Ask ChatGPT about ARFs

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Question>> If I have an ARF and withdraw 5% per year, and ARF growth is 0% annualised, when will the ARF be 0? Starting ARF is 157000.

Answer>> If you have an ARF with a 0% annual growth rate and you withdraw 5% of its value each year, you can calculate when the ARF will be depleted by dividing the initial value of the ARF (€157,000) by the annual withdrawal amount (5%).
The formula to calculate the number of years (n) until the ARF is depleted is as follows:
n=PV/W
Where:
  • n is the number of years until depletion.
  • PV is the present value, which is the initial amount in your ARF (€157,000).
  • W is the annual withdrawal rate (5% or 0.05 as a decimal).
Plug in the values:
n=157,000/0.05

Calculate:
n=3,140,000

With a 0% annual growth rate and a 5% annual withdrawal rate, your ARF will be depleted in approximately 3,140,000 years. In practical terms, this means that the ARF will never be depleted under these conditions.
Please note that this calculation assumes a constant growth rate and withdrawal rate, and it does not take into account factors like inflation, fees, or taxation, which can affect the ARF's longevity in practice.
 
Last edited:
GIGO Garbage in Garbage out. You did not format the question correctly to ChatGPT.

5% of a reducing balance goes on for 3,140,000 years.
 
CuriousCork said:
GIGO Garbage in Garbage out. You did not format the question correctly to ChatGPT.

5% of a reducing balance goes on for 3,140,000 years.
Click to expand...

Even if the question had been phrased differently, isn't ChatGPT wrong anyway? Taken literally, an annual withdrawal of 5% of a reducing balance could go on forever. Why did ChatGPT stop at 3,140,000 years?
 
Because 157,000 divided by 0.05 is 3,140,000 - ChatGPT needs to re-do Maths 101

If it's 5% of the balance each (the reducing balance) after 30 years there will 33,000 left and the withdrawal in year 30 will be 1,774
If its 5% of the initial amount (7,850) pa, then the ARF will run out after 20 years
 
LLMs like ChatGPT don't do well with maths, however text-based questions are their strength:

Pretend you are an experienced Irish financial advisor for Private Clients, located in Galway. You have a client who is reasonably financially literate, and who follows the discussions on askaboutmoney.com. Advise your client on what an acceptable safe withdrawal rate is for an Irish person looking to retire. Devise a suitable strategy for an Irish investor.



