Retirement savings get raided by 35% of laid-off workers

— -- The number of displaced workers has risen dramatically since the start of the Great Recession, and this year a third of them had to raid retirement savings to make ends meet.

Making matters worse, many who have lost their jobs have defaulted on 401(k) loans, causing taxes and penalties to further deplete their retirement savings.

"Of greatest concern are those who are in their 40s and 50s," says Catherine Collinson, president of Transamerica Center for Retirement Studies, which released a study today on the retirement outlook of the unemployed and underemployed.

Long-term unemployment for older workers has risen substantially, the U.S. Government Accountability Office says. Last year, 55% of unemployed workers age 55 and older had been seeking a job for more than six months.

Older Americans are hit hard two ways. "It is more difficult for them to find employment," Collinson says. "And they have less time to build or rebuild their retirement savings."

Displaced workers in their 40s and 50s have median household retirement savings of only $2,300, the Transamerica study says.

Unemployed and underemployed workers of all ages are under financial stress. And three in 10 do not have health insurance, the study found.

As financial problems mount, many displaced workers are tapping their savings. This year, 35% have taken money from their retirement savings.

During the recession, more workers took loans from their 401(k)s to help them keep up with daily living expenses and unexpected bills. But as the unemployment rate increased and then remained high, the rate of 401(k) loan defaults went up.

"That is the worst possible time, when someone who has lost their job is told that if they don't pay back the loan in full in 60 days, their account will be debited," says Hal Singer, managing director at Navigant Economics, a co-author of another report on defaults released this week. For example, if a displaced worker defaults on a loan of $6,542, it would drain $9,934 from his retirement savings, because of taxes and penalties, Singer's report says.

To protect retirement savings, the report suggests that when employees borrow against their 401(k) plan, employers should offer them the option to sign up for loan protection insurance in case they lose their jobs and are no longer able to repay the 401(k) loan. Singer says it's like getting mortgage insurance.

Displaced workers may feel discouraged. "But they should leave no stone unturned to help improve their outlook," such as going back to school or moving to a less-expensive city, Collinson says. And they should remember that their 401(k) account is one of the few assets that are protected in the event of bankruptcy.