Fortress Financial Plan

Our ancestors created many elaborate ways to defend themselves against invaders. One of the best examples of their ingenuity is medieval fortresses, which were built to be as defensible as possible. Every element of their architecture was designed to ensure the fortress was strong and could hold out against sieges, which could sometimes last months or even years. They were designed so that a small force could defend against invaders that were ten times or more in number.

Since they were built for a very specific purpose, they had multiple lines of defense: the outer curtain wall, moats and water defenses, turrets, towers, and many other elaborate constructions. Ingenuity and creativity made some fortresses truly impregnable.

Should your financial plan and investment strategy be structured to resemble a fortress?

Before we address this question, here is a simplified example of a client for whom we designed a “fortress” financial plan.

Background:

• Single woman
  
• Significant portfolio size
  
• Limited income
  
• No pension, average Social Security
  
• Plans to retire in 2 years
  
• Projected expenses: $10,000/m or $120,000/year

1st line of defense:

• Cash reserves to cover 12 months of expenses
  
• Maintained in a money market account with a current yield 5.14%
  
• Goal: provide immediate access to cash

2nd line of defense:

• Individual Treasury bonds to cover seven (7) years of cash needs
  
• Treasury bonds currently yield between 4.70% and 5.30%
  
• Goal: ensure no stocks need to be sold in times of market turbulence

3rd line of defense:

• Dividend-paying stocks
  
• Average dividend yield: 3% to 4%
  
• Goal: cover close to 100% of projected expenses with portfolio income

4th line of defense:

• Overweight domestic large-cap stocks
  
• Goal: increase portfolio stability

5th line of defense:

• Invest the rest of the portfolio in growth-oriented investments
  
• Goal: protect against inflation in the long run

Outcome:

Our client is confident that her portfolio is prepared to sustain any prolonged market turbulence. She sleeps well at night knowing she will not run out of money in retirement.

Before we go any further, please understand that this is not financial advice. This is a simplified example to help you understand the concept. Your specific portfolio needs to be structured in a way that matches your needs, with each component complementing the others to achieve true diversification.

Below are some common questions we receive from new clients when discussing this approach:

Do I need a fortress financial plan?

It depends on your circumstances.

If you are more than 7-10 years away from retirement, you will likely need to focus more on growth than on protection.

If you are within 7 years of retirement, it is a good time to start considering this approach.

I believe I have a well-positioned portfolio. Is this a good time to make adjustments?

The answer depends on your preferences.

Many of our clients have seen significant appreciation in their portfolio value due to market performance over the past few years.

It is possible that you may no longer “need” additional assets to retire successfully.

Focusing on protecting what you have may be a better approach for you.

I have a financial plan, but I am not 100% confident it will work for me in retirement. What should I do?

We often hear this from clients transitioning to us from other firms.

While there are many ways to create a financial plan, the key difference between a generic assessment and a true plan is the level of detail. 

A simple assessment of “you should expect to have X dollars by age 65” is not sufficient. 

You need to know exactly how your portfolio will be protected and how your expenses will be covered in retirement.