Plan for the retirement you want. Strategies for helping secure your future

Transcription

1 Plan for the retirement you want Strategies for helping secure your future

2 What s your vision for retirement? Laying the groundwork for tomorrow can help you get closer to the retirement you want. When you think of your ideal retirement, what does it look like? Does it include spending time with your family? Starting a new business? Pursuing your dreams, working on hobbies, or increasing your community involvement? All of the above? If so, you re not alone. Our definition of retirement is evolving, shifting from a few years of leisure when we no longer worked to a period of reinvention a Second Act that may last 20 to 40 years and likely will include work of some sort as well as leisure, family time and volunteer activities. 1 But if you re like many Americans, you may also worry about outliving your retirement income, are concerned about possible health problems and the corresponding costs, and anticipate offering financial assistance to other family members. 1 Much like any stage of life, retirement can offer both exciting opportunities and specific challenges. And it s no surprise that having a plan can help you get where you want to be in retirement. Putting some well-thought-out strategies in place now can help position you for the retirement you want. Navigating the path to retirement This guide offers resources and information to help you set your plan in motion: 1 Get started Evaluate your life priorities and fill in your financial picture. 4 Create a retirement income plan Work toward the retirement lifestyle you want. 8 Manage your wealth for the long run Tactics that can help you meet your needs through retirement. 1 Americans Perspectives on New Retirement Realities and the Longevity Bonus. Merrill Lynch/Age Wave (2013). Merrill Lynch makes available products and services offered by Merrill Lynch, Pierce, Fenner & Smith Incorporated (MLPF&S), a registered broker-dealer and member SIPC, and other subsidiaries of Bank of America Corporation (BofA Corp.). Investment products offered through MLPF&S and insurance and annuity products offered through Merrill Lynch Life Agency Inc.: Are Not FDIC Insured Are Not Bank Guaranteed May Lose Value Are Not Deposits Are Not Insured by Any Federal Government Agency Are Not a Condition to Any Banking Service or Activity

3 1 Finding the way forward The steps that follow from laying the groundwork to estimating your needs and filling in the financial picture can help you get started on your retirement strategy. Step 1: Start with a vision of your retirement It s easier to get where you re going if you know where you want to be. Consider how you want to live during retirement. What is important to you? What makes you happy? What do you love? What motivates you? Here are some common life priorities to get you thinking: Family and relationships with others Giving back, being a leader in your community or leaving a legacy Continuing to work, switching careers or starting a new business Remodeling your home, or purchasing a new or vacation home Leisure activities, pursuing your passions, and being creative Health, and intellectual and physical activities Once you have an idea of how you want your future to look, filling in the financial picture and establishing your goals can help you find the way forward from where you are now. Reality check Nearly 26% of all new businesses are started by people age 55 to Kauffman Index of Entrepreneurial Activity, Kauffman Foundation Family Giving Health Finances Work Leisure Home This graphic is for illustrative purposes only. Your personal view of these life priorities may differ, and you may place a greater or lesser significance on any one of these areas than shown.

4 2 Reality check Merrill Lynch suggests that you may need approximately 90% of your annual pre-retirement, after-tax income to maintain your current standard of living in retirement. Step 2: Estimate your retirement income needs No matter how you plan to spend your retirement or what stage of life you re in, figuring out how much income you think you ll need during retirement is key to creating a sound financial strategy and enjoying the retirement you picture. Only you can decide what amount is enough, but to help you find your answer, ask yourself: How much will you need to live on after you retire? For many people, typical costs may include: Basic necessities such as food, clothing and shelter for yourself, family members, and pets Household maintenance and utilities Health care, prescriptions and related expenses Insurance, such as health, home, auto and life Automobile and transportation expenses Leisure activities, such as dining out, hobbies, travel, etc. Taxes and inflation Miscellaneous and unexpected expenses After you ve looked at what it may cost you to live in retirement, the next step is to see if your anticipated retirement income and expected retirement savings will support your desired lifestyle.

