Chief Investment Office SUMMER Categorized Assets. Understanding your life Your financial strategy Staying on track

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1 A Path to Retirement Success Chief Investment Office SUMMER 2017 Many Americans are aware that it s important to save and accumulate assets in preparation for retirement. However, until the actual transition into retirement, most don t realize how challenging it can be to manage those accumulated assets to fund their desired lifestyles, cover their health care needs and leave the bequest they desire. The financial services industry has responded to this challenge with income-based approaches to retirement. But managing stable income flow, while crucial, may not be enough to meet the numerous challenges retirees face. Merrill Lynch s approach helps guide you into and through your retirement years by defining specific goals and taking systematic steps to achieve them. The approach builds on Merrill Lynch s proprietary Goals-Based Wealth Management (GBWM) process, which combines behavioral insights with robust investment analytics to provide guidance designed to help you achieve your retirement goals. This paper presents our GBWM approach to meeting the retirement challenge. A companion paper, In Practice: A Path to Retirement Success, goes through an illustrative case study. RETIREES FACE MAJOR CHALLENGES Over the next two decades, more than 10,000 baby boomers will retire each day resulting in more than 76 million new retirees. 1 This demographic surge along with market volatility, record low bond yields, fading traditional pensions and waning confidence in Social Security means that past approaches to investing for retirement may no longer suffice. Anil Suri Managing Director, Chief Investment Office Key Implications Nevenka Vrdoljak Director, Chief Investment Office Our approach helps clients work with their Advisors to define and position to achieve success in retirement. Designed for investors approaching or in retirement, it leverages Merrill Lynch s Goals- Based Wealth Management process to help clients systematically pursue their retirement goals. CLIENT FOCUSED Combines proprietary financial and behavioral assessments. Your Advisor can use these inputs to provide guidance that suits your unique financial and behavioral makeup. GOALS DRIVEN Helps protect you from critical retirement risks while achieving fundamental retirement goals: helping make your money last in retirement; covering potential long-term care costs; pursuing your passions and interests; and securing a legacy that lasts beyond your lifetime. OBJECTIVE SOLUTIONS Allows you to draw from a broad range of strategies and solutions. Goals Categorized Assets Portfolio Strategy Understanding your life Your financial strategy Staying on track Learn about your priorities, investment personality and resources. Defining and prioritizing your goals, including how much risk you re willing to take on, will help your advisor recommend an appropriate financial strategy and can help you feel confident that the recommendation is aligned with what you want to achieve. 1 Kelvin Pollard and Paola Scommegna, Just How Many Baby Boomers Are There? Population Reference Bureau, April As your life and the markets change, your advisor can help you track progress toward reaching your goals and revisit your financial strategy. Merrill Lynch Wealth Management 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 Merrill Lynch Life Agency Inc. is a licensed insurance agency and a wholly owned subsidiary of BofA Corp Bank of America Corporation. All rights reserved.

2 Traditional asset allocation methods suitable for wealth accumulation may not sufficiently address the critical risks retirees face. These include rising health care costs, longevity risk, sequence of returns risk and inflation risk. Health care costs loom particularly large for retirees. As people age, spending on health care rises. At some point, many retirees will require long-term care, which can severely drain the resources of all but the most affluent. Longevity risk is the risk of outliving one s wealth. People commonly underestimate their life expectancy when planning financially, elevating this risk. In fact, when asked to estimate how long the average person of their gender and age can expect to live, four in ten retirees underestimate by five years or more. Only one in seven similarly overestimates his or her life expectancy. 2 Sequence of returns risk refers to the risk of financial markets performing dismally in the years just before or after retirement. For example, many who intended to retire around 2008 were forced to change their plans due to poor investment performance. Inflation risk threatens everyone, but affects retirees in particular. Wages tend to rise with prices over time, insulating most workers from inflation risk. Retirees, by contrast, often rely on sources of income that do not grow with inflation. When not properly managed, these risks can undermine your retirement success. By taking measured steps aligned with your specific retirement goals, you can better protect yourself from these risks. GOALS-BASED WEALTH MANAGEMENT HELPS MEET THE RETIREMENT CHALLENGE The Goals-Based Wealth Management (GBWM) process provides advice and guidance for people in or near retirement that