It’s OK to Fail

Americans abhor failure, or so we’ve been led to believe. I joined the U.S. military in the late 1990s and can remember the Zero Defect Mentality the post-Cold War peace dividend bred into our military leaders. While I would like to think the longest-running armed conflict in U.S. history (Afghanistan), and the most controversial since Viet Nam (Iraq), bled our military leadership dry of the Zero Defect Mentality, I’ve watched it slowly creep back into prominence since 2010.

My current Commanding Officer (CO) is an exception to that trend. He uses a term to describe his willingness to accept failure: Recoverable Training Failure. It essentially means he allows people to learn from their mistakes, as long as those failures are recoverable (i.e. no one died or was seriously injured). He’d rather people fail in a training environment, take the hard lessons learned, apply them, and succeed operationally when it matters most.  It’s a combat veteran’s mentality and is a good leadership philosophy in my opinion.

There is some evidence among the social sciences, like behavioral economics, that fostering an environment tolerant of failure helps organizations grow stronger. I’m an avid listener of the Freakonomics podcast and they ran a memorable episode on this subject entitled Failure is Your Friend. In this episode, the authors of Freakonomics and Think Like a Freak provide several convincing examples of companies which outperform their competition by allowing their workers to fail. Conversely, they discuss companies in which failure was unacceptable, and therefore inevitable. The obvious subtext is that within a company where failure is looked at as a learning opportunity, employees are more effective in delivering success over the long term. (*** Grumpus Maximus is an Amazon associate.  See Disclosures for more details.***)

I believe tolerance for failure has direct application within the realm of personal finance too. No one’s financial journey will be failure free.  However, the financial mistakes you make offer great opportunities to learn, assuming you’re ready and willing to do so. In fact, if your mind is open enough, you may not need to learn all financial lessons first hand. Someone else’s failure might resonate so much that you can learn from their mistakes. That’s been the intent of the Unintentional Meander Series from its inception. In other words, don’t beat yourself up. Rather, let me beat myself up, and you concentrate on learning.

Grumpus Failedalots

While it’s possible to learn from financial failure, is it possible to recover from financial failure? Absolutely. My journey towards FI is living proof of that. Is it pain-free? No. Nor should it be. How would we learn from our mistakes and failure if it was consequence-free?  If you are reading this, something painful probably occurred in your financial life that drove you to seek out more information. Congratulations, you are part of an exclusive club. I mean it, I do not get many visitors, you are truly in an exclusive class of reader.

In my two previous posts from this series, I regaled you with a list of financial mistakes and failures that cost me well over $700K in out-of-pocket expenses or opportunity costs. One series of mistakes and failures was capped off by selling 300 shares of Amazon stock in late 2004 to buy a home in Southern California at the height of the housing bubble. The other mistake included a ~$20K tax bill. Of course, I’ve made many more mistakes with my money than just those two. Those particular mistakes just made for the most memorable stories.  Below is a short(ish) list of other financial mistakes and failures from my journey:

Investing Mistakes:

• I never invested through the U.S. Government’s version of the 401K, known as the Thrift Savings Program (TSP).
• I curtailed my investment activity heavily from late 2008 to late 2012.
• I failed to reinvest dividends in my largest investment account.

Purchase Mistakes:

• I purchased three new cars throughout married life; as opposed to shopping for used.

Tax Mistakes:

• I failed to invest exclusively in Roth products while eligible for Combat Zone Tax Exclusions (CZTE) throughout my career.

Certainly this is not an exhaustive list. However, most of these are multi-thousand dollar mistakes, the reasons for which echo that of my previous two meander stories: financial illiteracy, ignorance of opportunity cost, and a lack of a money strategy.  My choice to remain financially illiterate certainly explains the TSP and CZTE decisions. Since I never took the time to financially educate myself, especially on the U.S. tax code, I failed to realize the importance of tax-deferred traditional TSP contributions. All I knew was no match existed for Department of Defense (DOD) personnel, so I erroneously believed there was no advantage in investing in an account that locked up my money until 59 1/2. The same ignorance caused me to miss the tax implications of contributing directly to Roth vehicles while deployed to CZTE areas.

I have no idea why I didn’t set my dividends to automatically re-invest in my taxable account (which is my largest account by value) because I actually knew the importance of this as far back as a teenager.  I wish it was due to a great tax arbitrage plan where I took my qualified dividends (at 0% tax) and invested them in a Roth IRA.  In reality, it was a great oversight on my part, which means I missed out on huge dollar cost averaging opportunities over the years.  Don’t say it, I know, I am an idiot.

