Stop Treating Your Retirement Account Like a Piggy Bank

With Social Security and Medicare facing long-term threats to their fiscal health, and company pensions going the way of the dodo, you know how important it is to set money aside for your retirement.

Unfortunately, when it comes to building a nest egg for their golden years, millions of Americans are moving in the wrong direction by taking money out of retirement accounts early rather than letting them build up throughout their careers.

Raiding Your Retirement to Spend Now

A new study from HelloWallet found that more than a quarter of households that have access to a 401(k) or other defined contribution retirement plan at work have had to take money out of those accounts, either through loans or by outright withdrawals, in order to cover other types of expenses.

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The numbers are even higher for those in their 40s, where about a third of workers have dipped into their retirement funds to cover current expenses like mortgage payments, credit-card bills, and college expenses.

The numbers point to a continuing tug of war between employers and workers. On one hand, employers use 401(k) plans in order to encourage retirement savings, with many workers seeing the plans as a valuable employee benefit. Although hundreds of major employers have discontinued or scaled back on traditional pension plans, most have kept at least some commitment to worker retirement prospects by making employer matches or profit-sharing contributions to supplement the money that workers contribute from their own paychecks.

Yet on the other hand, in tough times, workers are clearly communicating that they don't value the retirement contributions their employers make as much as they would outright increases in regular pay.

With more than 9 percent of taxpayers in 2010 having voluntarily paid the IRS penalty of 10 percent for early withdrawals from retirement plan accounts, many workers are willing to take a significant haircut just to get the use of their money sooner rather than later.

Are Stagnant Wages to Blame?

Financial experts emphasize how important it is to treat retirement money as untouchable for current expenses.

The typical household with workers near retirement age has only about $120,000 in retirement assets, showing that, on average, Americans' current savings practices have little chance of yielding enough to provide more than a modest supplement to Social Security. If you convert a $120,000 nest egg to an annuity paying guaranteed monthly benefits for life, it would only pay out about $600 per month.

It's essential for people to understand that the seemingly huge sum required to retire is meant to cover what could be 30 years or more of life after work. Yet exercising the continuous discipline required to reach such a number is naturally hard during tough economic times.

As Chuck Epstein, author of How 401(k) Fees Destroy Wealth, points out in a recent blog post, while wages have risen in dollar terms over the years, their true purchasing power has largely stayed flat since the 1970s. Indeed, after peaking in 1972, weekly earnings adjusted for inflation fell more than 20 percent in the ensuing 20 years, and even in 2011, they were still almost 15 percent below their peak levels from nearly four decades before.

Because households include more working couples now than they did in the 1970s, household income hasn't been quite as flat as wages of individual workers. Nevertheless, with many important expenses having risen at a much faster pace than inflation, workers who've had to get through recent years with layoffs and wage cuts or freezes haven't had much capacity to keep retirement savings steady, let alone have them keep pace with rising costs.

Be Smart

There are some workers who truly have no choice but to use 401(k) loans or withdrawals to make ends meet. Many, though, are raiding their 401(k) in order to maintain a certain lifestyle that requires them to keep spending at an unsustainable pace, sacrificing their financial future for unnecessary current luxuries.

Instead of treating 401(k) accounts like a piggy bank to be tapped on a whim, you'll be far better off doing everything you can to cut back on expenses and set up an outside savings account for financial emergencies. As difficult as that may be, it's a far better outcome than spending your retirement in poverty.

Motley Fool contributor Dan Caplinger hopes to leave his retirement money untouched until he retires. You can follow him on Twitter @DanCaplinger.