reflects their needs, goals and resources. GBWM offers you a consistent, analytically robust process designed to: obtain a deep understanding of your goals and priorities; develop solutions tailored to achieve unique goals; and course-correct along the way. GBWM is based on three key principles: Wealth should be managed to achieve outcomes that are personally meaningful to you. The approach chosen to manage wealth should suit your unique Investment Personality and circumstances. The chosen approach should strive to achieve your goals with the most efficient use of resources. PURSUING RETIREMENT GOALS Recent research reveals a remarkable uniformity in investors goals as they approach retirement. Roughly two in three preretirees expressed concerns about: Health care costs Depleting their savings Maintaining a reasonable standard of living Many also wish to leave an inheritance. 3 An allocation of retirement resources helps you define and achieve success in retirement. It reflects proprietary behavioral and financial assessments that can help uncover your distinct financial goals and attitudes toward investments and risks. You work through the GBWM process to create an allocation of retirement resources to help meet key financial goals in retirement. The process begins by having a conversation with an Advisor regarding your priorities and goals. You and your Advisor then develop a strategy that reflects these goals. With this in place, you work together over time to make ongoing course corrections and continued progress toward your retirement goals. While most appropriate for clients who are in or near retirement., this approach can also offer retirement-related insights to other clients. UNDERSTANDING YOUR LIFE ASSESS SITUATION Merrill Lynch has, through focus group research, identified seven life priorities that represent areas of concern and opportunity for clients transitioning to or living in retirement (Figure 1, on the next page). The process begins with an assessment, which includes a behavioral profile as well as demographic and financial information. Investment Personality Assessment Merrill Lynch offers a structured method to determine a client s Investment Personality. This helps the Advisor and the client jointly tailor a unique strategy best suited to achieving his or her goals. 4 Based on behavioral finance research, an Investment Personality has three primary components: the investor s Mindset toward risk, Approach to investing and Purpose for investing. The Investment Personality Assessment provides unique insights into your feelings about risk and loss. Understanding how market swings might influence your decision-making helps you create an investment approach to achieving retirement goals while staying within your comfort zone. 2 Society of Actuaries, 2015 Risks and Process of Retirement Survey, June Ibid 4 Anil Suri, Innovations in Behavioral Finance: How to Assess Your Investment Personality, Merrill Lynch Wealth Management, Spring A Path to Retirement Success 2

3 Figure 1: Seven Life Priorities Family Giving Recognizing that a retiree s essential spending requirements will grow over time with inflation, the Advisor and client identify an approach that can address both inflation and longevity risk. GOAL 2: Cover my potential long-term care costs Long-term care expenses are of particular concern because they can potentially drain your wealth. 5 By one estimate, at least 70% of people over 65 will at some point need long-term care. 6 Some will rely on family to provide this care, but many prefer to fund it themselves. Health Finances Work In light of these factors, it can be very important to consider contingencies related to potential health challenges when setting the parameters for seeking potential solutions. Leisure Home Source: Merrill Lynch Wealth Management Financial Assessment In addition to an Investment Personality Assessment, an Advisor works with you to complete a financial assessment that examines your resources, spending plans and contingencies. A key element of the financial assessment is taking inventory of your resources, which can include future lifetime income streams earned while working, such as pensions and Social Security. Resources might also include financial assets such as mutual funds and certificates of deposit, as well as wages or business income that will continue into your retirement years. YOUR FINANCIAL STRATEGY ARTICULATE NEEDS AND GOALS The information gathered in the behavioral and financial assessments captures your concerns and goals. Most retirees have four salient goals: helping make their money last in retirement; covering potential long-term care costs; pursuing passions and interests; and securing a legacy that lasts beyond their lifetime. GOAL 1: Help make my money last in retirement For most retirees, having a lifetime stream of income to cover essential expenses is a a top priority. Essential expenses are needs such as housing, utilities, health care, food, transportation and taxes. Two ways to meet future long-term care needs are to selfinsure by setting aside assets or to purchase long-term care coverage. This need not be an either/or choice. 