Financial Freedom Vs. Retirement: Do You Know The Difference?

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Financial Freedom Vs. Retirement: Do You Know The Difference?

Published July 24th, 2018 by Ryan Krueger

This is a guest contribution by Ryan Krueger of investment advisory firm Krueger & Catalano. You can follow Ryan on Twitter @RyanKruegerROI.  This is the first part of the Financial Freedom Day Series.

If you are reading this, I will take an educated guess that your nest egg is already well informed. Sure Dividend offers sharp tools and analysis delivered in a digestible format, unlike any other source I have consumed.

Ryan Krueger’s Story

Admittedly, I am severely biased by the first half of my career on Wall Street as a portfolio manager; hundreds of millions of dollars wasted on conflicted research each year. Finding the good stuff made needles in haystacks look like bowling pins. By the time I left, the pages of legal disclaimers at the end of each report often were longer than the research from the analyst.

I am thrilled to offer a few pages from our playbook on planning that works in this article.

You can tear them apart, or slide any into your own game-plan if they fit. At some point everybody realizes that informed simplicity, in a written plan, is the key to success.

The second half of my career has been invested in owning and operating an independent money management firm, focused on comprehensive income planning. We found something far more inspiring than retirement plans.

Financial Freedom Is Better Than A Retirement Plan

When multiple and different income streams exceed all known expenses and contingencies, then you have something better. Financial Freedom allows spending the most valuable asset of all – your time – exactly as you wish.

People avoid planning for a lot of reasons. But planning is not limiting, it is liberating. The discipline it takes can unlock doors to more purpose filled time, that many did not even know existed.

Good news, it is easier than you think. We have the great fortune of working for a variety of families ranging from ultra-high net worth, all the way to those just starting. In every case, each individual has the same two questions deep down, whether they have been able to say them out loud yet or not.

That’s it. Stop letting endless information complicate your life. If you can answer these two questions, clearly, then you will have a gift most will never know – peace of mind.  Regardless of account size or age, during great bull markets or crashes, I have found without a doubt these are the two questions the best and brightest still wonder about…until they have a plan. So, there is no better place to start this Financial Freedom Day series.

The Financial Industry Doesn’t Understand Financial Freedom

Let’s dig in right when I left Wall Street in 2006, just before their credit crisis shook allocations and short circuited some of their inventions (again). What I learned inside the belly of that beast is that NONE of what we need to execute a simple plan has been invented by Wall Street in the past 100+ years. You can take a deep breath right now, because this letter does not lead to any of their products. We do not use one of them. I humbly suggest re-reading that 100+ year sentence one more time, and consider reclaiming all your time back from those other rabbit holes.

The final presentation I made before leaving, showed how their customers can go broke taking out less than they made. I even spotted them the very best results those brokers could hope for. You may have guessed by now that I was not terribly popular with this crowd.

Peter Lynch led Fidelity Magellan to an unrivaled track record during the 1980’s. There was only one time I recall him stepping outside his stock-picking batter’s box to share numbers for income planning. He suggested withdrawing 7% from a portfolio per year was sustainable for retiring (Worth magazine/Sept 1995). For starters, he dismissed the notion of owning bonds at all since stocks outperform them over time. So, with 100% of a nest egg invested in stocks yielding an average of 3% dividends and generating 8% from capital gains, his projected average annual 11% total return was more than enough to pull 7% from.

I ask amateur and professional investors alike what their best guess is. Start with any sized nest egg. If they made an average of 11% then subtracted 7% annually, after thirty years, what would it be worth? Their answers were always huge numbers, every single time. That is what the best mind inside the country’s leader in retirement assets recommended. What could possibly go wrong?

When you are living off that nest egg rather than adding to it, then average rates of return no longer matter. The sequence of those actual returns each year can wreak havoc to any diversified allocation. All I had to do was walk them through one of the recent 30-year periods where that strategy took any nest egg to $0.00 less than half way through. Big losses hurt more than big gains help. It does not matter how great a track record could be if you run out of money before you get there. Using nothing but real math from the year to year actual returns, while withdrawing principle, I challenge any retirement plan based on projected rates of returns.

“One of the great tragedies of life is the murder of a beautiful theory by a gang of brutal facts.”
-Benjamin Franklin

Financial Freedom Is All About Cash Flows

If the best mutual fund manager of a generation could get it this wrong, it is a good idea for any investor or adviser to get a second opinion on their math as well. A humble suggestion to where that math should start is free cash flow, the exact same oxygen needed for any business to survive and then thrive, not just ‘over time’ as Lynch said, but much more importantly for you ALL the time. No different than any other business, if you are relying on any form of earnings from the sale of assets, as unfortunately most retirement plans do, then you may outlive your money. Therefore, one of the principles of this Financial Freedom Day letter will be to never rely on, or even mention bull or bear market predictions.  I am neither an optimist nor a pessimist. I am a relentless possibilist. And, I just stick to the math.

Unlike a typical retirement plan based on total return, Financial Freedom occurs when your mailbox money coming from income alone exceeds all bills going out. Mailbox money does not come from selling stuff. or projected-maybe-down-the-road-hopefully, it is pure income.

Financial Freedom Question:  Am I Going To Be Okay?

Let us attack the first question. Am I going to be okay? It is crucial to know the answer, not hope, and it will knock out the most important first step to achieving peace of mind.