5 3 Step 3: Fill in the financial picture A retirement that may last 20 years or more may give you more time to do what you want, but it also means your money will need to last longer, too. To help fill in your financial picture and pinpoint where you may need to make adjustments along the way, consider: How much retirement income could you have? Depending on your personal circumstances, possible sources of income may include: Income from full-time, part-time or temporary work Social Security benefits Annuities Pensions Other miscellaneous sources of income, such as rent or royalties How much have you already saved for retirement? Everyone s situation is different, but for many people, this may include: Bank accounts, such as savings, money markets or certificates of deposit (CDs) 401(k) accounts at current or former employers Traditional and/or Roth Individual Retirement Accounts (IRAs) Health savings accounts Equity you may have built up in your home or other property Other investments, such as individual stocks or bonds, mutual funds, Treasury bills, etc. How did your expected income and savings match up to your anticipated expenses? Were you right on target? Or did you find that you may want or need to put aside more than you are currently? Maybe there are some potential trade-offs you can make now that can help increase financial security later. For example, can you keep your automobile a few more years to avoid making car payments? Would you be willing to eat out less often to reach your financial goals faster? Are you still using those services you may have set up as recurring automatic payments, or is it time to re-evaluate? Using what you ve learned can help you map out your financial goals and a retirement income plan. Reality check Two-thirds of Americans are willing to spend less on themselves now (entertainment, vacations, eating out) in order to save more for retirement. Americans Perspectives on New Retirement Realities and the Longevity Bonus. Merrill Lynch/ Age Wave (2013).

6 4 Creating a retirement income plan A retirement plan can help you prepare to meet your expenses and manage your assets to last your lifetime and beyond. Consider your financial goals Thinking about your short-, intermediate- and long-term income needs and financial goals can help you map out your retirement plan. Here are some common financial goals and investing strategies to support them: Short-term goals, such as everyday living expenses Require liquidity and income. Intermediate-term goals, such as assets to last through retirement Allow for investments with the potential to generate both growth and income. Long-term goals, such as leaving a legacy May be achieved through a focus on growth investments. Where will your income come from? Reality check Nearly three-quarters (72%) of Americans say they want to keep working in retirement, whether full- or part-time, or cycling between work and leisure. Work in Retirement: Myths and Motivations, Merrill Lynch/Age Wave (June 2014). Now that you ve thought about your goals, knowing where your retirement income will come from can help you structure your strategy. Sources of income may range from work to Social Security, retirement accounts, health savings accounts, and guaranteed income streams such as pensions and annuities. Continuing to work during retirement Today, many people are planning to work during at least part of their retirement. Working longer can help you pay off debts, further fund your portfolio, or support extra expenses and fun splurges. It may also allow you to delay tapping into your retirement savings until much later. But many people are planning to work during retirement for stimulation, satisfaction and social connections, too. In fact, these factors were nearly as important as income to Americans when asked what their top reason is for planning to work during retirement. And while pre-retirees think they ll miss the additional income the most when they stop working, those who have already retired said that what they actually miss most is their workplace friendships. 1 1 Americans Perspectives on New Retirement Realities and the Longevity Bonus. Merrill Lynch/Age Wave (2013).

7 5 Maximizing your Social Security benefits If you re eligible for Social Security benefits, you ll want to factor those payments into your income retirement plan. First, you ll need to decide when to begin your benefits. Early benefits are available at age 62, full benefits are available between ages 65 and 67, depending on when you were born, and delayed benefits peak at age 70. When you re considering which option to choose, think about your income needs, your health and family longevity, and also your spousal benefits (if you re married, divorced or widowed). If you start collecting at your earliest eligible age, the payment amount will be reduced. If you continue working, or have other income such as from a retirement account and your total income exceeds certain limits established by Social Security, you may have to pay income tax on your Social Security benefits. To get an estimate of your benefits, visit the Social Security website at Retirement milestones Retirement has many milestones. The most common are shown here. Age 50 Additional catch-up contributions can be made to qualified retirement accounts Age 59½ Withdrawals from most retirement accounts without a 10% additional federal tax (in addition to ordinary income tax) Age 62 Eligible age for reduced Social Security benefits Age 67 Full Retirement Age for those born in 1960 or after Potential Years in Retirement Age 55 Withdrawals from 401(k)s and 403(b)s if separated from service without a 10% additional federal tax (in addition to ordinary income tax) Age 60 Eligible age for Social Security survivor benefits even if divorced (must have been married 10 years) Age 65 Eligible age for Medicare, even if still working Age 78 Average U.S. life expectancy 2 2 Source: The Society of Actuaries, Life Expectancy Calculator Individual Annuitant Mortality tables with no mortality improvement

