Tackling Retirement Risks

Transcription

1 Tackling Retirement Risks CHIEF INVESTMENT OFFICE SPRING 2018 Anil Suri Managing Director, Chief Investment Office Nevenka Vrdoljak Director, Chief Investment Office Few Americans feel very secure about retirement. In 2007, 41% of retirees said they were very confident about having enough money to live comfortably throughout their retirement years. By 2017, that figure had fallen to a meager 18%.1 This discouraging statistic suggests an important question: What can you do to create a more secure retirement? Fortunately, there are steps you can take to help boost your retirement finances. Doing so involves mitigating key retirement risks. Our previous paper Pitfalls in Retirement discussed common mistakes to avoid, such as: overspending, investing in an overly conservative way and not adhering to a retirement plan.2 This paper addresses several key retirement risks that are due neither to poor planning nor to inadequate discipline, and can prove even tougher to address. The paper first describes four important risks that retirees face: longevity, health care, sequence of returns and inflation. It then examines four strategies that can help you mitigate these risks. Exhibit 1: Key retirement risks THE CHALLENGE: KEY RETIREMENT RISKS Research reveals a remarkable uniformity in the personal risks that people deem important as they approach retirement. Nearly three-quarters of pre-retirees express concern about health care costs in retirement; seventy percent are concerned about depleting their savings; and most place a priority on maintaining a reasonable standard of living.3 Thus, the two salient personal risks in retirement relate to longevity and health care. Retirees are also exposed to financial market risks. Two key market risks they face are sequence of returns risk and inflation risk. Longevity risk Longevity risk is the risk of outliving your wealth, possibly due to living longer than anticipated. Calculations based on data from the Society of Actuaries show that a 65-year-old couple has a 50% chance of one spouse living to 92 and a 10% chance of one spouse living to 100 (Exhibit 2). Prudence suggests that you should not plan to averages; after all, living to 100 is a real possibility for many Longevity PERSONAL Health Care MARKET Sequence of Returns Inflation Source: GWIM CIO. Employee Benefit Research Institute and Mathew Greenwald & Associates, Inc., 2007 and 2017 Retirement Confidence Surveys. Pitfalls in Retirement, Merrill Lynch Wealth Management, Spring Society of Actuaries, 2017 Risks and Process of Retirement Survey, January 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.

2 Exhibit 2: Longevity risk For a couple, both age 65, at least one spouse can expect to reach... Exhibit 3: Long-term care risk Of Americans now turning AGE 92 50% CHANCE AGE 97 25% CHANCE AGE % CHANCE 7 in 10 will need some form of long-term care in their lifetimes Source: Merrill Lynch Wealth Management, GWIM CIO Office calculations based on Society of Actuaries, 2012 Individual Annuity Mortality Tables, Basic. In thinking about retirement, many fail to appreciate just how long they might live. When asked to estimate how long the average person of their gender and age can expect to live, four in ten underestimate by five years or more. Only one in eight similarly overestimates his or her life expectancy. 4 Health care risk But surely affluent Americans are insulated from the shock of unforeseen health care expenses to their retirement security, right? Alas, wrong. Half of affluent Americans say they are highly concerned about the rising costs of health care and their potential to deplete their retirement savings. 5 The risk associated with a long-term-care event is of particular concern (Exhibit 3). According to the U.S. Department of Health and Human Services, at least 70% of people over 65 will need long-term care at some point. 6 This risk grows with age. HealthView estimates that by age 85, half of all Americans will require some form of long-term care. By age 95, roughly nine in ten will need such care. 7 Long-term care can be provided at home, in an assisted living facility or in a nursing home. The annual cost of long-term care varies widely across communities. Nationwide, it averages $97,455 per year for a nursing home stay. An assisted living facility costs $45,000 per year on average, and a home health aide $49, Thus, an extended long-term care event can severely strain the resources of all but the wealthiest. It s important to start planning for long-term care now to maintain your independence and to make sure you get the care you may need, in the setting you want, in the future. Source: