Here’s a pretty simple solution for illustrator. If you want to cut blurred holes into objects or even into live(still changeable text):
1) Just draw the shapes of the holes where you’d like them to be. They must be over the text you wish to cut them into.
2) Then select these objects and use the soft-edge tool(in the Effects palette). and soften these as you like.
3) Next, select both the `holes´ and text below them.
4) While both `holes´ and text are still selected, go to the transparency palette, click on the tiny arrow on the upper-right corner and select clipping path.
Your should now have blurred openings in your text. You could even scan in a weathered texture jpg, convert it to vectors, delete the white and use the remaing black weathered texture as your blurred mask.
This is a CS4 Illustrator method so there’s probably even more comfortable versions of this solution in the higher versions