A recent study by New York financial technology company SmartAsset identifies where people have access to the best 401(k) benefit plans in New Hampshire. The study compared employer contributions against total contributions, as well as retirement plan investment performance and administrative fees in cities across the country.
Strafford County, Lebanon and Laconia lead the way. For a more detailed look check out the table below:
Methodology: First, SmartAsset looked at employer and employee 401(k) contributions to determine employer contribution percentage. This is the sum of employer 401(k) plan contributions divided by the sum of total 401(k) plan contributions. We then indexed the ratio to 100, with a score of 100 representing the highest employer contribution percentage. This index reflects how generous companies are when it comes to contributing to employee 401(k) plans.
Then it created an investment performance index by calculating annual earnings on investments as a percentage of average total assets and an administrative fee, then finally, calculated a weighted average of the indices for employer contributions, investment performance and administrative fees to yield an overall score.
Perhaps the greatest advantage of the 401(k) is that contributions to a 401(k) savings account are made pre-tax. When your employer sends out paychecks, the 6% (for example) of your income that you’ve decided to contribute to your 401(k) has already been withdrawn, before your employer has withheld anything for taxes. That leaves 6 percent less income to be taxed, and a lower overall tax bill. Eventually, you will pay income taxes on it, but only when you withdraw it. If you don’t plan on doing so for 10, 20, or 30 years, that extra cash has a long time to earn interest. That adds up.
So, let’s use the 401(k) calculator to show you how. For example, let’s say you are 40 years old, and plan on retiring at the age of 67. That leaves 27 years for your current investments to gain value. Using the previous example, in which you make $100,000 per year, and your employer matches up to 6% of your income, you stand to earn over $10,000 more by putting your $6,000 in your 401(k) this year as opposed to a standard savings account—even if you assume both will garner the same 4 percent return rate.
Are there any downsides?
Well—yes. A 401(k) really only makes sense as a retirement savings plan, and not as a general savings account. There’s a 10% penalty for withdrawals before your 60th birthday (well, before you turn 59 ½ but how many people celebrate that milestone), and that’s on top of the regular income taxes you will have to pay. That penalty is enough to negate the other financial benefits of a 401(k), so any money you’d like to have ready access to should be saved somewhere else.
Secondly, investments made through a 401(k) often carry risk. As mentioned above, you will select from an array of investment choices with varying levels of risk, and with many of these, it is possible (albeit unlikely) that you may lose money over time. Keep that in mind when deciding how to allocate your retirement savings. It's important to also steer clear of 401(k) plans that charge high fees if you want to keep more of your money working for you.
In all, however, the 401(k) is a great option for your retirement savings. Given the tax advantages, the ease of use and the possibility of those additional matching funds, if your employer does offer a 401(k), you should definitely consider taking advantage of it.