07/11/2013 10:47 am ET Updated Sep 10, 2013

Retirement Recovery After Tapping That Nest Egg Early

In August, employees are most likely to take early withdrawals and loans from their defined contribution plans according to the ING U.S. Retirement In Review customer study. There are many reasons why you might need to tap your retirement savings during your working years -- college funding (which could explain the August uptick), a health emergency, job loss, unexpected bills -- even though you know this strategy is not an ideal solution to financial troubles.

Why is taking money early from your retirement plan not ideal? First, Americans are already not saving enough for their retirements. In fact, the new National Institute on Retirement Security Retirement Savings Crisis study shows the dire state of most Americans retirement savings, with a median retirement account balance of $3,000 for all working-age households and $12,000 for near-retirement households. In addition, the 2012 ING U.S. Redefining Retirement Readiness study found that nearly half (45 percent) of individuals with annual household income of $40,000 or more are not confident that they can save enough for retirement. Withdrawing retirement funds prematurely can only further delay or alter an already-tenuous retirement.

Second, by withdrawing funds early, you miss out on the potential growth of that money. The withdrawn funds sit on the sidelines. With a loan, you may not be able to contribute much beyond paying back the loan, which creates a double negative financial impact. As opposed to loans, early hardship withdrawals are permanent and subject to a 10 percent tax penalty in addition to income tax if you are under the age of 59½. If you must withdraw from retirement accounts, opt for a loan rather than a hardship withdrawal as long as you have a loan option in your retirement plan. A loan allows an employee to pay back the funds and is not a taxable event*. Fortunately, individuals are twice as likely to take loans as hardship withdrawals. Plus, the percent of individuals' taking loans is, on average, less than 1 percent of the total, according to ING U.S. customer research.

There are situations where you are left with no other choice but to take a loan or withdraw retirement savings. Perhaps a health emergency or job loss makes it unavoidable. If you've looked at all possible options and tapping your retirement savings is your last resort, here are some steps to take to get back on track.

1. Run the numbers on how much you need to contribute to get back to where you started in the shortest amount of time (loans must generally be paid back within five years, but if you change employment, loans typically need to be paid back in 60 to 90 days to avoid taxes and penalties). Use that figure as the bare minimum amount to contribute into your retirement plan. If possible, try to go beyond that amount to more quickly get your account out of the red.

2. Look at your budget very closely and re-think expenses, prioritizing retirement savings over non-essentials such as vacations, takeout or cable TV. Even doing this budget trimming for a set period of time can help with your retirement recovery.

3. If you are 50 or older, take advantage of catch-up contributions. In 2013, you can put away an additional5,500 in catch-up contributions beyond the17,500 retirement plan contribution limit.

4. Re-think your retirement plan. You may need to work longer than you had planned or maintain some part-time employment in retirement to supplement your income. These days, there is no one-size-fits-all approach to retirement. Many retirees, whether intentionally or not, are redefining what it means to retire.

5. Consult with a financial planner who can help talk though your situation, options and design a new financial roadmap that gets you over the bumps in the road and to a secure retirement.

No matter where you are on the road to retirement and what setbacks you've had, it's all about how you recover and where you go from today forward.

*Neither ING Financial Partners nor its representatives offer tax or legal advice. Please consult with your tax and legal advisors regarding your individual situation.

ING Retirement Coach Jacob Gold is a third generation financial advisor. He is a published author of "Financial Intelligence; Getting Back to Basics after an Economic Meltdown", which was published in August 2009. Gold is a CERTIFIED FINANCIAL PLANNER™ practitioner and FINRA Series 7, 24 and 66 securities registered.

Jacob Gold & Associates, Inc. is not a subsidiary of nor controlled by ING Financial Partners, Inc. Securities and investment advisory services offered through ING Financial Partners, members SIPC.