Mapping out retirement strategy could be your Maginot Line

July 8, 2014 

After World War I, France still needed to protect its borders, but it was outnumbered. Its birth rate was down since the war, and Germany had almost twice the people. So France built the Maginot Line and, with it, a lesson in how small changes and assumptions can have large impacts on your retirement strategy.

André Maginot, a World War 1 veteran, was the French Minister of Defense at the time. France ran defense in World War I somewhat successfully, so Maginot decided to do it again. He embedded 3 billion francs' worth of artillery casemates, machine guns, tanks and cement into the earth along the borders between Germany and Italy. Machines could rise out of the ground, shoot 360°, and lower back into place. Electric power. Diesel redundancy. Even underground trains. The Maginot Line was 200 miles of engineered brilliance.

France assumed future wars would continue to use trenches and defensive tactics of the past. They were wrong. With new tactics based on speed and maneuverability called "Blitzkrieg," the Germans went around the Maginot Line. They attacked through Belgium and bombed the Maginot Line from the air. It took nine years for the French to build the Maginot Line, but only five days for the Germans to defeat it.

As you transition from saving for retirement to taking distributions in retirement, most people recognize they need to modify their balance sheet (see Winchester Mystery

House) and their investment strategy. Today's retiree faces a more challenging task of meeting longer time horizons, increasing health care costs, and less predictable income.

With a blitzkrieg of new challenges, addressing risk through a tolerance questionnaire and by simply adjusting your equity weighting accordingly could become your Maginot Line.

An important distinction for each retiree is understanding those sources of income that are fixed, such as social security and pension income, from those that are variable, such as portfolio distributions. The ratio of covered expenses to savings, combined with the strength of your personal financial statement, can help dictate how flexible you can be to prudently pursue your goals.

Those with a more constrained coverage ratio or seeking a more thoughtful approach should consider goals-based planning to pursue their objectives. A goals-based plan does not rely on "risk tolerance," market forecasts and timing, or rules of thumb for planning as these methods may be unreliable.

Instead, a goals-based planner evaluates your household earning potential (human capital), savings (financial capital), and your other resources (social capital). Then the planner looks at your current and expected future income and expenses, and your household risk exposures, which are much broader than the market risk an investment plan considers with its mix of stocks and bonds, but which can significantly impact your ability to reach your goals.

Things will change as they inevitably do and, rather than monitor just past performance, a forward-looking process can help determine when future markets would trigger a potential problem or opportunity. The lesson of the Maginot Line is that we need to actively think through and manage the risks that threaten your lifestyle and could stop you from reaching your goals.

Gardner Sherrill, CFP, MBA, is an independent financial adviser with Sherrill Wealth Management. To learn more visit sherrillwealth.com. The opinions expressed in this material do not necessarily reflect the views of LPL Financial. Securities and advisory services offered through LPL Financial. Member FINRA/SIPC.

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