically adjust your asset allocation. As market conditions and your life circumstances change, AI can recommend adjustments to your investment portfolio to ensure it remains aligned with your risk tolerance and retirement goals.

AI can continuously track your financial progress and alert you to any potential shortfalls in your retirement plan. This allows for a more dynamic approach to retirement savings, ensuring your nest egg is sufficient to cover your expenses throughout your golden years.

The potential benefits of AI-powered pension planning are undeniable. AI can empower individuals to take control of their financial future. However, according to the Enwealth Survey, only a small percentage (12.9 percent) of the population is well familiar with the concept of AI not to mention, its’ integration into financial planning. Thus, institutions should aim to educate their members on the methods and advantages of using AI in financial planning.

Individuals, on the other hand, should involve their retirement planning advisor in this journey if they feel are uncertain. With such collaboration, individuals can navigate the complexities of retirement planning with greater confidence, ensuring a comfortable and financially secure future.

Mr Wafubwa is the Managing Director, of Enwealth Financial Services Limited.

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