8 6 Taking advantage of retirement accounts Employer-sponsored plans such as 401(k) plans and traditional and Roth IRAs are tax-advantaged investment instruments that can help you increase your potential retirement wealth while offering tax-deferred or tax-free compounding. Since taxes are handled differently depending on the type of account, understanding which tax laws apply can help you plan ahead and take full advantage of these retirement accounts and the income they can provide during retirement. Please consult a tax advisor for assistance with your personal situation. Traditional IRAs and pre-tax contributions These investment vehicles can reduce your current income taxes, since taxes are delayed until you withdraw the money. Generally speaking, at age 59½ you can start making withdrawals from traditional IRAs and from your retirement plan if you made pre-tax contributions, without being required to pay a 10% additional federal tax. Ordinary income tax still applies. Required Minimum Distributions (RMDs) typically must begin in the year you turn 70½, although you can delay your first distribution until April 1 of the following year. Roth IRAs and Roth after-tax contributions If you expect taxes to go up in the future or if you expect to be in a higher tax bracket in retirement, a Roth IRA or Roth 401(k) contributions (if offered through your employer s retirement plan) may be right for you. With a Roth account, you pay taxes now at your current income tax rate. Qualified withdrawals in retirement on your assets and any earnings are then tax-free with certain restrictions. 3 Qualified withdrawals from these accounts don t affect the taxability of your Social Security benefits. RMD rules don t apply to Roth IRAs but do apply to Roth 401(k). Making catch-up contributions If you are age 50 or older and participate in a retirement plan or contribute to a traditional IRA, you may be able to make catch-up contributions. These contributions are designed to help you contribute more for retirement as it approaches. To be eligible for catch-up contributions, you must contribute the maximum amount allowed to your retirement plan or IRA. After that point, you can contribute an additional amount, as determined by limits set by the IRS. 3 Any earnings can generally be withdrawn tax-free if you meet the two requirements for a qualified distribution : (1) At least five years must have elapsed from the year of your initial contribution (or opened the account, in the case of a Roth IRA), and (2) you must have reached age 59½ or become disabled or deceased (or if a Roth IRA, also for a first-time home purchase, up to a lifetime cap of $10,000). If you take a non-qualified withdrawal, any Roth 401(k) investment returns are subject to regular income taxes, plus a possible 10% additional federal tax if withdrawn before age 59½.

9 7 Is it guaranteed or non-guaranteed income? Most retirement accounts are considered non-guaranteed income because if and when the funds are fully withdrawn, there will be no more income from those accounts. Guaranteed income generally involves sources that continue to pay you for the rest of your life no matter how long you live. Social Security, pensions and annuities are expected to be guaranteed, based on the paying ability of the respective supporting entity. If you re concerned about your non-guaranteed income lasting long enough, you may want to consider purchasing a guaranteed income product, such as an annuity, to fill the gap. An annuity can provide some sense of security with a guaranteed income stream to meet everyday, fixed expenses. 4 Setting up a Health Savings Account (HSA) At age 65, you will be eligible for Medicare, even if you re still working. Since Medicare might not be adequate to cover all of your health care expenses after you retire, you may decide to explore other options for covering your anticipated needs. If you re under age 65 and enrolled in a high-deductible medical plan, you could consider opening a Health Savings Account (HSA) if your state allows it. An HSA is a way to save money to help pay for qualified medical expenses, such as visits to the doctor, prescriptions and eyeglasses, to name just a few examples. Your employer may offer an HSA, but if not, you can open an individual HSA at any time with a bank or other qualified institution if you satisfy certain conditions. For more information on qualified withdrawals from an HSA, please consult your health care, legal or tax advisor. Reality check When asked what their biggest financial worries are for retirement, Americans said health care expenses topped the list. Americans Perspectives on New Retirement Realities and the Longevity Bonus. Merrill Lynch/ Age Wave (2013). 4 An annuity is a contract or agreement in which a client makes payments to an insurance company, which, in turn, agrees to pay out an income stream or a lump sum amount at a future date. Variable annuities are long-term investments designed for retirement. Investment return and principal value of an investment will fluctuate and your investment may be worth more or less than the original cost. Withdrawals or surrenders may be subject to contingent deferred sales charges (CDSC). Withdrawals and distributions of taxable amounts are subject to ordinary income tax and, if made prior to age 59½, may be subject to a 10% additional federal tax (in addition to ordinary income tax). Withdrawals reduce the living benefit, death benefit and account value. All annuity contract and rider guarantees, optional benefits and any fixed subaccount crediting rates or annuity payout rates, are backed by the claims-paying ability of the issuing insurance company. They are not backed by Merrill Lynch or its affiliates, nor does Merrill Lynch or its affiliates make any representations or guarantees regarding the claims-paying ability of the issuing insurance company.