U.S. Department of Health & Human Services. National Clearinghouse for Long- Term Care Information. Who Needs Care? Data as of February 21, 2017, longtermcare.acl.gov/the-basics/who-needs-care.html (accessed September 14, 2017). Sequence of returns risk The performance of a retirement portfolio from which assets are regularly drawn depends critically not just on the average level of returns, but also the sequence in which they occur. Poor investment returns early in retirement can derail a retiree s plans. Consider the example of an investor who retired at the end of 1988 with $500,000 invested 54% in stocks, 44% in bonds and 2% in cash. Over the next twelve months, the investor spends $25,000 (a 5% drawdown). In each subsequent year, she rebalances the portfolio and increases her annual spending in line with inflation. By year-end 2008, the portfolio would have more than doubled, to a value of $1.23 million (Exhibit 4, see next page). Now imagine the same retirement portfolio in 1988, but with the annual returns realized in reverse chronological order. By the end of the period, the portfolio s value would have actually declined to $396,000. Thus, the identical set of annual returns would have resulted in very different outcomes depending on the order in which they occurred. The practical implications of sequence of returns risk are readily apparent. Amid the financial crisis of , many Americans were forced to postpone retirement because of a sharp, unexpected decline in the values of their portfolios. Inflation risk Inflation threatens everyone, but especially retirees. Wages tend to rise with prices over time, helping to insulate most workers from inflation risk. Once they retire, people lose this 4 Society of Actuaries, 2013 Risks and Process of Retirement Survey, December Just as people tend to underestimate how long they can expect to live, so too they tend to overestimate for how long they will be in the workforce. The 2015 EBRI Retirement Confidence Survey finds that just 9% of workers say they plan to retire before age 60, compared with 36% of retirees who report they retired that early. The take-away for pre-retirees is that it s valuable to save while you can because retirement might last far longer than you expect. 5 Age Wave/Merrill Lynch, Finances in Retirement: New Challenges, New Solutions, U.S. Department of Health & Human Services. National Clearinghouse for Long-Term Care Information. Who Needs Care? Data as of February 21, 2017, longtermcare.acl.gov/ the-basics/who-needs-care.html (accessed September 14, 2017). 7 HealthView Inc. data are licensed by Merrill Lynch and used with permission for this report. 8 Source: Genworth 2017 Cost of Care Survey. The costs for assisted living and nursing home care are for a private room. The cost estimate for a home health aide is based on 44 hours per week for 52 weeks. Tackling Retirement Risks 2

3 crucial protection. Because retirees often rely on sources of income that do not grow with inflation, even a gradual increase in the cost of living can pose a challenge. At a 2½% rate of inflation, for example, consumer prices end up doubling after 28 years. Moreover, health care costs, which disproportionately burden older Americans, have historically outpaced the overall rate of inflation. Exhibit 4: Sequence of returns risk Evolution of the value of a diversified portfolio, Portfolio value ($) 1,800,000 1,600,000 1,400,000 1,200,000 1,000, , , , ,000 0 Actual history Reverse history Actual history $1.23M Reverse history $396, Notes: Assumes a $500,000 investment that at year-end 1988 was allocated 54% to U.S. stocks (proxied by the S&P 500 Index), 44% to U.S. bonds (ICE BofAML U.S. Broad Market) and 2% to cash (ICE BofAML U.S. Treasury Bills 3 months) and rebalanced annually. It is not possible to invest directly in these unmanaged indexes. Annual spending is $25,000 for the first year, rising in subsequent years with inflation (CPI-U). Withdrawals are taken at the beginning of each year. Source: GWIM CIO. Inflation can also spike suddenly: Prices more than doubled from 1972 to 1980 (Exhibit 5). Millions of seniors rely on stocks and bonds for financial security, but both tend to perform poorly when inflation gathers pace. So inflation represents a unique and, if not managed with forethought, potentially devastating variable in financial planning for retirement. ADDRESSING RETIREMENT RISKS Although you cannot avoid longevity, health care, sequence of returns and inflation risks, you can mitigate them. Four strategies can help: 1. Carefully consider when is the best time for you to claim Social Security. The choice of when to claim Social Security is among the most important financial decisions that you will make. For many families, the lifetime expected value of Social Security benefits can exceed $700,000. Recent Merrill Lynch research shows that waiting to claim Social Security can potentially boost the expected lifetime benefits for an individual by as much as $55,000 to $70,000. Couples stand to benefit more from waiting than singles. 