More people are tapping their 401(k) for cash

Based on current savings rates, the center estimates that 43 percent of households risk not being able to fund the same standard of living during retirement as they have in their working years. That percentage increases to 49 percent for Americans between 36 and 43 whose main retirement plans are 401(k) accounts, not employer-funded pension plans like older generations.

Some plans don't allow workers to make contributions while making payments on loans. Others require workers to wait a set time before contributing again after taking a withdrawal. If the employer matches contributions, workers are taking a double hit.

"The idea of paying yourself back is not necessarily a plus," said Charlie Nelson, a senior vice president at Great-West Retirement Services. "For a loan, you're paying back using after-tax dollars, so generally, over time, you won't earn as much."

Great-West Retirement Services, the unit of a Colorado-based insurance company that manages 3.5 million accounts for employers, said hardship withdrawals jumped 14 percent last year, and the number of loans rose almost 13 percent, with a dramatic increase occurring in the fourth quarter.

Fidelity Investments, which jockeys with Vanguard Group as the nation's largest mutual fund provider, said it saw withdrawals surge 17 percent in 2007, with record withdrawals in December, but a smaller increase in loans. Vanguard saw no change.

"What we're talking about is people spending their retirement now and lowering their standard of living when they retire ... People aren't willing to make some of the tougher choices in the short-term to make a better future for themselves," said Stuart Ritter, a certified financial planner with T. Rowe Price.

In the last three decades, 401(k)s have replaced traditional pension plans as employers' preferred retirement offering, which has shifted the responsibility of saving to employees from employers. Only 32 percent of workers ages 36 to 43 have any coverage by a pension plan.

If Americans find they didn't save enough, they may have to work longer and shorten their "golden years" of retirement, Munnell said. Otherwise, workers will have to cut corners and settle for a frugal retirement.

Theresa Perry, who manages benefits for the firm PinkSlip LLC in San Francisco Bay, said she's been surprised by the number of people using hardship withdrawals to make payments on so-called "piggyback" loans, which are home-equity loans wrapped with a first mortgage to allow borrowers to fully finance a home's value.

"I've been doing benefits administration for 15 years and using 401(k)s to keep mortgage payments under control is new to me," Perry said. "They're not taking money out to purchase homes anymore. They're taking money out to keep the home they already have."

Ritter worries that unaffordable mortgages or other financial troubles will persist for many consumers, even after they have tapped retirement funds.

"That's not a smart strategy. You don't want to apply a short-term fix to a long-term issue," he said.

But for Americans who are struggling to keep afloat in a slumping economy, today's money problems are more urgent than a far-off retirement date.

Said Charlton: "We have to take care of ourselves now and put retirement on the back burner."

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