A Guide to Goal-Based Financial Planning

A Guide to Goal-Based Financial Planning

Helping clients prioritize finances around goal-oriented plans determines the optimal plan to fund them. And the modern economy reminds us all – to plan for everything. Goal-based financial planning expands an individual’s focus into all aspects of their financial life without solely focusing on retirement – while significantly highlighting it. 

A simplified-two-step way of understanding goal-based financial planning is:

  1. Identify an individual’s most vital financial objectives
  2. Then generate strategies to reach them

The overarching process of identifying the steps (broken down below) needed to reach an investor’s financial goals are based on: 

  • Overall financial resources 
  • Risk tolerance 
  • Estimating the amount of savings to set aside at a given rate of return 
  • How those funds should be invested to improve their ability to achieve them

Read: 4 Ways To Use Goal-Based Investing In 2022

Chapter 1

Why has goal-based financial planning grown in popularity in recent years?

The state of our economy is complex and subject to rapid changes, making it challenging to reach investors’ financial goals without thorough planning. Gone are the days when it was easy to achieve a goal such as saving for retirement simply by setting aside a certain amount of money – trusting that over time it would grow large enough to enable living comfortably in peacewithout getting bored in retirement.

Market volatility and rapidly changing economic conditions mean that careful analysis is needed when evaluating the optimal approach to achieving financial objectives. 

Often, financial advice or reporting focuses on the performance of an individual’s investments in absolute terms – how much money did they make or lose in percentage terms? Or on a relative basis – how did their portfolio perform in comparison with market averages such as the S&P 500 or Dow Jones? 

However, this type of reporting misses what is most important to most people – what progress have they made towards achieving their financial goals, and how likely are they to reach them? 

While it’s certainly important to follow the performance of investments in absolute and relative terms, beating the market average or your neighbor’s investment performance doesn’t mean much if you fall short of your financial objectives. 

Important goals of purchasing a house, financing a child’s college education, or retiring, require substantial amounts of money to finance in this day and age. Being able to save and invest enough to reach these goals is the primary reason most people invest.

Goal-based planning typically involves the following steps:

  1. Identify your goals: Common goals include:
    • Pre-retirement saving for those preparing for retirement
    • Retirement income for retirees
    • Education expenses
    • Major purchases such as a home or vehicle
    • General savings fund
    • Emergency savings fund
  2. Budget for your goals: This involves estimating how much in savings it will take to meet a goal and how much you would need to set aside to reach that savings goal, given your projected return.
  3. Select an investment approach designed to deliver the expected returns: This portion of the process takes into account your risk tolerance when building an investment portfolio with performance characteristics projected to enable you to reach your objectives.
  4. Monitor your progress towards reaching your goals: This enables you to view your progress and make any adjustments necessary to keep yourself on track.
Chapter 2

How can goal-based investing help with your retirement plans?

Retirement planning today can be an extremely complex endeavor. Changing tax rules, volatile investment markets, and a more mobile workforce mean that ‘set it and forget it’ strategies are no longer as likely to be successful as they may have been in the past. 

With people moving more frequently from one employer to the next these days and the increasing rarity of Defined Benefit pension plans among private sector employers, the chances are good that you will have to rely on your own resources to fund a significant portion of your income in retirement. 

Goal-based investing can be a crucial element in helping make your retirement plans a reality. This approach focuses on creating an investment portfolio tailored to achieving your retirement savings goal, taking your risk tolerance and time horizon into account. 

Typically, an essential part of a goal-based investing approach is to project the likelihood that your investment portfolio will generate the returns necessary to hit your savings goal. Projections of this type, based on the historical performance of similar portfolios, are known as Monte Carlo simulations. Such a simulation can provide you with a comfort level that your savings are on track to reaching your objective. 

Suppose the likelihood of reaching a goal using a Monte Carlos simulation is above 70%; it is seen as indicating that your plans have a solid chance of success. A number above 95%, or even 90%, could suggest that you are saving more than is needed to have a good chance of reaching your goal. 

This is because the analysis considers all types of market conditions, even those that may be fairly improbable, including bear or bull markets that extend much longer than usual.

The probability level a person is comfortable with for each goal should be determined individually. One approach is to aim for a higher probability of success for your most crucial goals while accepting a lower level for goals that aren’t as vital. 