9 People routinely claim Social Security when they retire, but many stand to benefit from separating the decision of when to retire from that of when to claim Social Security. So even if you retire at age 62, it may make sense, if feasible, to wait until age 66 or beyond to claim benefits. Claiming at age 66 instead of age 62, for example, will raise your monthly benefits by one-third (Exhibit 6). Exhibit 6: Trade-off between claiming age and annual benefits: An illustrative example Annual benefit Dollars ($) 40,000 30,000 20,000 10,000 $18,000 $19,200 $20,800 $22,400 $24,000 $25,920 $27,840 $29,760 $31,680 Exhibit 5: Inflation risk Consumer Price Index (1972 = 100) Claiming age Source: GWIM CIO Office calculations based on Social Security Administration data available at < html#drctable>, accessed June Your Financial Advisor can help you identify the most financially opportune time to claim Social Security benefits, a determination that varies widely among retirees in different circumstances. Some guidelines to consider: Source: Calculations by GWIM CIO Office, based on CPI data from the Bureau of Labor Statistics. Those who (due to poor health or other reasons) have very short life expectancies should consider claiming benefits at 62, the earliest possible age. 9 Claiming Social Security, Merrill Lynch Wealth Management, Fall For further details, see Suri and Vrdoljak, op. cit. Tackling Retirement Risks 3

4 Unmarried people whose life expectancy is average should consider waiting until age 69 or 70 to claim. Doing so boosts expected lifetime benefits by an estimated 14-18%. Many married couples stand to gain from coordinating when they claim benefits. For many married couples it makes sense for the higher earner to delay claiming benefits. 2. Boost your retirement income by allocating assets to a lifetime income annuity. A key question to consider in preparing for retirement is whether your guaranteed lifetime income from Social Security, pension and annuities will cover your essential living expenses. If not, consider buying a lifetime income annuity to close the gap. Suppose, for example, you will be receiving annual pension and Social Security income of $40,000, but will need $50,000 to cover essential expenses. You can purchase an annuity that will pay, in monthly installments, $10,000 per year for the rest of your life. A lifetime income annuity is a financial contract with an insurance company that pays a stream of income over the lifetime of an annuitant. These payments can be monthly, quarterly, semiannual or annual. Annuities are the only financial instruments available today that, like Social Security and pensions, can offer a lifetime income regardless of how long a person lives. 11 Two common types of lifetime income annuity are immediate annuities and variable annuities with guaranteed lifetime withdrawal benefits (VA+GLWB). An immediate annuity can provide a higher level of guaranteed lifetime income than a VA+GLWB, but the latter offers greater flexibility and upside potential. 12 What does research on annuities suggest? After surveying hundreds of research articles on annuities, Moshe Milevsky concludes that: Most financial, public and insurance economists would agree (something that is rare) that life annuities, longevity insurance and guaranteed pensions have an important role to play in the optimal retirement portfolio [A]ll of these researchers agree that life annuities are a legitimate and core product for the optimal retirement portfolio. 13 Wade Pfau, another leading retirement expert, expresses a similar opinion: The income annuity provides protection on the downside. You can invest enough that the annuity payouts will cover your essential spending, and the rest of your portfolio you can invest more aggressively. The annuity effectively replaces the bond allocation for retirees.. [I]t s hard to make a strong argument against them. 14 And the U.S. Government Accountability Office notes: Experts we interviewed tended to recommend that retirees draw down their savings strategically and systematically and that they convert a portion of their savings into an income annuity to cover necessary expenses. 