7 GOAL 3: Pursue passions and interests Your Advisor works with you to identify your important expenses. These are wants such as travel, entertainment, gifts or a vacation home. GOAL 4: Secure a legacy that lasts beyond my lifetime After addressing lifetime income and contingency needs, you may want to leave a bequest for your family or favorite charities. For some, life insurance may be a useful tool to help achieve his goal. ALLOCATE RETIREMENT RESOURCES The Advisor uses the information gathered through the behavioral and financial assessments to identify ways to realize your retirement goals (see Figure 2, on the next page). If your wealth and income cannot support your goals, you may need to make compromises such as working longer, scaling back spending or tolerating greater uncertainty with respect to achieving some goals. You can choose an allocation that positions you to achieve your retirement goals with the greatest level of confidence given all available resources, including future Social Security and pension income. The allocation conforms to your Investment Personality and addresses a web of key retirement concerns: longevity, sequence of returns, health care costs and inflation risk. Because these risks pose a multifaceted challenge, the allocation draws from a broad palette of strategies and solutions, some well known and others less so. These can include: systematic withdrawal programs, 8 lifetime income 5 Long-term care refers to the assistance people need to perform activities of daily living, typically due to advancing age, cognitive impairment, injury or illness. 6 Centers for Medicare & Medicaid Services, 2015 Medicare & You, National Medicare Handbook, September 2014, p For a thorough discussion of these and other options, see Healthcare Costs in Retirement: Preparing Today to Protect Your Wealth Tomorrow, Merrill Lynch Wealth Management, For more on systematic withdrawal programs, see David Laster, Anil Suri and Nevenka Vrdoljak, Systematic Withdrawal Strategies for Retirees, Journal of Wealth Management, Vol. 15, No. 3 (Winter 2012), pp A Path to Retirement Success 3

4 Figure 2: Retirement Goals to Address PURSUE PASSIONS AND INTERESTS SECURE A LEGACY THAT LASTS BEYOND MY LIFETIME COVER MY POTENTIAL LONG-TERM CARE COSTS HELP MAKE MY MONEY LAST IN RETIREMENT Source: Merrill Lynch Wealth Management, CIO Retirement Strategies For Illustrative Purposes Only annuities, 9 longevity insurance (a deferred income annuity), investments with market downside protection, life insurance and long-term care insurance. You might also consider strategically timing when to claim Social Security. 10 Some simple examples help illustrate how Investment Personality, goals and resources can combine to yield guidance to retirees: A high-net-worth client with a strong desire for accessibility and a low desire for protection might focus on systematic withdrawal programs, self-funded long-term care and wealth accumulation with long-term investments. A client with a high desire for protection and low desire for accessibility might have an allocation that includes annuities and a long-term care policy. IMPLEMENT GOALS-BASED SOLUTIONS The implementation of retirement solutions might address numerous challenges, such as the illiquidity of certain investments, potential tax consequences of transitioning 401(k)s and IRAs, and the timing of the purchase of annuities. Many clients feel more comfortable implementing a complex financial solution with the benefit of personal, professional guidance. 11 They value and appreciate an Advisor s experience and personal touch. STAYING ON TRACK In the final and ongoing step of the process, you and your Advisor together periodically review progress toward your goals, discuss any changes in your situation and correct course, as needed. Each individual may view the relative importance of life changes very differently, so your Advisor can draw out details and help you connect these changes to your goals. Developments such as a spouse s illness, a grandchild s college dream or an increase in additional spending can have a significant impact on your life priorities and retirement goals. As such, your Advisor can incorporate these changes into your annual review. Beyond providing essential information, the process of continued discovery and collaboration solidifies the relationship between you and your Advisor. CONCLUSION Most retirees share critical concerns: the rising cost of health care, making sure their assets last and being able to afford the lifestyle they want. Many also wish to leave a bequest. Goals-Based Wealth Management can help you attain these goals. The process seeks to enable you and your Advisor to work together to achieve a retirement that is both financially and personally satisfying. Our framework uses behavioral and financial assessments to create a goals-based approach to retirement. It yields guidance that is effective and conforms to your personality. The approach also fosters a closer relationship between you and your Advisor, enabling you to adopt the solution and stick with it to achieve retirement security. 9 Lifetime income annuities include: immediate annuities, variable annuities with guaranteed lifetime income and fixed indexed annuities with guaranteed lifetime income. The role that these annuities can play for retirees is explored in our publications: The Role of Variable Annuities in Addressing Retirement Risks Journal of Retirement, Fall 2014 and Goals-Based Wealth Management with Guaranteed Lifetime through an Annuity, Merrill Lynch Wealth Management, May Lifetime income can be accomplished through an optional living benefit available for an additional cost. 10 See Anil Suri and Nevenka Vrdoljak, Claiming Social Security, Merrill Lynch Wealth Management, Summer EBRI s 2016 Retirement Confidence Survey finds that just 6 percent of workers and 4 percent of retirees have ever obtained financial advice from an online advice provider. A Path to Retirement Success 4

