Revisiting the Fortress Financial Plan

With everything going on in the markets this year, I wanted to revisit something we talk about a lot with our clients.

If you're not familiar with it, the Fortress Financial Plan is the framework we use for clients who are in or near retirement and prefer a more reliable, income-focused approach.

In very simple terms, rather than selling investments to fund your lifestyle, we focus on generating portfolio income to cover your expenses.

This is how we help our retirement clients stop worrying about the market.

It's been a couple of years since my original newsletter on this topic which you can review HERE.

A lot has changed in the markets since then, so I wanted to revisit the concept with fresh eyes.

So let's just jump into it with a real client example.

What does this actually look like in practice?

As always, client names and exact numbers have been adjusted for privacy.

Picture a couple we'll call Evelyn and Mark.

Like many of our clients, they came to us a few years before retirement feeling a mix of excitement and anxiety.

They had spent decades building their nest egg and the thought of depending on it for the rest of their long retirement was unsettling.

I noticed they weren't afraid of the market necessarily.

They just wanted to know their monthly bills would be paid regardless of what the market did on any given day.

At the same time, just like for most younger retirees, they still had 25 to 30 years ahead of them.

So they understood that staying invested in stocks was essential to keeping up with inflation over time.

After reviewing their situation, we structured their portfolio around one straightforward goal.

We wanted to generate enough income from dividends and interest to cover roughly 75% of their monthly cash needs.

We accounted for Social Security and other income sources first, then based the portfolio's income target around what remained.

For Evelyn and Mark, that came to approximately $8,500 per month before taxes, or about $102,000 per year.

Once we implemented the Fortress Financial Plan adjustments, their portfolio now does exactly that.

Valued at approximately $3.5 million, their portfolio produces an estimated $105,000 in annual income or yields around 3% (this is slightly above the target by design).

Because of this, their portfolio preserves its value over time and they rarely need to sell anything to meet expenses.

This dramatically reduces their exposure to market turbulence or "sequence of returns" risk.

In plain terms, sequence of returns risk is the danger of being forced to sell investments during a market downturn.

What makes this financial plan a "Fortress" though?

The income piece is crucial to the Fortress Financial Plan but there are other important components too.

I'll go over the structure of their portfolio briefly, so you can see a little bit "under the hood."

I promise to stay away from technical stuff or jargon!

The portfolio is organized into four distinct layers with each serving a different purpose.

Think of a medieval fortress that has multiple defenses and layers of protection such as the moat, guard towers and gates to protect against invaders.

The first is a cash reserve of approximately $100,000 held in short term government securities.

This layer covers roughly twelve months of their expenses at a yield of around 3.5% and generates about $3,500 per year.

The second layer is a bond ladder totaling approximately $1.3 million and designed to cover about seven years of cash needs.

A bond ladder is just a series of bonds that mature at different times, so we always have money becoming available when we need it. This layer yields around 4% on average and generates roughly $52,000 in annual income.

The third is a dividend stock portfolio of approximately $1.7 million invested in domestic and international companies.

This portion yields around 2.7% on average, contributes roughly $46,000 in annual income and serves as the main protection against inflation over time.

The remainder of the portfolio is the fourth and final layer, which is a growth stock portfolio of approximately $400,000.

It produces modest dividend income of about $3,500 per year, but its primary purpose is long term growth and potential inheritance for the children.

Overall, the portfolio targets a 70% stock and 30% bond allocation.

We adjust this mix based on market conditions and the best yields available at the time.

Why this matters right now

If you retired two or three years ago, there's a reasonable chance your portfolio has grown by 30% or more.

That's great news!

But it raises an important question. What do you do now?

You have a few paths forward.

The first is to stay the course and keep pursuing growth.

That's not a wrong answer.

But once your lifestyle expenses are covered, it's worth asking if you actually need to keep taking the same level of risk, especially with markets near historic highs.

The second option is to sell some stocks and shift into bonds.

Also reasonable, but bonds have their own limitations.

After taxes and inflation, most bond investments barely keep up with rising prices.

Bonds do very little to protect your purchasing power over a long retirement.

The Fortress Financial Plan offers a third path.

Rather than moving heavily into bonds or staying fully growth-oriented, you shift toward dividend-focused and mature companies.

You give up some upside in high-growth markets.

But you gain consistent income and much more security.

And you reduce your dependence on market timing, which helps most people "move on with their life" to put it one way.

This approach tends to be much better suited for retirees in their retirement years.

Fair word of caution!

There are, of course, many technical layers involved in implementing and maintaining this approach as markets evolve.

I won't get into it here as I just wanted to update you on this approach and describe potential benefits.

As always, this is not financial advice.

The Fortress Financial Plan isn't right for everyone.

But for clients in or near retirement who want to stop worrying about what the market does on any given day, it has been a genuinely different experience.

If you have ever wondered whether this kind of approach could work for your own situation, feel free to reach out and I will be happy to discuss it with you.