Wondering am I going to be okay is a normal person’s way of saying – save the volatility jargon, confusing charts, and new Frankenstein funds designed to help me sleep better (that would give you nightmares if you knew what was inside some). Just tell me how this all works if something bad happens. Am I going to be okay?!

Here is your answer. Know exactly how much of your nest egg is COMPLETELY removed from harm’s way.  Not low risk, I mean no risk.  How much do you have in:  Cash, CD’s, Treasuries, and Insured Deposits?

“A man is rich in proportion to the number of things he can afford to let alone.”
Henry David Thoreau (1817-1862)

One of those types of insured deposits is called an insured Tax-Free Municipal Bond.  Last I checked with the St. Louis Federal Reserve, the percentage of U.S. Households that directly own individual bonds of any kind is down to 1%. Inside that gigantic market of all bonds, it is a fraction of a fraction that own insured Tax-Free Municipal Bonds in their own accounts. Now, compare that to the percentage of households who say they would rather pay less in taxes and/or would like to have more peace of mind. You will start to understand why this is the most astounding investment contradiction I have ever witnessed.

Yields on those bonds are lower now than other times in the past, so they are less tempting for many. Not me. It is the same reason my kids know we eat broccoli before chocolate cake. “We gotta do what we need to do, before we do more of what we want to do.” They can roll their eyes in unison by now. Beautifully boring risk-free assets are the broccoli many investors give too many reasons for skipping these days. If we are to build a true Income Plan, it must be able to withstand ANY market, not rely on projections for average markets.

On Fees & Funds

To be clear, I am not talking about bond funds, ETF’s, or fixed income alternatives. Broccoli does not get healthier the deeper it is stuffed in cheese casseroles that your crazy aunt smothers it in. An insured risk-free bond does not need any Frankenstein fund around it. When interest rates rise, bond funds can fall in value and unlike an individual bond, funds have no maturity date promising when you will get all of your money back. When leverage and derivatives are added inside bond funds and fixed income products, they can do a lot worse than fall.

Frankenstein Funds

Far more common than any market disaster’s impact on a nest egg is a conspiracy that robs investors in plain sight every day – excessive fees. I looked up the largest bond mutual fund to make my point as hard to defend as possible. One of the original ideas with mutual funds was as they increase in size, the same cost of doing business is spread among more customers whose expenses should then go down. So, the largest funds should have considerable cost advantages. I found it cost 1.43% last year. The risk-free 20-year Treasury yield is currently 2.9%, a good benchmark to compare any decisions you are willing to pay to actively manage around. So, you are counting on incredible bond trading profits to justify paying almost HALF the risk-free rate of return in a chase for higher total returns. The co-conspirator is anybody who signs up for the crippling math of high fees.

But, there is an even bigger problem. Mutual fund investors have no idea what they sign up for, even if they are thoroughly informed and willing to read the entire fund’s prospectus. They would find in this case, the annual fund management expenses to be 0.67% (which can be found on Morningstar easier). Following SEC rules, mutual funds do NOT disclose what their annual transaction costs ON TOP of that misleading figure are. Even the most sophisticated investors believe their “total expenses” may be less than half of what they actually are. The fund cannot disclose the trading costs ahead of time because they have no idea what they will be until the year is over. The only clue an investigative investor has, in order to take a guess, is looking at the turnover rate. This large fund happens to be running at 291% annual turnover. Bonds, no different than stocks, cost a fund money every time they are traded. Customers will get that invoice and have no clue what number they are signing their name under ahead of time.

“The greatest trick the devil ever pulled was convincing the world he did not exist.”
– Keyser Soze

That 1.43% does not even include tax consequences of all that trading which can be massive if held outside retirement accounts. The idea of dedicating a portion of any nest egg to play great defense, with zero intention of active trading, begs the question why anybody would be invested in a bond fund outside of a 401(K).

According to recent data from ICI, the leading source on mutual funds, $10.4 trillion was invested in bond funds, up more than 70% since 2010.  That does not even include the blended stock/bond funds. In eight of the last ten years net flows into bond funds have been greater than stock funds. Bond funds just saw their largest net inflow, $260 billion, in five years. It is worth repeating here that when interest rates rise, bond funds can fall substantially in value. An individual bond held directly in your own account, has a maturity date showing exactly when you get your principal back, after years of receiving interest payments as well.

The default rate of AAA-rated general obligation municipal bonds has been 0.00%

Municipal bonds have been around for more than two centuries. No Wall Street product or fund has that kind of track record.

Final Thoughts

Financial Freedom Step #1: Calculate exactly how much of your nest egg is completely removed from harm’s way.

I am still learning after all these years with a focus on only this craft. I love research more now than ever before. I attribute all of our success to a simple formula. Curiosity > Conviction. If we knew all the answers, it would not be called research.

I applaud anybody reading this far for doing your own research. I am happy to help lend a hand with any question or challenge if I can.

I invite you to E-mail me your retirement and financial freedom questions. You can reach Ryan Krueger, the author of this article, at  Also, be sure to follow Ryan @RyanKruegerROI.

Note:  Ryan is an investment advisor not affiliated with Sure Dividend.  This is a guest post from Ryan, and does not necessarily reflect the views of Sure Dividend

The next edition of Financial Freedom Day will address question #2 “How much is enough?”

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