Will a recession hit in 2023? At this point, things could really go either way. In 2022, the Federal Reserve doubled down on interest rate hikes, raising rates aggressively in an attempt to slow the pace of inflation. And the Fed isn't done raising rates, either.
In fact, in late November, Federal Reserve Chair Jerome Powell said that the central bank is looking to get inflation back down into the 2% range. And the only way to get there in an expedited fashion is to keep forging forward with rate hikes.
Image source: Getty Images.
Those rate hikes, however, could cause a major pullback in consumer spending. That has the potential to batter stocks across a range of industries -- notably retail and hospitality. It could also drive the economy into recession territory, leading to a notable uptick in unemployment.
But that may not happen. In December, the Consumer Price Index rose 6.5% annually. That represents a much slower pace than what we saw in November. And if that trend continues, the Fed might back down on rate hikes after all.
Without a crystal ball, however, we can't predict what will happen. So it's best to brace for a potential recession in 2023. But should you keep up your retirement savings efforts if economic conditions worsen, or should you take a break? Well, it depends.
Put your near-term needs ahead of retirement
The importance of saving well for retirement cannot be emphasized enough. Seniors who retire mostly or solely on Social Security often wind up cash-strapped. So it's essential to have additional income sources to tap, and funds in an IRA or 401(k) plan can serve that purpose.
But while you may be of the mindset that retirement savings deserve priority in your budget, the reality is that, sometimes, long-term goals have to be pushed aside to cope with economic circumstances. And if things worsen in 2023, you may reach a point where you have to cut back on IRA or 401(k) contributions to focus on shoring up your near-term savings instead.
In fact, if at this very moment, you don't have enough money in a regular savings account to cover three full months of essential bills, do not put another dime into your IRA or 401(k). Instead, pump more money into your emergency fund so that if economic conditions worsen and your job ends up on the chopping block, you'll have a means of paying your bills without resorting to debt.
It's all about priorities
Saving for retirement is important, but your near-term financial needs must come first. Period. So if economic conditions worsen and your wages are cut or you grow increasingly worried about losing your job, it's really OK to temporarily reduce your IRA or 401(k) contributions -- or even stop making them, period.
There's a lot of pressure to save for retirement due largely to Social Security potentially looking at benefit cuts in the not-so-distant future. But that doesn't mean hitting pause on your IRA or 401(k) contributions is unacceptable if the circumstances warrant it. Telling yourself that could help you get through a recession more easily if that scenario comes to be.