In spring 2015 I read the book The Millionaire Next Door and began to listen to the Money Guy Podcast. I’ve blogged about Millionaire and the Money Guy Podcast previously, and highly recommend them both. “Have a plan for every dollar” is a common refrain on the Money Guy podcast, but I didn’t have a plan for every dollar until that summer. Nor did I fully understand the idea of opportunity cost prior to then.  Once I read Millionaire Next Door and started listening to The Money Guy, I began to understand both.  Unfortunately, I bought my family’s most recent of three new cars in late 2014.  These days I cringe when I think of the opportunity cost of driving three new cars off the lot.  (*** Grumpus Maximus is an Amazon associate.  See Disclosures for more details.***)

 

The one outlier in my list above is staying out of the market from 2008 to 2012. It is not an issue I addressed in my previous blog posts.  To be clear, I continued to make contributions to both of our Roth IRAs, and Mrs. Grumpus continued to make 401K contributions until she stopped working in late 2009.  We also contributed to a 529 when our first son was born.  Except for the 401K and 529s though, most of the post-2008 contributions sat unallocated in money market funds.  Almost all of my tax-free deployment money (from the two deployments I mentioned in my Worth vs. “Worth It” post) sat in savings accounts until late 2012 as well.

How do I explain that set of circumstances?  Fear.  The Great Recession scared me just like the majority of the country.  However, by sitting my money on the sidelines for so long, I missed the great buying opportunity that was the Great Recession when everything was on sale!  Who knows just how much portfolio growth I missed out by not buying as the market sank and then dug itself from a hole?  Even if it was calculable, I don’t think I want to know.

Recovery

OK, hopefully by now everyone is feeling good about their relatively minor money failures when compared to mine.  Am I right?  Great!  Once again my job here is done.  Self-flagellation time is over.  I will see everyone next week …

 

Oh, you are still here.  I’m sorry, you said something about “getting to the point”?  You mean beyond proving I’m a money management idiot for the third time?  Ah yes. Well, I suppose my point is that despite those mistakes, here I am, only three years (four at the outside) away from declaring Financial Independence (FI) and retiring in my mid-40s.  How is that possible?  Where does a government employee, who at conservative estimates easily pissed away 3/4 of a million dollars (out of pocket expenses and opportunity costs) in bad money decisions, find the temerity to declare himself and family so close to FI?

Funny you should ask.  I’ve given it a lot of thought lately.  The short answer is that all my mistakes were Recoverable Financial Failures (RFFs) — as my CO might choose to call them.  I don’t say that as a form of braggadocio either.  If I had my druthers I would rather have the money, and you could have the RFFs.  I’d even throw in the blog at no extra charge (I know, I’m a charitable guy).  Yet, that is not to be, and since it is not, let’s see if we can tease out a few lessons from my RFFs which hold some applicability to everyone.

Pensionitis

Let’s start with the obvious and most pertinent lesson to my Golden Albatross readers, the defined benefit pension (from here on referred to as the pension).  As I point out on my About Me page, as well as Part 1 of the Pension Series, the day in the U.S. when the majority of workers could rely solely on their pension to support them in retirement is long gone.  Currently, only a few professions have access to pensions at all, and a large portion of those, even in the public sector, are at risk (see Part 1 of the Pension Series for more on this topic).

My family and I are both lucky and blessed to not find ourselves in that situation.  The stability of my military pension is not in question unless the solvency of the U.S. government comes into question.  Beyond monetary compensation, my pension also comes with other earned benefits (OEBs), most importantly the highly subsidized family healthcare for the remainder of my and Mrs. Grumpus’s life.  While I think a family of four could live reasonably well from the pension I stand to earn at 20 years of service, my family and I are planning to use it in combination with a calculated safe withdrawal rate (SWR) from our investment portfolio to continue with our current standard of living.  Which is a long-winded way of saying we need the investment money in order for our retirement plan to work as designed.

That said, while my pension won’t cover everything in our retirement budget, it will cover a large portion of it.  What this translates into is a much smaller Gap Number and a much larger margin for error as I try to save the amount required for my Gap Number.  So while having that aforementioned 3/4 of a million dollars would be great, its absence will not prevent me from retiring at a time of my choosing.  This is the wonderful thing about a good defined benefit pension, it provides such a high floor of retirement income (i.e. a level of earned income we will never fall below in retirement) that it forgives a lot of stupidity and mistakes made in your wealth accumulation years.

You Can Take That To The Bank …

 

A high savings rate also forgives a lot of financial mistakes, which is why I highlight it as the second reason my financial failures proved recoverable.  This has applicability beyond that of just the Golden Albatross crowd too.  I’ve stated in other blog posts, but with only the effort it took to track our expenses in Microsoft Money and Quicken, my family and/or I saved between 25% and 40% annually throughout my career.  Let’s juxtapose that with the conventional wisdom which is to save between 10 to 15% of your annual earned income for retirement.  Had we done that, my mistakes would be biting us on the ass at the moment.

In episode 448 of Radical Personal Finance, Joshua Sheets argues that your 401K won’t make you wealthy.  It’s a good episode, and worth a listen for a number of reasons beyond the topic of this post.  In case you are too busy to listen though, one idea he touches upon is that your career is a better wealth generator than any investments you make.  Your investments play a role in building wealth, but as a force multiplier (my military interpretation of what he said), not as the main mechanism.  This is similar to the philosophy espoused at the Earn, Save, and Invest (ESI) Money blog.  Your earned income is what builds your wealth IF you are able to save it.  Investments simply multiply the effect of saving.