For instance, you might not want to stint on funding your retirement plan, aiming for an 85% or even 90% probability level, while settling for a 60% or 70% chance of success on less vital objectives such as buying a second house or luxury automobile. 

A key benefit of taking this approach is that it allows you to monitor your progress towards your retirement savings goal and make changes when needed. If a Monte Carlo analysis indicates you have fallen below whatever probability of success threshold you are comfortable with, you can then take steps to boost that number. 

This could include increasing the amount you set aside in retirement savings, either in a lump sum or in installments over time, or adjusting your portfolio mix to try and improve returns, assuming doing so remained within your risk tolerance criteria. If neither of those steps is feasible, you could reduce funding for a less critical goal or, if that isn’t possible, adjust your objective to one that is more likely to be achievable.

Chapter 3

When should you create a goal-based financial plan?

The best time to create a goal-based financial plan is when you have a good idea of your goals and what you have (or are likely to have soon); if you have excess funds to set aside to fund those goals – great. 

For instance, while taking steps to save for retirement early in your career, it’s a good idea if you have the funds to do so. If you don’t have a clear idea of what type of retirement lifestyle you expect to lead, creating a detailed goal-based retirement plan might be difficult. 

The same goes for a financial plan as a whole. While it is undoubtedly an excellent idea to develop the habit of saving for future objectives as early as possible in life, to create a goal-based financial plan, you need to identify your goals and how much it will take to fund them. This does not mean that you should wait until you have been working for many years to create such a plan. 

Even if you aren’t sure what type of house you want to buy, what college your children will attend, or how much you plan to spend in retirement, you can still set up a goal-based plan to generate a certain amount of general-purpose savings or to fund an emergency reserve. Once you feel you have a relatively good idea of how much you will need to save to achieve a specific goal, you can set up a goal-based plan for that goal. 

Goal-based financial planning can be segmented so that new goals can be added at any time, while existing goals can be removed when they are fulfilled or no longer operative.

Many people are interested in making progress on these financial plans very early in their working life. Thus, the time to create such a plan is not age-dependent – it can be done whenever you have identified a goal or goals and the approximate amount of money it will take to reach your goal(s). 

In addition to specifying your goals, it’s best, if possible, to have at least some of the savings necessary to fund them. 

It’s fine to identify goals before you can start saving for them but ideally, you can begin funding them without undue delay. The reason for this is straightforward: due to the power compounding, the sooner you can start saving for a goal, the more likely you are to achieve it.

Chapter 4

What is the difference between a comprehensive financial plan and a goal-based financial plan?

A comprehensive financial plan focuses on covering all of the various aspects of an individual’s financial life. Such a plan aims to reduce the potential that unexpected events derail their financial planning. 

For instance, a married couple may be setting aside funds for retirement, but if one of them is injured without having disability insurance, their ability to fund the retirement lifestyle of their choice may be adversely impacted. Similarly, they may set aside funds to buy a house only to end up using them to pay for the cost of a child’s college education because they failed to save for such a goal.

Comprehensive planning typically encompasses saving for retirement or other goals, purchasing insurance, performing estate planning, etc. It differs from a goal-based financial plan in that it doesn’t necessarily incorporate mapping out all the steps of saving and investing to achieve each of your financial goals. 

A goal-based financial plan goes a step further than the typical comprehensive plan. Rather than simply recommending that you save money for a specific goal, it maps out exactly how much you need to commit to reaching that goal and how those funds should be invested to optimize your ability to achieve it. 

As touched on previously, a goal-based plan typically includes a Monte Carlo analysis, providing you with a confidence level for each goal you are attempting to achieve. Such a plan allows you to monitor your performance to track your progress towards your goals and to make changes if necessary to keep on track. 

On the other hand, a comprehensive financial plan may focus more on how your investments have performed on an absolute or relative return basis without providing a deep dive into the progress you are making towards achieving each of your goals.

Chapter 5

How can a financial advisor help with your goal-based financial plan?