Financial Advisory Session: Safe Withdrawal Rate & Retirement Strategy for an Irish Investor
Location: Galway, Ireland
Introduction:Dia dhuit! It's great to see you again. I understand that you're interested in planning for your retirement, and you've been active on askaboutmoney.com. That's an excellent resource for Irish investors. Let’s dive deep into the topic of safe withdrawal rates and devise a strategy tailored for you.
1. Understanding the Safe Withdrawal Rate (SWR):The SWR is the percentage of your retirement portfolio you can withdraw annually without running a significant risk of depleting your funds during your lifetime. The oft-quoted figure from U.S. studies is 4%, but there are various factors to consider:
  • Inflation: The Irish inflation rate can differ from that of the U.S. Historically, it's been quite volatile. A SWR must account for the erosive effects of inflation on purchasing power.
  • Taxation: Ireland has its taxation nuances. Withdrawals from certain pension products may be subject to taxation, which can impact the net amount you receive.
  • Market Volatility: The Irish market doesn't necessarily move in tandem with international markets. While diversification is crucial, understanding local market conditions is vital.
2. Tailoring the SWR for Ireland:Given the unique financial landscape in Ireland, a conservative approach might suggest a SWR of 3.5% for a start, adjusting as necessary based on individual circumstances, the state of the market, and your specific portfolio mix.
3. Strategy for an Irish Investor:
Step 1: Asset Allocation:
  • Equities: Given the global nature of the Irish stock market, with big players like CRH and Ryanair, a good portion in Irish equities gives you both local and international exposure.
  • Bonds: Irish government bonds can act as a stabiliser in volatile markets. Consider a blend of short-term and long-term bonds.
  • International Diversification: Don't put all eggs in one basket. Diversify geographically by investing in global equities and bonds.
Step 2: Tax Efficiency:
  • Utilise products like the Personal Retirement Savings Account (PRSA) or other pension products. They come with tax advantages that can bolster your returns.
  • Stay updated on changes to the Capital Acquisitions Tax (CAT) and other relevant tax codes.
Step 3: Rebalancing:Regularly rebalance your portfolio, at least annually. This ensures your risk level remains consistent and you capitalise on asset classes that have performed well.
Step 4: Regular Review of SWR:Given the uncertainties, review your SWR every few years. Factors such as health, unexpected expenses, or a significant market downturn might necessitate adjustments.
Step 5: Consider Professional Management:If managing your portfolio becomes too time-consuming or complex, consider employing a Discretionary Fund Manager. They can handle the intricacies, allowing you to focus on enjoying retirement.
4. Additional Considerations:
  • State Pension: Factor in the State Contributory Pension. While it's a modest sum, it can act as a cushion.
  • Property: If you have property investments, consider the liquidity and income they might provide.
  • Healthcare: Ensure you have a plan for potential healthcare costs, as these can significantly impact retirement savings.
Conclusion:The journey to retirement is a marathon, not a sprint. Regular reviews, smart diversification, and a good understanding of the Irish financial landscape will serve you well. I'm here to guide you every step of the way. Slán go fóill, and let's ensure you have a comfortable and prosperous retirement!
 
jpd said:
Because 157,000 divided by 0.05 is 3,140,000 - ChatGPT needs to re-do Maths 101
Click to expand...

Thanks. I didn't spot that. It seems that ChatGPT misunderstood the question...

If I have an ARF and withdraw 5 CENT per year, and ARF growth is 0% annualised, when will the ARF be 0? Starting ARF is 157000.

Instead of

If I have an ARF and withdraw 5 PER CENT per year, and ARF growth is 0% annualised, when will the ARF be 0? Starting ARF is 157000.

@redstar Were you speaking to ChatGPT using voice recognition? ;)
 
Now that ChatGPT has been given access to the internet it could consume all of the discussion on AskAboutMoney and you will see answers similar to Kilkenny06's response above.
 
That was well written - but it doesn't have a lot of concrete details. It's mostly motherhood and apple pie stuff
  • "Stay updated on changes to CAT",
  • "A SWR must account for the erosive effects of inflation on purchasing power."]
It seems to consider the Irish Stock Market as important whereas it should be ignored mostly - there are only a few large companies quoted AIB, BOI, Ryanair,...
 
I've tried asking it more specific questions. While in general the advice is reasonable, I believe ChatGPT only has data to 2021, it misses the detail that a good financial advisor would have (eg. class s on ARF income).


How would I ensure that I retain access to the State Contributory pension if I retire early?


