updated 7/16/2008 10:46:32 AM ET 2008-07-16T14:46:32

Workers in America are raiding their already fragile retirement piggy banks to weather financial hardships such as unemployment, medical emergencies and buying a home.

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And they're doing it even though borrowing a modest $5,000 can dramatically erode savings over time, according to a study released Wednesday by the Center for American Progress.

The study found workers in 2004 had $31 billion in outstanding 401(k) loans, a fivefold increase from $6 billion in 1989. Between 1998 and 2004, an average of 12 percent of families with 401(k) plans borrowed from them.

"They don't necessarily pay penalties. But the penalty is that they have fewer retirement savings," said Christian Weller, an author of the study.

As economic conditions grow bleaker, the number of people dipping into retirement money will only rise, he added.

A $5,000 loan, for example, could cut retirement savings by 22 percent even if the loan is repaid without penalty, according to the study. That's assuming the person has a $40,000 salary and is five years into a 35-year career.

401(k) allows easy access
One reason people are increasingly using 401(k) plans as a crutch is because they're so easy to access compared to pensions and individual retirement accounts, or IRAs.

"The borrower acts like a bank to himself," Weller said.

Typically, borrowers can repay loans within five years without penalty. Loans for first-time homes must be repaid within 15 years to avoid penalties.

That doesn't mean people are raiding savings to go on shopping sprees. Middle-class families in particular are turning to retirement money to get through financial crises such as unemployment and medical emergencies, the study found.

When Rachel Hernandez took out a $7,000 loan from her retirement plan, for example, it was after her daughter was killed and she took time off to care for her grandchildren.

'It was something I had to do'
"I understood it was going to hurt my retirement, but it was something I had to do," said Hernandez, a 46-year-old resident of San Antonio, Texas. She was working as a reservation agent for Southwest Airlines at the time and it was the second time she borrowed from her 401(k); the first time was to buy a house.

"Obviously it's going to impact my retirement, but I'm glad I had the option," she said.

People can typically borrow $50,000 or half the vested balance of their 401(k) accounts with extremely favorable interest rates. Failing to repay loans on time typically incurs a 10 percent excise tax and borrowers must also pay income tax.

Dipping into retirement money wouldn't be a problem if other sources of retirement income — such as Social Security and pensions — weren't drying up, Weller said. More people today are counting on 401(k) accounts to be their primary income source in retirement.

Yet a study by Hewitt Associates this month found four out five workers aren't socking away enough money into their 401(k) accounts to keep up their standard of living after retirement.

On average, employees are projected to replace just 85 percent of their income in retirement, compared with the 126 percent they would need when factoring in inflation, longer life spans and medical costs, the study by Hewitt found.

© 2013 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


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