August 24, 2023

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Good day. Financial independence is an ambiguous term, but it comes with certain tenets we mostly agree on — such as having a full-time job.

Basic stepping stones like this have become more elusive over the years though, taking longer than before. Can you guess what percentage of 21-year-olds in the U.S. are working in a full-time role today? (don't cheat!) a. 28% b. 39% c. 50%.

Here are the topics for today:

How Tech is Changing Financial Advice
Are Target Date Funds Right For You?
How to Help Your Children Become Financially Independent

FINANCIAL PLANNING

How Tech is Changing Financial Advice

Artificial Intelligence has been around for decades now, loitering in the backdrop of technology and science fiction without ever truly coming to reality. Now though, it's here. Over the course of 2023, AI and its many manifestations have taken center stage, causing both hopefulness and apprehension in the process.

And nothing is really off limits for AI, not even our personal finances. With robo-advisors and self-management of our finances becoming increasingly popular, there's a sizable market here for AI to slot into.

What's changing

Tech and AI are assisting in bringing education to the forefront of the financial wellness picture. Financial institutions and services will be able to utilize tech to attune their offerings to each client's specific needs and teach them about subjects relevant to their situation along the way.
As individuals become more informed, advice will become more holistic. Good financial advisors have always tried to take a "big picture" approach to their client's financial situation, but the nature of the niche has had clients heavily focusing on investments in the past. Now that holistic financial wellness is becoming more popular, consumers are getting informed, and tech is expediting it all, this should facilitate an advice environment that considers all aspects of financial wellness equally.
Automation will aid advisors in giving even better advice. By automation and simplifying redundant admin processes, mathematics, comparisons, data-parsing, and more, new technology will allow financial planners even more time to focus on what their best at — distilling a wealth of information into an applicable plan of action for their clients.
Practical implications: From the consumer standpoint, AI began interweaving itself into our finances a long time ago, and the most recent advancements just represent a fully fleshed-out version of it. For us, AI will likely be used to analyze all of our data and provide recommendations based on that, not to mention automate a lot of mundane tasks like balance inquiries, transfers, loan apps, and more. And the final frontier? Providing hyper-personalized advice via chat platforms like those we're seeing now.
Good, bad, or neither? There's the potential for both good and bad here. On one hand, bringing AI to finance creates a lot of benefits in the areas of efficiency, customer service, accuracy, and access to financial advice. On the flip side, you've still got concerns regarding how impersonal it might be and oh, the data security issues.

INVESTING

Are Target-Date Funds Right For You?

Wells Fargo and Barclays Global Investors introduced the first target-date fund back in 1994, making them a spry 29 years old, and relatively young in the financial world. They were designed mostly with the "do it for me" type retirement investor in mind, aiming to meet the needs of busy professionals without much time to invest on their own.

This of course came at a time when self-directed investing was nowhere near as popular as it is today and far from accessible as it is now either. While target-date funds do maintain their appeal, we're also beginning to learn more about their shortcomings that date back to their origins.

The path of a target-date fund

Target date funds are tailored to an investor's anticipated retirement year, and so they're also tethered to your age. They start out with a higher allocation toward equities, usually about 90% prior to age 40. After this, they meander down toward 50% as you near retirement age, ultimately dropping as low as 20-30% equity if the fund is held through retirement.

That sounds pretty logical on the surface—a fund that's designed to optimize its allocations based on my age? Perfect, right?

Yes, they're certainly better than nothing, and perhaps even perfect for someone who really wants a hands-off approach to managing their nest egg, but this so-called "glide path" has some inherent biases, and it seems to be falling short based on some new data.

How target-date funds might fall short

Recent research from the National Bureau of Economic Research suggests these funds might be overly conservative, which is something that could cost passive investors a lot of money, maybe even a comma or two.

Researchers turned to a budding branch of artificial intelligence (AI), often referred to as deep learning, to mint this data. Simply put, the AI was put through what they dubbed "the game of life" to account for the "risky economic environment in which people earn, save, and invest over their lives." Its goal was to solve the optimal allocation to equities over time.

The outcome? After running this simulation countless times, the result was an AI-crafted glide path that never falls below a 60% equity allocation at any point along the lifetime of the account holder.

Source: WSJ

Viewing retirement investing through a personal lens

A commonly followed proverb of investing is to trust facts over feelings. This is seen in everything from buying the dip, holding through crashes, and dollar-cost averaging. The takeaway is to ignore the micro for the sake of the macro.

Although these funds undoubtedly use data to generate glide paths, it seems that the algorithms behind existing target-date funds might be a bit emotional, potentially leading investors astray as it tapers out of equities with age.

What's the solution, then? Make your retirement investing more personal. Account for your own age, health, dependents, financial situation, career, risks, and retirement goals, and only then decide how to invest, adjusting as things change.

You might still come to the conclusion that a target-date fund is perfect for you, and that's certainly a fine outcome. The larger point here is perhaps that it may also be worth doing some healthy second-guessing before investing.

MONEY TIP

How to Help Your Children Become Financially Independent

As a parent, one of the proudest moments you'll ever have is when your children's dreams and adult lives come to fruition, watching them achieve what you once did. In recent years though, those accomplishments that you may have considered normal are becoming increasingly elusive as both competition and prices rise across the economy.

Buying a home, starting a family, and even getting your first real job are all coming much later in life now. What used to be normal at 21 is no longer so, and these achievements we used to consider normal are harder to come by.

Some data on the matter

Work & independence: Back in 1980, 64% of 21-year-olds in the U.S. were working in a full-time role, compared to just 39% today. 42% of them were also financially independent, whereas now just 25% can say the same.
Home & family: 62% of 21-year-olds were living on their own in 1980, but 51% are now. 18% of them had a child, and only 6% do now. 32% of that group was also married back then, and yet now only 6% can claim the same.

As a parent, how can you help?

Ironically enough, getting your own finances in order is arguably one of the best ways to be able to help your children down the line. If your own financial life is stable, you're able to retire, invest for your kid's college, and save, you'll be in a much better position to help them out later in life.
Gift them a credit score: 53% of young adults aged 18 to 24 didn't have a credit card as of late 2021 — this is risky. Like it or lump it, credit is almost a necessity in modern finances, and it opens many doors that may otherwise be locked. As a parent, you can easily gift your child a credit score (eventually) even if they aren't old enough to apply by making them an authorized user on one of your accounts. Just remember, your creditworthiness will reflect on them, so act accordingly.
Start showcasing the importance of good financial habits early on in your kids' lives. To some extent or another, we are all a product of our environments, especially as children and young adults. By instilling good financial values and habits in your kids when they're young, you significantly increase the likelihood of them mirroring those behaviors in adulthood and up their proclivity to success in the process.

🌊 BY THE WAY

👨🏻‍💻 Answer: 39%. Compared to 64% of 21-year-olds back in 1980, just 39% have full-time roles today (Pew Research Center)
🧳 The Global Entry applicant glut (Axios)
👀 ICYMI. An update to 401(k) catch-up contributions (Finny)
🤖 Meta is launching "AI-personas" across all platforms (The Verge)
📚 Finny lesson of the day. Everyone's definition of financial independence is different, but there are a few undeniable traits of reaching this level:

What is Financial Independence?

Retirement Planning

6 mins

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