That is a big “if” for a lot of people.  Below is the most recent data set (2015) from the Organisation for Economic Co-operation and Development (OECD) displaying savings rate as a percentage of GDP for some of the G20 countries:

 

Country	Value
CHN	47.06359
KOR	16.05058
RUS	15.32493
DEU	10.0186
MEX	5.981629
JPN	4.100744
USA	3.672438
AUS	3.475573
FRA	2.645969
CAN	2.513502
ITA	0.750082
GBR	-0.01837

Yeah!  The U.S. isn’t last!  USA! USA! USA!

Pardon my economic nationalism, but I was truly surprised the U.S. was not last.  Really though a 3.67% savings rate is all we can manage nationally?  No wonder why the U.S. is rushing headlong towards a retirement crisis.  Good job team!

Like I was saying, saving a substantial part of a paycheck is a stretch for a lot of people, but for some reason, it never was for me.  I’m not sure why, but I never enjoyed spending my money.  Maybe I inherited the saver’s gene because saving my money for another day always seemed the better option.  Living below my means always seemed prudent too.  As I related in You Can Teach An Old Dog New Tricks, I eventually ground Mrs. Grumpus down to the point of capitulation (not a tactic I recommend if you like a happy marriage) on the issue as well.  However, it’s not like we were saving with anything specific in mind.

It should be apparent from this series of posts that until 2016 there was no grand plan for our money.  We saved and I invested it because I thought it was what a responsible adult was supposed to do.  I did a mediocre job with the investments and managed a mediocre return.  Occasionally we’d buy a sensible new car or take a nice vacation.  We had kids, started tucking money away for college into 529s, but still no grand plan.  I assumed I would work until 55 – 65 and retire like everyone else.  This is the unintentional meander I refer to in the title of this series.  Sure, we were doing some things right during our meander, but we could just as easily meandered down a different path.

 

In 2016 though, it all gelled around the events described on my About Me page.  I read The Simple Path to Wealth, discovered web pages like Mr. Money Mustache and Can I Retire Yet?, and made some calculations.  I realized despite all the mistakes, our savings, investing, and the pension put us in striking distance of the FI Retired Early (FIRE) life.  Suddenly everything we had done financially, both good and bad, took on a new meaning and purpose.  It was nice to discover our early life choices provided options to us later in life, especially considering how my mental health issues were so reliant on the outcome.  Which brings me to my last and final point …

Sometimes It’s Better to Be Lucky …

Yes, you know the rest.  There is no way I am going to wrap up a series about my epic but recoverable financial failures without a nod to the role luck played in putting my family and me in such a good position.  And make no mistake, I am wrapping up this series.  Who knew it was a best of three?  I didn’t and I’m the guy writing it.  However, I’m tired of dragging up past money mistakes and wringing them for every teachable point.  I think we’ve got the gist, so it’s time to ride this wave all the way to the beach and call it a day.

Now some might argue that you create your own luck and that by saving so much, investing, and sticking with a pensionable career despite its hardships, that I put myself and my family at this point.  And while everyone pats me on the back, I’m sure karma would plot my demise around the next corner.  Since I still have three to four years left in the military, let’s not court disaster just yet.  I’m not naive enough to think it was all, or even mostly, me that got us to this financial point in time.  There are an infinite number of ways this could have turned out, most of them bad.

 

In light of that, others might argue the hand of the divine.  In response, I’d say it’s a big universe, one for which we don’t have all the answers.  However, if the Gods are out there, I doubt they have time to interfere in the affairs of this mere mortal.  If they do they could at least grant me the ability to use the Force.  Grumpus Minimus #1 would think that is so cool, and frankly so would I.  Seriously though, best to chalk a healthy portion of my good circumstances up to luck and leave it at that.

Conclusion

I have a feeling my conclusion on luck may leave some reader’s a bit upset.  That’s understandable since luck is unique and not subject to rules which might allow for employment in a retirement strategy.  In fact, I wouldn’t recommend banking on any luck, other than bad luck, for your retirement planning.  To that end, I would refer you to Big Ern McKracken’s work at Early Retirement Now (ERN) for a better understanding of how to mitigate the effect of bad luck on your SWR.

Good and bad luck aside, where does that leave us for this article?  Well, it leaves us with a laundry list of almost unbelievable financial failures, some musings on the capacity of a pension to assist with recovery from those failures, and a drive-by on how a good savings rate combined with investing can also assist.  And that is where I think I will end this article and series.

Not every post provides some dramatic insight, and I never promised total enlightenment.  For that, you will have to caddy 18 holes of golf for his Holiness the Dali Lama.  Just make sure to ask him for a “little something, you know, for the effort”.  On my Home Page, I promised you a memorable story or three about my money mistakes, and I think I’ve delivered in that regards.  Like I said above, I still have three years for sure, and four on the outside, before retirement.  I hope there are no more reasons to revisit this topic prior to then, but given my history, it’s probably inevitable.  Until then, I hope your financial journey is a little less meandering.