Melba Durr and Troy Johnson have heard all the hands-off rules about dipping into retirement savings.

But they’re not paying any attention to the advice.

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Joey Ivansco/jivansco@ajc.com

Troy Johnson, is someone who has been dipping into his 401k to survive during this economic downturn, effectively wrecking their future retirement money.

Family health problems and the threat of losing her home forced Durr to dip into her 401(k) twice in the last three years. Now, the fund contains about $20,000 — half of what it used to have.

“No doubt, I wrestled with it,” the 53-year-old Decatur widow said. “But what am I supposed to do? I wouldn’t wish it on anybody.”

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Likewise, Johnson of Forest Park has had to rely on his 401(k) after using up the severance he received in a 2006 layoff, as well as money from family to help him ride out the rough patch. His 401(k) is “90 percent” gone, and he still hasn’t found another corporate job.

“Right now, it’s just about surviving,” said Johnson, a consultant who helps companies create Web-based publications for their data.

The tough economy and tight credit have pushed more people to rob their future to pay today’s debts.

Originally designed to help workers supplement and ease into a comfortable retirement, 401(k)s have grown in importance as many companies end or cut traditional pension plans.

In its early days, prematurely tapping into the tax-deferred savings plan could only be done for special purchases, such as for a down payment on a home. For financial relief, many consumers would use home-equity loans and other forms of credit, leaving 401(k)s to accumulate money for retirement.

But now, with home values falling and credit drying up for many consumers, 401(k) plans are being raided with greater frequency to pay medical bills and credit-card debt, avert home foreclosures and other big-ticket problems, and even pay for day-to-day expenses, such as groceries.

Such retirement raiding can carry stiff penalties — 10 percent if you’re under 59 1/2 years old — if the loan is not repaid. There can be even greater problems later. Experts say people who borrow — no matter what the reason — are incurring deep losses in unrealized retirement income.

“There’s no do-overs when it comes to retirement,” said Beth Almeida, executive director at the National Institute on Retirement Security. “If you mess it up, you face some severe consequences. You either don’t retire or you severely ratchet down your standard of living.”

Nonetheless, many of the nation’s big retirement fund managers and retirement studies report more Americans are dipping into their 401(k) accounts.

Vanguard, a large mutual fund company, said “hardship withdrawals” from 401(k) plans increased 22 percent at the end of last year, compared with a year earlier.

The Transamerica Center for Retirement Studies saw the biggest one-year jump — from 11 percent to 18 percent — in people withdrawing money from their 401(k) plans, according to its latest survey.

“That was startling,” said Catherine Collinson, president of the Los Angeles-based nonprofit corporation that’s been tracking retirement trends for a decade. “What was even more startling is that 49 percent of those taking out the loans were doing so to pay off debt.”

“So if people are feeling the pinch right now and borrowing on their 401(k) plan, that will have an impact on the size of their nest egg when they retire,” she said.

How big of an impact?

Consider this: Borrowing $30,000 from your 401(k) could ultimately cost you $600,000 in lost retirement income, according to the National Center for Policy Analysis.

Here’s how: Let’s say, you’re 35 years old and borrow $30,000 over five years, with monthly payments of $583, including interest. In most plans, no pre-tax contributions are made while you’re repaying the loan to yourself. If the account was earning a market interest rate of 6.25 percent, you would have $192,794 less when you retire at 67 than had you not borrowed. If the account was earning 10 percent interest, you would have $646,200 less at retirement than if you had not borrowed.

That data was eye-opening to Pamela Villarreal, senior analyst at NCPA who helped create the center’s 401(k) calculator. She learned first-hand about the consequences of borrowing against your 401(k). Fifteen years ago, she and her husband withdrew $10,000 for a down payment on a house. They were unable to contribute to the plan while they had the loan, which took two years to repay.

“We didn’t think anything of it,” Villarreal said. “We felt we’re paying interest, but we’re paying ourselves. We thought we wouldn’t have that big a loss.”

Then, they did the math.

“We were mortified,” Villarreal said. “Even though we’re done paying on the loan, we’re still living with that loss. If you calculate the compound interest you lost from the day you took the money out until the day you retire, the loss is incurred year after year. When we retire, we’ll have less money in our account than had we left it alone and (taken) out a conventional loan.”

Villarreal’s decision was made in fairly good economic times. Today’s decisions are being made by the financially vulnerable who may not be able to replenish their 401(k).

Many of the financially strapped are in their 20s and 30s.

A recently released Fidelity Investment survey found large numbers of young workers were cashing out their 401(k) plans when they switched jobs. They used the retirement money to pay debts and mortgages.

While they wanted to save for retirement, they couldn’t because current debt got in the way, the survey found. Fidelity officials worry the trend could lead to a savings crisis among Gen Xers.

“Consumers are hurting,” said Jeff Wenger, assistant professor of policy analysis at the University of Georgia. “They don’t have any other place to turn other than their retirement. They’re borrowing because home equity has fallen or they’ve lost their jobs or they’re having some health emergency they can’t pay for.”

Wenger, an expert in labor economics and pensions, co-authored a study looking at the effects of 401(k) withdrawals for the Center for American Progress. The report was presented this summer at congressional hearings on the problem of retirement-raiding.

“We’re not saying tapping into your 401(k) is a horrible thing,” Wenger said. “It’s a reflection of the horrible crisis people are facing. We should be adding protection so that people have enough [health and unemployment] insurance so they don’t have to tap their retirement.”

Ironically, 401(k)s were set up to give American workers a good start in building what experts say should be a three-legged stool of retirement. Essentially, they say, workers may be able to live comfortably in retirement on income from Social Security, a company pension and 401(k).

But with lenders making it more difficult for consumers to get loans, some workers see the 401(k) as their best resource. They can tap it at any time.

“While it may seem like an easy fix or good solution,” Collinson warned, “it’s a wolf in sheep’s clothes. If the person taking the loan cannot repay it and they default on the loan, they’ll be subject to regular income tax on the amount they borrowed, and if they’re under 59 1/2 years old, a 10 percent penalty.”

Worse, if they leave their company or are laid off before they repay the loan, they have to pay it back in full, immediately. That can create a further downward spiral.

That sobering message is coupled with the fact that Social Security’s future is uncertain. And many companies have curtailed pension funds in favor of letting workers contribute more to their retirement through savings plans like 401(k)s.

Now the third leg of retirement — 401(k)s — seems shaky.

“People are not prepared for retirement,” Villarreal said. “Many are really depending on Social Security for their primary source of income. So 401(k) borrowing is just making them even less prepared for retirement.”