10 8 Managing your resources to last Beyond a retirement income plan, there are things you can do now to potentially extend the life of your retirement wealth, from keeping tabs on your investment strategy to planning your legacy. Invest to meet your needs throughout retirement While your chief concern may be preserving your retirement wealth as you move closer to retirement, investing too conservatively can also be risky. For example, if your portfolio fails to grow enough before you retire, you may not reach your income goals, and if your portfolio fails to grow after you retire, you may not be able to lead the lifestyle you want. Keeping tabs on your investment strategy can help you make any needed adjustments to your retirement income plan if your personal or financial situation changes. Using some or all of these methods could help keep your plan on track: Find the appropriate asset mix for your goals, timetable and risk tolerance Keep your accounts diversified to help protect against market volatility Consider whether your investment choices are likely to keep up with inflation Rebalance your accounts regularly Review your strategy at least once a year as you approach retirement While asset allocation, diversification and rebalancing don t ensure a profit or protect against loss, they can be effective strategies for managing investment risk. Manage any liabilities Preparing to meet unexpected costs and keeping expenses under control can have a positive impact on your future, too. To help manage your liabilities, you may want to try some or all of these tactics: Become more aware of day-to-day cash flow and expenses Create a retirement budget and try sticking with it for a month or two to see if it works for you Pay down debt, especially high-interest debt Consider health care options, including long-term care insurance or help from family members 5,6 Set up an emergency cash fund to protect long-term investments Have credit in place before you need it, such as a home-equity line of credit If possible, avoid early withdrawals from your retirement accounts Taking early withdrawals from qualified retirement accounts can be expensive. If you withdraw funds before the age of 59½, you may be required to pay a 10% additional federal tax in addition to ordinary income tax. And, you re not only reducing the amount of money you ll have available for retirement, but decreasing the potential for growth on those assets. Of course, you may need to consider withdrawals for emergencies or other expenses, but hopefully withdrawing these assets can be a last resort. You may also want to speak with a tax professional to learn more about the potential implications before making an early withdrawal. 5 All guarantees and benefits of an insurance policy are backed by the claims-paying ability of the issuing insurance company. They are not backed by Merrill Lynch or its affiliates, nor does Merrill Lynch or its affiliates make any representations or guarantees regarding the claims-paying ability of the issuing insurance company. 6 Long-term care insurance coverage contains benefits, exclusions, limitations, eligibility requirements and specific terms and conditions under which the insurance coverage may be continued in force or discontinued. Not all insurance policies and types of coverage may be available in your state.

