Managing your retirement portfolio in uncertain times

Emily Hill, Bowersock Capital Advisors Founding Partner, joins Yahoo Finance Live to share some alternatives to having a traditional pension and discuss how COVID-19 is impacting her clients' retirement portfolios.

Video transcript

BRIAN SOZZI: The market may be looking a little shaky this month, but it has enjoyed a pretty solid 2021 thus far. So should you be making any changes to how you plan for retirement given the bid under stocks? Emily Bowersock Hill is the founding partner at Bowersock Capital Advisors and joins us right now. Emily, good to see you on this Thursday morning. Look, so the market has enjoyed a really strong 2021. Things are getting a little shaky here right now. If one is nearing retirement, how should they be planning right now?

EMILY HILL: Well, in our view, the market has captured about five to six years of returns in one year. So while we aren't necessarily expecting a serious correction, I do think we have to be modest about our expectations for returns to especially US stocks in the future. So for people who are planning for retirement, and especially are close to retirement, we're suggesting taking profits and rigorously rebalancing portfolios, and also making sure you have enough of a cash cushion so that-- and by that, I mean, you know, if you do not have a pension, you know, two to three years of living expenses so that you will be in a position to ride out a major correction or bear market when those finally occur.

- What's the number one concern that your clients have been bringing up to you recently? And what have you been telling them in order to position for this kind of risk?

EMILY HILL: You know, I think people generally are-- you know, unlike back in 2007 when I think there was a lot of optimism about market appreciation continuing, my clients are generally skeptical. And there are and they're sort of astounded that the market has continued to rise. So I don't have a hard time talking people into rebalancing their portfolios. I don't see a huge amount of greed out there.

BRIAN SOZZI: Emily, are you starting to get a lot more questions now on how high net-- from high net worth households about the threat of higher taxes? And what should they be doing if they are concerned about higher taxes?

EMILY HILL: You know, it's been very interesting to watch. And I think it's hard to tell at this point what's going to come out of Congress. I do think that now, especially for high net worth clients, is a time to be thinking about, you know, what would the implications be for a drop in the exemption amount? Which I think is possible to happen.

I think it's looking less likely that the step up in basis is going to be eliminated. And I do think, yes, I'm getting a lot of questions about it. Really, we knew something like this was in the works, so people should have been talking about this for the last year. So most of our clients who are in a situation where they need to take action are, you know, prepared to do so pretty quickly.

- Emily, one of the things you pointed out in a note is that, you know, fewer and fewer clients actually have a pension that they can rely on for retirement. And at Bowersock, one of your goals is to create a portfolio that acts like a type of a pension. And I'm wondering how would one go about doing that on their own? And what's the benefit of structuring a portfolio in that way?

EMILY HILL: So very good question. You know, it used to be 20 25 years ago that a pretty large percentage of the American public had a pension in addition to Social Security that they could rely on. You know, those were the days when you'd work for General Motors for, you know, 25 or 30 years, and then a substantial amount of your retirement spending was predictable and, you know, and at least reliable.

Fewer and fewer people have that. There's still some really high-end law firms that provide a predictable pension and some companies do that. But one of the things we try to do for those people who no longer have a pension-- and, you know, companies in general have tried to move the risk onto their employees by using. you know, instead of a defined benefit plan or a pension plan, you having a 401k plan instead.

So, you know, that obviously can allow for a lot of growth, but you can't be certain that at age 65 you are going to have X number of dollars of an income stream coming in. So how do we address that for the majority of people that don't have a pension? It used to be that you could provide that relatively predictable cash flow by using fixed income. You know, CDs tax-free bonds, investment grade corporate bonds. But, you know, as you've seen, interest rates have plunged to such an extent that you basically cannot make-- you know, you're going to get a negative real return in bonds over the next five years. So you can't rely on that income stream.

So what we encourage our clients to do is to come up with a pension alternative. And there are a number of options for that. You know, my first choice is typically a private investment. Many of these, unfortunately, are only available for qualified purchasers. Which is a qualified purchaser is someone with $5 million in excess of their personal-- of their primary residence. And that would be a private lending fund, private real estate fund, an infrastructure fund.

If you are in the category where that is possible, you know, there are options like owning rental real estate in a stable real estate market where you have a different kind of cash flow. It's basically cash flow diversification. Leased farm ground would be another example. One option is annuities. Those tend to be quite complex and expensive. And so it's usually not my first choice. But in some cases, it can make-- they can make a lot of sense.

BRIAN SOZZI: Sure. Well, it sounds like this millennial will be working to the age of 100. No pension plan here. We'll leave it there. Emily Bowersock Hill, founding partner at Bowersock Capital Advisors. Appreciate the insights this morning.