401K Lessons (Learning it the Hard Way)

Last year was my first full year at work. I managed to max out my 401K contribution with one paycheck left to go. So for the last paycheck I set the contribution rate to 0%. This week I had to go in to reset it back to the original rate. Boy, was I in for a painfully rude shock - my 401K returns were negative. When I was younger I used to wonder why people who have money still worry about money. But in that one moment when I was staring at the numbers in red indicating negative returns on my hard earned money (that I had scrimped and scrounged to save, I must add) it was suddenly very obvious. The knot at the pit of my stomach did not feel good.

To cut a long story short, things have gone further south since then, and as of today, I am down 5% for the year. And my all-time returns have shrunk so badly that the returns on my 401K statement are beginning to resemble that of my bank statement. I have had 401K on my mind for the past few days, and here are some lessons I am learning.

Do not track the returns of the 401K on a daily basis
This is advice I need to learn to live by, since I value my sleep too much. Until this week, I hardly paid attention to how my 401K was doing, except for an occasional look out of curiosity, and I was doing fine. But now that I know it is not doing well, I have an obsessive urge to check it the first thing every morning. And with the losses going higher each day, it is turning out to be a heck of a lousy way to start the day.

Pay attention to asset allocation
When I started my contributions, since it was still very early in my career, I presumed I should be able to take a lot of risk. So I did. I put 100% in stocks - 20% large cap, 40% in mid cap and 40% in International. And now it is clear to me that this risk level is way too high for me to handle. It is very important to look realistically at what risk you can stomach, and balance it against how much returns you hope to make. So, I finally took some time out to go through all the funds, their volatility levels, their performance history, the expense ratios etc. and reallocated my future contributions. My asset allocation choices are - 50% domestic stock, 32% international stock and 18% bonds. And the funds I have selected offer performance close (though not quite there) to what my earlier allocation did but have much lower volatility. I still have a few questions about some of the funds, and have mailed the fund managers for details. Once I get the information, I hope to finalise my selection and freeze the allocation and only visit it once every 5 years or so to see if the risk tolerance is still OK.

Don't lose perspective
I have at least 30 more years to go before I can retire (assuming I do not retire early). The amount I have in my account is a small drop in the pond when compared to the final balance that my 401K account will have. The 5% loss on that small figure is but a ripple in the pond. In the long run, this experience is just a small blip that might not even register on the radar. It is important to have this long-term perspective to avoid losing sleep and to control the temptation to mess with the allocation every now and then.

Nobody else can determine what is best for you
Our company's 401K plan provides us access to some financial software and I went through it to obtain some advice on what my model allocation should be. I also had several discussions with the better half and some older colleagues. I used all this advice, but in the end, what I chose was uniquely suited for my particular situation. It is easier to let someone else handle the decisions (e.g., financial advisers, spouse, parents etc.) but to really be peaceful, it helped for me to go through the details of the funds and determine what was best for me.

In a way, I am glad that I chanced upon looking at my 401K when it was doing particularly bad. I had not paid much attention before and had randomly picked funds with seemingly good performance in an effort to maximize my returns without really paying much attention to the associated risk level. Now I have put in a lot more reading of the funds offered and have picked the ones that I believe are more suitable for me for the long run. I don't know if this is the allocation I will stick with forever, but for now at least, I feel a lot at peace with my choice.

*Image credit: Photograph by jay d [via Flickr Creative Commons]

Quick Update

I have been gone for so long that I don't know if anyone ever reads this blog anymore. But if there is someone out there, here is some quick update.

During the last couple of months we spent a boat load of money on medical bills. The total came up to a little more than $15,000. About $4,000 was covered by insurance and so a little over $11,000 was out of pocket. The lady in the business office of our provider was very helpful and sat with us to review the financial costs and possible ways to get reimbursement from the insurance company for some more money. So I have filed claims for another $6,000 or so. Hopefully, at least a part of it will be reimbursed.

So far the experience with the insurance company is mixed. On the "good" side, two of my initial claims (for $163 and $192) were approved. On the "bad" side, the claims adjusters are a bunch of jokers!!!! While the first check (for $163) was sent to me correctly, they sent the second check (for $192) to the provider! After a very long phone call with the customer service we found out why the claim showed as approved/paid on the website but I did not see the money even after a month! The agent gave me two options - (a) I file a case, they will investigate, then they will send a letter to the provider requesting that the money sent by mistake be returned and after they reclaim the wrongly addressed check, they will cut a new check for me, or (b) I contact the provider directly, explain to them that I have paid twice for the services - once out of pocket and once via insurance - and then request a refund. Since option (a) will likely drag on for months, I chose option (b) and spoke to the same lady at the business office of my provider. She was very understanding and has agreed to cut the refund check to me.

Out of the remaining claims, I think we have a good chance of the claims being approved for about $4,000. The rest of it, I just filed since the bills were lying around and the worst that could happen is that the claims will be denied. I hope the claims falls in the hands of the same moron adjuster who goofed up my earlier claims and sent the check to the provider. Who knows... he might just approve all those other claims too that are at a high risk for being denied :)

So our out of pocket tally will finally be in the range of $7,000 to $11,000.

For the first time in a long while though, we went through the expenses without worrying or fretting about it too much. With everything else going on around us, that was such a boon! I did get a bit anxious for a couple of days when I found out just how much the bills could be, but I think that was more out of habit than actual financial reasons. And we have paid off all the credit card bills and are not carrying over any debt. That feels real nice too.

As for the money spent, every single penny spent was well worth it! Like I mentioned before, it was an elective procedure and a bit of a gamble at that. Statistically, the chances that the procedure would work for us was under 50%. We could have probably saved ourselves a lot of money if we had waited some more time to see if the situation could be resolved with other less expensive, but less effective procedures. Or we could have seeked medical attention in our home country where the costs are about 1/5th of the costs here in the US. But in the end we chose to take the gamble. If we do not use money for the things we really want, and are not willing to pay the premium for the peace of mind of doing things the way we like it and on our schedule, then what good is the money for? Luckily, for us, things worked out! I am still a little anxious, but it is getting more and more real with each passing week, and each follow up visit to my doctor. If any of you readers are in the same unfortunate situation as us, you have likely figured out what this is all about. Keep your chin up, and in the end it will all work out. For the rest of you who have no clue of what I am talking about, count your blessings, say your prayers and kiss your kids once more tonight! You have no idea how fortunate you are for being so normal :)

*Image Credit: Photograph by joyrex [via Flickr Creative Commons]