Recent global research highlights a growing trend: individuals are increasingly turning to AI tools for guidance on important life decisions, including financial planning:
- Studies show that around 75% of users act on advice provided by AI systems even when they are incorrect.
- In high-stakes areas such as health and finances, surveys indicate that as many as 1 in 3 adults rely on AI for advice, with a significant portion not seeking professional input thereafter.
In retirement planning, a common AI approach is to use discretionary cash first while delaying income from a Living Annuity. Although it seems logical, it can introduce unintended risks.
Here are some important questions to ask yourself (or your advisor).
1. Unbalanced Income Withdrawals can lead to Tax Inefficiencies
Different investment vehicles (Living Annuities and Discretionary or “cash” Investments) are taxed differently on both growth and income.
By drawing a carefully considered blend of income from both your Living Annuity and your Discretionary Investments, your withdrawals can be structured in a way that minimises tax and creates a more sustainable retirement plan.
2. Cash Investments Struggle to Keep Up with Inflation
Using discretionary capital first often means holding a large portion in cash.
Research and commentary from Ninety One highlights that being too conservative in retirement can be just as dangerous as taking too much risk:
- Inflation steadily erodes purchasing power
- Real (above-inflation) returns are likely to be negligible or negative
- Your “safe” capital becomes less valuable over time
3. Delaying Drawing Annuity Income Can Result in a Higher Tax Rate Later
You may unintentionally create a future problem when delaying annuity income. This can force higher taxable withdrawals later.
As discretionary assets reduce:
- You eventually rely more heavily on your annuity
- Withdrawals may need to increase to meet income needs
- Higher drawdowns can threaten long-term sustainability, especially near the 17.5% annual Living Annuity limit.
4. Unbalanced Drawdowns Risk Long-term Growth and Stability
Global research from Morningstar shows that “total return” strategies tend to outperform rigid risk-tiered allocations within an overall portfolio.
By having a flexible, balanced approach:
- You avoid high withdrawals from low growth assets and forced high withdrawals from segments experiencing market downturns.
- You maintain a smoother income stream while protecting your overall capital value.
5. Psychological Comfort Can Lead to Poor Decisions
The idea of “using cash first” often provides psychological comfort:
- It feels safer
- It delays difficult decisions
- It creates a sense of control
A critical reality: AI can be a powerful source of information, but it is not a substitute for professional advice—especially when planning your retirement, managing taxes, balancing income sources and managing investment returns. Many people follow AI recommendations without context, nuance or long-term planning.
Take action: Review your retirement strategy with Investonline to ensure that your portfolio, income withdrawals, and investment strategy are structured for long-term sustainability.
During our retirement review process, we will investigate the following aspect of your retirement plan:
- ✓ Tax efficient income withdrawal strategies
- ✓ Liquidity during your life and in death
- ✓ The impact of various inflation rates on living expenses
- ✓ How to incorporate ad hoc expenses
- ✓ Improving the overall longevity of your plan
- ✓ Most suitable investment strategies
Please see a short video of how we help guide our clients around retirement.
Contact us to discuss your retirement goals and ensure your plan is optimised for the long-term.