5 Anil Suri, Managing Director, Head of Portfolio Analytics & Innovation Development Center, leads the development of frameworks and solutions for asset allocation, portfolio construction and management, goals-based wealth management and retirement investing across traditional, market-linked and alternative investments. Anil has been with Merrill Lynch since 2004, where he previously led investment strategy & analytics in the Alternative Investments area and was a Senior Investment Strategist on the Merrill Lynch Research Investment Committee (RIC). Anil s research has been published in several academic and practitioner publications such as the Journal of Portfolio Management and has been discussed in Barron s and The Wall Street Journal. His prior experience includes roles as a senior AI strategist at Citigroup, trader at Credit Suisse and management consultant at McKinsey. Anil serves on the International Advisory Board of the EDHEC Risk Institute in Nice, France. Anil earned an M.B.A. with honors from the Wharton School of the University of Pennsylvania, an M.S.E. from Princeton University and a B. Tech. from the Indian Institute of Technology at Delhi. Nevenka Vrdoljak, Director, CIO, holds analytical responsibilities in the areas of asset allocation and retirement investing. Nevenka developed Merrill Lynch Wealth Management s target date asset allocation approach for institutional plan sponsors. Her research has been published in the Journal of Wealth Management and Journal of Retirement. Previously, Nevenka held analytical roles at Goldman Sachs Asset Management (London) and Deutsche Bank Asset Management (Sydney) in the fixed income, currency and derivatives areas. She holds a bachelor s and master s in economics with honors from the University of New South Wales (Sydney). She was awarded an Australian Commonwealth Scholarship where she completed advanced studies in econometrics at Georgetown University. Nevenka graduated from Columbia University with a master s in mathematics of finance. A Path to Retirement Success 5

6 Related Research Publications from the Chief Investment Office Summer 2017 A Path to Retirement Success Summer 2017 Claiming Social Security Spring 2017 The Family and Financial Security Spring 2017 Pitfalls in Retirement Winter 2017 Target Date Asset Allocation Methodology Spring 2016 Tackling Retirement Risks Fall 2016 Financial Security for the Caregiver Summer 2016 Women and Life-Defining Financial Decisions The Global Wealth & Investment Management Chief Investment Office (GWIM CIO) provides industry-leading investment solutions, portfolio construction advice and wealth management guidance. This material was prepared by the GWIM CIO and is not a publication of BofA Merrill Lynch Global Research. The views expressed are those of the GWIM CIO only and are subject to change. This information should not be construed as investment advice. It is presented for information purposes only and is not intended to be either a specific offer by any Merrill Lynch entity to sell or provide, or a specific invitation for a consumer to apply for, any particular retail financial product or service that may be available. This article is provided for information and educational purposes only. The opinions and views expressed do not necessarily reflect the opinions and views of Bank of America or any of its affiliates. Assumptions, opinions and estimates are as of the date of this material and are subject to change without notice. Past performance does not guarantee future results. The information contained in this material does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account a client s particular investment objectives, financial situation or needs and is not intended as a recommendation, offer or solicitation for the purchase or sale of any security, financial instrument or strategy. Before acting on any recommendation, clients should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. Annuities are long-term investments designed to help meet retirement needs. In essence, a contractual agreement in which payment(s) are made to an insurance company, which agrees to pay out an income or a lump sum amount at a later date. Annuity contracts have exclusions and limitations. Early withdrawals may be subject to surrender changes, and, if taken prior to age 59 1 / 2, a 10% additional federal tax may apply. Life insurance policies contain fees and expenses, including cost of insurance, administrative fees, premium loads, surrender charges and other charges or fees that will impact policy values. 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. All guarantees and benefits of an insurance policy and all annuity contract and rider guarantees, including optional benefits 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 claimspaying ability of the issuing insurance company. ARBW3DKV