How Goal-Based Investing Can Help You Retire Early

How Goal-Based Investing Can Help You Retire Early

When are you planning to retire? Do you have a date agreed upon with your loved ones? There is so much to consider, which is why goal-based investing (GBI) is a helpful method to get you there on time. 

By assessing goals and assets, you can allocate what is needed when you need it. That’s one of the reasons that GBI can help you retire early. You set the date at which you’d like to retire and save toward that goal.

How does your money personality fit into the equation? Prism Planning Partners will help you become better self-aware as part of comprehensive financial planning.

Whether you plan to retire in Libertyville, IL, or travel to places you’ve never seen, you can arrange for a dream retirement. Here are the steps toward retiring early using goal-based investing.


1. Determine how much you’ll need in retirement

To reach life goals, you need something of a mathematical equation: not just “I want to save 10% of my salary toward retirement,” but “I need xx in my retirement accounts to retire.” The “xx” depends very much on how much you’ll need in retirement.

A financial advisor specializing in goal-based investing can help you determine the figure. The figure itself will be goals-based since how much you need in retirement depends very much on what you plan to do in retirement. Do you plan to travel the world, RV around the country with friends, visit kids or help raise grandchildren, split your time between homes, or start a hobby-based business?

One of the most prudent moves you and your financial advisor can make is forecasting a retirement budget. If you are currently working with a monthly budget, go over the categories and, first, estimate which categories you will still need in retirement and which you can eliminate. You might not need, for instance, a monthly commuting category if you don’t plan to drive to and from a daily job. 

Then, determine if you will need any additional categories in retirement. If your current employer pays healthcare insurance, for instance, you may need a category for that.

Once you are done, you have at least a forecast of your retirement expenses. Then, a financial advisor can work with you to determine how much you’ll need.

We take our initial “getting to know you” stage very seriously so that we can craft a realistic plan that you’ll actually follow!


2. Save in retirement accounts

Regardless of the amount you’ll need to retire early, it’s likely you’ll save in tax-advantaged retirement accounts. If you are eligible to participate in defined contribution (DC) plans such as 401(k)s, you can sock up to $20,500 per year in pretax income for 2022. You are entitled to an additional $6,500 contribution per year if you are 50 or older. 

Investing in a 401(k) is an excellent deal as the ability to save pre-tax can lower your tax bill. The invested money also grows tax-free until you withdraw it at retirement.

You can also enhance your retirement savings if your employer offers a match. Employer matches are usually from 50% to 100% of employee contributions. In other words, if you save 6% of your salary and your employer offers a 100% match, they will also kick in 6%, for a total of 12%

If you don’t have access to a 401(k), you can save up to $6,000 in an Individual Retirement Account (IRA), with a $1,000 catch-up contribution per year if you are 50 and over. Like money in 401(k)s, contributions grow tax-free until you withdraw them.

Unlike 401(k)s, contributions to traditional IRAs are not taken out pretax. But the amount of your contribution is deductible on your tax return if the money was made to a traditional IRA account.


3. Consider tax issues

Be sure to consider tax issues when saving in retirement accounts. If you save in traditional 401(k) or IRA accounts, you receive tax advantages in the year of contribution. In exchange, the money grows tax-free until you withdraw it.

However, note that there are tax penalties if you withdraw money in traditional retirement accounts before the age of 59½. The Internal Revenue Service (IRS) will levy a 10% penalty on the amount. You will also be taxed at your ordinary rate. The penalty will be levied every year until you reach 59½, so this can be a problem if you plan to retire early.

One solution is to contribute to Roth retirement accounts rather than traditional accounts. The contribution amounts in both Roth 401(k)s and Roth IRAs are the same as traditional accounts, and so is the ability of the money to appreciate tax-free.

You forfeit the tax advantages in the year of contribution. Roth contributions are made with after-tax dollars and are neither tax-free or a deduction. 

But the recompense can be sweet. Withdrawals from Roth accounts are never taxed (as long as you’ve held them for at least five years) simply because they have already been subject to tax (when you contributed them). They are also not subject to penalties if you withdraw them before you turn 59 ½ (again, as long as you’ve held them for at least five years). 

That can make them ideal for early retirees.  


4. Figure out any guaranteed income you’re eligible to receive

Even if you plan to retire early, calculating how much guaranteed retirement income you’ll be eligible to acquire later in life can help you. After all, if money is scheduled to kick in during your 60s, you can adjust the total amount you need to save accordingly.

If you’re eligible for Social Security benefits, determine how much those are likely to be. The Social Security Administration (SSA) provides a calculation of monthly benefits. 

After you know it, factor in the age at which you plan to retire, as that affects the amount of your Social Security benefits. Those eligible can elect to receive benefits starting at the age of 62, but if you retire earlier than your full retirement age (FRA), your benefits are reduced up to 30 percent. (FRA is based on your birth year; for those born in 1960 and after, it’s 67.) 

If you can wait until after your FRA, on the other hand, benefits increase between that birthday and your 70th birthday, by roughly 8% per year. After the age of 70, there are no further increases.

When calculating this, be sure to remember that you can retire and not draw Social Security. The decision on when to take benefits is entirely up to you; your employment status does not determine it. It’s also not coupled with the receipt of Medicare. You can enroll in Medicare when you reach 65 regardless of work or retirement status.

Similarly, if you participate in any defined benefit (DB) retirement plans, such as a pension, you must determine how much you are likely to receive in retirement.

Are you ready to determine your retirement age? Prism Planning Partners is prepared to help by discussing your financial goals!

As you can see, Goal-based investing is all about achieving the goals you want, when you want, and how you want. The job of a GBI financial planner is to reach destinations on your retirement wish list – this requires:

  • Investment strategy
  • Your financial situation
  • Investing decisions 
  • Your risk tolerance
  • Investment portfolios
  • Your cash flow
  • Investment management

Take the next step to meet your goals by reaching out; contact a wealth management financial advisor specializing in goal-based investing.


Prism Planning Partners, LLC dba Prism Planning Partners is a Registered Investment Adviser. This article was produced by Paladin Digital Marketing, an entity unrelated to Prism Planning Partners and may not necessarily reflect the expertise of this financial advisor. This publication is not intended to provide investment advice and is intended for your information only. Opinions and forward-looking statements expressed are subject to change without notice. Information based upon third-party sources and data are believed to be accurate and reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. All domestic and international rights are reserved. No part of this publication including text, graphics, et al, may be reproduced or copied in any format, electronic, print, et al, without written consent from Prism Planning Partners. Neither Prism Planning Partners, nor its investment advisor representatives provide legal or tax advice. Please be advised to consult your investment advisor, attorney or tax professional before making any investment decisions.