A financial planner in Chicagoland typically analyzes the six main areas of your financial life. These include: 

  1. Cash flow
  2. Taxes
  3. Insurance
  4. Investments
  5. Estate planning
  6. Retirement

A financial advisor can organize all of these items for you and sync them with other goals you might share, such as funding a child’s college tuition, purchasing a second home, or gauging the feasibility of early retirement. Going beyond the facts and figures, an advisor can help serve as your financial life planner

In fact, at Prism Planning Partners, our defined process helps you communicate your values and goals to us clearly and succinctly.

A financial advisor can help create and implement your goal-based financial plan. While software can perform many complicated calculations for this type of planning, these programs can be expensive to purchase and challenging to learn. A financial advisor who offers you this type of software will typically be experienced in helping clients put it to use to evaluate and monitor their goals. 

Another benefit of using a financial advisor is the expertise they can offer in both helping you set realistic targets for your savings goals and in building and managing a portfolio to help you meet your investment targets. 

One issue that can trip up people when saving for a goal is exactly how much they should set aside to put them in a position to reach their goal. An experienced advisor can offer suggestions based on their knowledge of retirement planning principles and their past work in this area. 

This, combined with access to sophisticated financial planning software, enables an advisor to help you set goals and track your progress towards reaching them as efficiently and effectively as possible.

Chapter 6

How to achieve your life goals with goal-based investing?

As previously mentioned, the complex nature of today’s financial markets means that simply setting aside savings and hoping doing so will be enough to enable you to achieve your goals is not an optimal planning strategy. Two significant factors that make it difficult to use a ‘set it and forget it’ strategy when attempting to reach your financial goals are:

  • Market volatility: While the information age has created opportunities for investors in technology stocks to benefit from the growth of the online economy, the speed with which information travels these days means that market reaction to the news, whether good or bad, can happen at lightning speed. The volatility exhibited by modern financial markets can make it difficult to predict exactly how much your savings will grow over time, meaning that it is crucial to be flexible in planning for your goals. 


  • Inflation: The rise in the cost of living over time is another factor that can significantly impact your ability to reach your financial goals. If your plans don’t take it into account, you may hit your numerical target, only to find that your purchasing power is less than you had expected. 

Goal-based investing (GBI) provides a practical template for achieving your life goals by identifying the steps necessary to save and invest an amount sufficient to fund them. Whether the goal is to live a comfortable retirement lifestyle or to fund a child’s education, amass enough for a down payment on a house, etc., goal-based investing can improve your chances of reaching such goals by allowing you to build enough savings to fund them methodically. 

This includes making adjustments to your investment strategy or the amount you are setting aside to fund a goal. For example, if inflation rises dramatically while you are saving for retirement, a goals-based strategy enables you to adjust your retirement savings goal to reflect this fact. 

Read: What To Consider Before Investing

This approach is laser-focused on helping you get where you need to go financially. In the service of helping you achieve your goals, it can incorporate portfolio optimization techniques designed to seek the highest return for a given level of risk. 

For instance, if your goal is to build a certain level of retirement savings, a goal-based approach would identify the number of funds needed to be set aside at a given rate of return to reach your objective at a specified probability rate. 

For example, if you select an 85% rate, you can use this rate to monitor your progress toward your goal over time. Suppose the probability rate should drop significantly below 85% at any time. In that case, it provides an early warning sign that you may need to change your savings amount, investment strategy, or risk profile to improve your chances of reaching your goal. 

Each life goal you set can be approached this way, enabling you to progress toward multiple goals simultaneously. If at any point, you find yourself short of funding for all your goals, you can always reduce your contribution to lower priority goals. Additionally, suppose you find yourself falling behind in your progress towards achieving one or more of your objectives. In that case, you can switch some or all of the funding from lower priority or longer-term goals to make up the shortfall.

For instance, if you found that you were falling behind in your savings goal for accumulating enough savings to purchase a house in five years, you might decide to lower your savings for retirement to boost your chances of buying a home. Then, once you have either reached the goal or put yourself back on track to reach it, you could restore your retirement savings to the original amount. 

Libertyville, IL, comprehensive financial planning combined with goal-based financial planning provides you the visibility and flexibility needed to adjust your financial strategy when necessary. Prism Planning Partners can help you achieve the most important goals for you and your family.

If you’d like to schedule a no-obligation consultation to learn how we can help you optimize your financial planning and investing, feel free to check out our fees

Contact us today – we look forward to serving you for years to come!

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