Our Own War Chest

Mar. 2nd, 2022

I’ve used the term “War Chest” in the past, but I think it makes sense to bring it back up again and offer a bit of a refresher on the concept.

At first glance, you may think it has something to do with the war that is going on right now between Russia and Ukraine. It really has nothing to do with this specific war, but I think you could make some comparisons as I go through the concept again.

When I refer to a war chest as it relates to finances, I am referring to a bucket or a pool of money that can be used in times of market volatility.

You’ve all heard me talk about the concept of the foundation, walls, and roof in the past. This is a similar concept, but I think  it could be a better illustration for those folks who are taking distributions for income needs in retirement.

We all know that markets are cyclical and they go up and down over time. We also know that if markets go down over a long period of time, there can be some adverse impact on the account if you are withdrawing the same amount each month from that account. How do you protect yourself from this?

The war chest is one way to do this. The amount of money that someone has in their war chest varies depending on their situation. If someone is taking money from their accounts every month, they could choose to have 3 to 5 years of income in their war chest. Some people may choose to have more, but I think 5 years for most folks works.

The war chest contains cash, bonds, and even fixed or fixed index annuities. In my illustration, the war chest is separate from your long term growth funds. This allows you the opportunity to continue to withdraw funds monthly, from assets that aren’t as volatile as your growth funds.

My art teacher would likely be ashamed, but I’ve included an image that illustrates the concept.

On the left hand side is the income spigot. This can be turned on or off. Inside the account on the left side, you’ll see that I illustrate a 5 year war chest of cash, bonds and fixed annuities. As you can see, there’s not a lot of volatility here so withdrawals don’t have as much of a negative impact when markets are retreating. On the right hand side you will see what I am calling the “growth” part of the account. You can see from the image there is more volatility here. The pie chart in the middle represents your individual allocation. This will be specific to you and your risk tolerance.

The war chest allows you to buy time while the markets go up and down if you have to make withdrawals. If you only wanted to draw money from your war chest, you could do that and over time, history has shown us that markets increase. In a few years, if you want to take some funds from the growth bucket and replenish your war chest you can absolutely do this!

All this image is supposed to do is to give you another way to see what we talk about all the time…a long term perspective in the midst of normal volatility.

I think the image is helpful when you look at it in the proper context and realize that a war chest allows you to enjoy life while others are panicking and making rash decisions. Short term perspectives can ruin long term results, so don’t get too caught up in what’s going on right now.

If you have any questions about your war chest, give the office a call and I’d be happy to walk you through the concept for your situation.

Thanks for the trust you’ve placed in our firm!

-Lee Perkins