It may not surprise you that a soaring unemployment rate is forcing many Americans to tap into their retirement savings account in order to survive. The current unemployment rate sits at 10 percent of the population.

In today’s beaten-down U.S. economy, most people can’t turn to savings, big raises or a home-equity loan to escape the financial squeeze. They are casualties of the recession. With the recent falls in the stocks and bonds people’s 401(k) retirement savings account have also taken a beating.
Fidelity Investments recently released the results of a study on retirement savings accounts in a special report. According to Fidelity Investments, by the second quarter of 2010, the number of loans from 401(k) accounts reached its highest point in 10 years. Comparing the second quarter of 2009 to the second quarter of 2010 reveals that loans against retirement savings accounts increased by 2 percent from 20 percent in 2009 to 22 percent in 2010. The average loan against a retirement savings account is $8,650.
According to Barry Bluestone, dean of the School of Public Policy and Urban Affairs at Northwestern University, “People who borrow money from 401(k) accounts for living expenses are desperate. These are people who have exhausted unemployment benefits but have a retirement plan they can draw on.”
There are worse things, though, than dinging retirement – like being evicted, which was among the top reasons for hardship withdrawals.
--------------Report reveals more results
The primary reason provided as a need for borrowing against a retirement savings account was financial hardship. The withdrawal amounts from these accounts are increasing, too, going from 2 percent in 2009 to 2.2 percent in 2010.
According to Fidelity, a financial hardship definition for the account holders borrowing from a retirement savings accounts included foreclosure or eviction. Other reasons provided for borrowing against the retirement savings account were to cover college education expenses or to buy a home.
More loans means less in balances
With more retirement savings account holders pilfering the money they have in their 401(k) accounts, the average balance in these accounts is also decreasing. During the period covering April to June 2010, the average balance in a 401(k) account balance was $61,800. While this is a 15 percent increase from the April to June period in 2009, the average balance decreased from the first to the second quarter of 2010.
The increase in year-over-year comparisons is due to the fact that the working Americans in the country continue to put money into their retirement savings account. According to the president of Fidelity workplace investing, James MacDonald, “The majority of participants continue to make saving through their workplace plans a priority. However, the current economy has forced some workers to borrow from their 401(k) accounts in order to pay for critical living expenses, ultimately jeopardizing their future retirement.”
Should a 401(k) be used like a piggy bank, to be tapped and filled as needed?
Five years ago, the same notion got home-equity loans into trouble. Some borrowers used them wisely, but many loaded up debt to buy real estate, vacations and flat-screen TVs.
That risk-taking and indulgence amplified the housing crash and put more people underwater on their homes. The overhang continues to haunt the recovery today.
""From a cash standpoint, 401(k) loans make a lot of sense, assuming you can meet the commitment,"" says Rocky Farr, a financial planner at Diesslin & Associates in Fort Worth. ""But lower-paid employees could get in over their head.""
That doesn't happen a lot, at least not measured in defaults, which is what scares people most about this loan. Fail to pay it, and it's converted to a withdrawal, with taxes and penalties thrown in. Lose your job, and the loan must be repaid in full, usually within 90 days.
Bluestone adds that it is a natural progression for the employed to save more money because they are jittery about what the economic situation holds.
(Source: VisualEconomics.com/Star-Telegram.com)