If you're thinking about early retirement in Ireland and want to ensure access to the State Contributory Pension when you reach the qualifying age, you should be aware of a few key factors:
1. Contribution Record:The State Contributory Pension is based on your PRSI (Pay Related Social Insurance) contributions. To qualify:
  • You need to have started paying insurance before reaching the age of 56.
  • You need a minimum of 520 full-rate PRSI contributions (equivalent to 10 years).
  • For the maximum pension rate, you'll need an average of 48 yearly contributions over the entirety of your working life (from age 16 to State Pension age).
2. If Retiring Early:If you retire early and stop paying PRSI contributions, it can affect your average annual contributions, potentially reducing the amount of the State Contributory Pension you receive. To mitigate this:
  • Voluntary Contributions: If you stop working (or are made unemployed) and are no longer making compulsory PRSI contributions, you may opt to make voluntary contributions. These can help maintain your PRSI record and count towards the State Contributory Pension.
3. Understand 'Yearly Average' System:The pension amount is based on the yearly average of contributions:
  • If you have gaps in your PRSI record because of early retirement, it may lower your average.
  • Consider this before retiring early. For instance, if you've worked for 30 years (from age 25 to 55) and decide to retire early, waiting another few years to retire might significantly boost your average yearly contributions.
4. Keep Records:Maintain comprehensive records of all your employment and PRSI contributions. This will ensure you have a clear picture of where you stand and can argue your case if there's any discrepancy in the State's records.
5. Regularly Review Your PRSI Statement:You can request a PRSI statement at any time from the Department of Social Protection. This statement will give you a breakdown of your contributions and indicate what pension entitlements you can expect.
6. Stay Updated on Changes:Government policies and regulations regarding pensions can change. Stay updated on any changes to ensure you remain eligible for the maximum benefits.
Conclusion:Early retirement requires careful planning, especially if you aim to maximise your State Contributory Pension. Consider consulting with a financial advisor to understand the full implications of your retirement decisions on your future pension entitlements.
 
And it gets a crucial question wrong. I've highlighted this in Bold Italic under #5.

Tell me more detail about ARFs and PRSI

Certainly. An Approved Retirement Fund (ARF) is a personal retirement fund where you can keep your money invested after retirement as a means to provide for your post-retirement income. It's a flexible tool that allows retirees to remain invested in the market while drawing down income as needed.
Here's a closer look at ARFs in relation to PRSI (Pay Related Social Insurance):
1. PRSI Classification:When it comes to retirement, most individuals fall under PRSI Class S (self-employed category) if they're drawing income from an ARF.
2. ARF Withdrawals and PRSI:
  • Income you withdraw from an ARF is subject to income tax, the Universal Social Charge (USC), and potentially PRSI.
  • If you're under the age of 66 and are making withdrawals from your ARF, you'll typically be subject to PRSI at 4% under Class S. This is because, for PRSI purposes, such income is treated similarly to earned income for self-employed individuals.
  • Once you reach the age of 66, even if you're still drawing from an ARF, you're no longer subject to PRSI on that income, regardless of the amount of the income.
3. PRSI Exemption:While the 4% PRSI charge is generally applied to ARF withdrawals for those under 66, it's worth noting that there's an exemption for individuals who have a combined total income of less than €5,000 per annum. This would include any income being drawn from the ARF.
4. Implications for Future Social Welfare Benefits:The payment of PRSI on income (like from employment or an ARF) can potentially qualify you for certain social welfare benefits. However, PRSI contributions made on ARF drawdowns (under Class S) won’t count towards the State Pension.
5. Voluntary Contributions:If you've ceased all insurable employment and are concerned about maintaining your PRSI record for State Pension entitlement, you might consider voluntary contributions. However, as mentioned earlier, PRSI payments on ARF income don't count towards these entitlements. So, if maintaining your PRSI record for the State Pension is a concern, you'll need to consider voluntary contributions separately from any PRSI paid on ARF withdrawals.
Conclusion:ARFs offer a flexible way to manage your pension wealth post-retirement, but understanding the tax and PRSI implications is crucial. Given the potential complexities, especially regarding PRSI and how it interacts with other aspects of your financial life, it's often advisable to seek guidance from a financial advisor or tax professional in Ireland.
 
Dave Vanian said:
Thanks. I didn't spot that. It seems that ChatGPT misunderstood the question...

If I have an ARF and withdraw 5 CENT per year, and ARF growth is 0% annualised, when will the ARF be 0? Starting ARF is 157000.

Instead of

If I have an ARF and withdraw 5 PER CENT per year, and ARF growth is 0% annualised, when will the ARF be 0? Starting ARF is 157000.

@redstar Were you speaking to ChatGPT using voice recognition? ;)
Click to expand...
Nope
I asked...
"If I have an ARF and withdraw 5% per year,"
 
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