11 9 Consider consolidating your assets If you have several different retirement accounts, including multiple IRAs or accounts with previous employers, consolidating them into a single retirement account can make it easier to keep track of your money, track your progress and calculate RMDs in retirement. 7 When you retire, or separate from service, you have choices for what to do with your 401(k) account. You may be able to roll it over to an IRA, roll over an old 401(k) to a 401(k) at a new employer, take a distribution from the account, or leave the account where it is (depending upon your account balance). Each choice offers advantages and disadvantages, depending on your desired investment options and services, fees and expenses, withdrawal options, RMDs, tax treatment, protection from creditors and legal judgments. These are complex choices and should be considered carefully. You may want to seek professional guidance from your tax, legal and financial advisors before taking action. Leave a legacy If you re thinking about leaving some of your retirement assets to your heirs, there are a number of options you could consider. One is to stretch an IRA, which lets you pass the IRA from generation to generation, so your beneficiaries continue to benefit from the tax-advantaged status of the IRA. Another option is a trusteed IRA, which provides more control over the distribution of assets. And reviewing your beneficiary information regularly can help ensure it s up-to-date. Without a designated beneficiary, your retirement assets could revert to your estate and potentially be subject to probate, leaving a court to decide how to distribute them rather than following the plan you ve so carefully developed. Stretching an IRA for your heirs 8 Year 1: Chris, age 54 Chris rolls over $400,000 from an employer s retirement account into an IRA and names his spouse, Pat (age 48) as beneficiary. $4.5 $4.0 Year 17: Chris, age 70½ Chris begins taking RMDs. Year 32: Chris, age 85 Chris dies. The original rollover has grown to more than $1 million. Pat rolls over the IRA as her own, and continues RMDs based on her life expectancy. She designates her son, Bob, as the new beneficiary. Year 42: Pat, age 89 Pat dies. Bob, now age 60, continues RMDs based on his life expectancy. Year 67: Bob, age 85 IRA assets are depleted. Total distributions throughout the life of the account equal $4,320,480. $4,320,480 Amounts in Millions $3.5 $3.0 $2.5 $2.0 $1.5 $1.0 $0.5 $0 $400, Life of the IRA in Years Account Balance Total Distributed 7 Diversification does not ensure a profit or protect against loss. 8 The hypothetical example is illustrative only. It assumes a 6% annual return, that the account owner rolls over the account on Jan. 1 of the year he or she receives the assets, that all distributions are taken on the last day of each distribution year and that all distributions are the required minimum amount. These amounts are not adjusted for inflation and do not reflect any state or federal income tax that may be due upon distribution. This chart does not reflect past or future performance of any specific investment vehicle. It also does not reflect the volatility that can occur in an equity-based account and assumes current tax laws remain in effect throughout. This information is based on our understanding of current tax laws, which are subject to change.

12 Questions? We can help with the answers. The transition to retirement requires preparation and careful planning to address the complex issues that may affect your financial security. If you have questions about the transition to retirement, Retirement Education Specialists are available to assist, without any obligation and at no cost to you. If you re eligible, a Retirement Education Specialist will put you in touch with a Merrill Lynch financial advisor, who can help you put the pieces in place for the retirement you want. Working with you and your other advisors, your financial advisor will take the time to understand your needs and goals. He or she can help you determine strategies to help maximize savings during peak earning years, design an income strategy for retirement and determine how to manage your assets throughout retirement Merrill Lynch Retirement Education Specialists are available Monday through Friday, 8 a.m. to 7 p.m. Eastern. Online resources for you Take advantage of these online resources from Merrill Lynch to help with your retirement planning. Benefits OnLine Education Center Make smart, informed financial decisions with the help of articles, videos, calculators and planning tools. Budget & Savings Calculator See how small changes to today s spending habits may really add up for retirement. go.ml.com/calc myfuture Get practical investment guidance and financial tips from this quarterly online newsletter. Merrill Lynch and its financial advisors do not provide tax, accounting or legal advice. Please consult your own independent tax or legal advisor as to any tax, accounting or legal statements made herein. Variable annuities are sold by prospectus only. Before investing, investors should carefully consider the investment objectives, risks, charges and expenses of the variable annuity and its underlying investment options. The current contract prospectus and underlying fund prospectuses provide this and other important information. You should read the prospectuses carefully before investing or sending money. Please contact your financial advisor to obtain the prospectuses. Merrill Lynch Life Agency Inc. is a licensed insurance agency and a wholly owned subsidiary of Bank of America. Benefits OnLine is a registered trademark of Bank of America Corporation Bank of America Corporation. All rights reserved. ARQ3BCGJ B /2015 ADA