15 Our own research uses simulation analysis to examine whether a variable annuity with a guaranteed lifetime withdrawal benefit (VA+GLWB) can help mitigate longevity and sequence of returns risk. 16 We find that people who live long lives or who endure low returns during the first five years of retirement are particularly at risk of outliving their wealth (Exhibit 7). Allocating part of their portfolios to a VA+GLWB reduces their risk of having a spending shortfall later in life. Even in scenarios where retirees exhaust their wealth, a lifetime income annuity will continue to make payments for life. Exhibit 7: VA+GLWB can help mitigate key retirement risks Probability of shortfall 20% 15% 10% 5% 0% 0% VA+GLWB allocation 30% VA+GLWB allocation 16.8% 13.1% Longevity risk 18.6% 11.1% Sequence of returns risk Source: The Role of Variable Annuities in Addressing Retirement Risks. Journal of Retirement, Vol. 2, No. 2 (Fall 2014), pp All annuity guarantees and 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 do Merrill Lynch or its affiliates make any representations or guarantees regarding the claims-paying ability of the issuing insurance company. 12 Guaranteed income may be based on purchasing an optional benefit that is available for an additional cost. Withdrawals under the optional benefit may be taken only while it is in effect, and they are determined by, and subject to, the optional benefit s terms and conditions. Annuity assets may be limited to specified investment options, including limited access to more aggressive investment options or required allocation to stable value options, reducing both the range and number of allocation options under the VA when a GLWB is elected. 13 Moshe A. Milevsky, Life Annuities: An Optimal Product for Retirement Income, CFA Monograph, 2013, p Reshma Kapadia, Retirement Rules: Rethinking a 4% Withdrawal Rate, Barron s. 11 April U.S. Government Accountability Office, Retirement Income: Ensuring Income throughout Retirement Requires Difficult Choices, June 2011, p The Role of Variable Annuities in Addressing Retirement Risks, The Journal of Retirement, Vol. 2, No. 2 (Fall 2014), pp Tackling Retirement Risks 4

5 3. Draw down assets from a balanced portfolio. If your guaranteed sources of income cover essential expenses, you might consider following a systematic withdrawal program (SWP) to generate additional income. A SWP regularly draws down a percentage of a portfolio s assets to provide income and then rebalances the remaining assets to a target allocation. Our research indicates that it is overly simplistic to recommend, as some do, a single spending rate for all retirees. Sustainable spending rates depend critically on your age and risk tolerance. Exhibit 8 shows our estimates of sustainable spending levels for retirees seeking a moderate level of confidence (90%) that they will not outlive their wealth. 17 Exhibit 8: Rethinking the 4% Rule: Systematic Withdrawal Rates Systematic Withdrawal Rates (%) % 3.89% 4.28% 4.83% 5.61% 6.48% 7.29% Age Notes: The systematic withdrawal rate is the maximum initial share of wealth that we believe a client can spend while attaining a 90 percent probability of success. The probability of success measures the likelihood that a retiree will be able to spend according to plan without exhausting her wealth. Spending is assumed to rise each year with inflation. For capital market and planning horizon assumptions underlying these estimates, see the Appendix. Source: Determining Sustainable Retiree Spending Rates Merrill Lynch Wealth Management 2018 For a 65 year old retiree the sustainable spending rate is 4.28%. But a 75-year-old can safely spend at a 5.61% rate, and a 55-year-old who may have many more years to live should spend at a more modest 3.54% rate. Men, because they have shorter life expectancies, can safely spend a bit more than women of the same age. But couples, who should plan over the lifetimes of both spouses, should spend a bit less than singles. Finally, let s consider what asset allocation may minimize the risk of outliving your portfolio. It s important to note that retirees of all ages stand to benefit from having some equity exposure. Holding a portfolio comprising only bonds and cash may feel safe, but it can actually elevate your risk of outliving your money. Our research finds that retirees between the ages of 55 and 85 seeking to maximize how much they can safely spend should allocate 37% of their portfolio to equities. 18 Your Financial Advisor can help you in determining the appropriate allocation to equities when building a balanced portfolio based on your specific investment objectives and risk tolerance. 4. Plan ahead for future possible long-term care needs. Many people harbor misconceptions about long-term care. Some believe, It won t happen to me! But as previously noted, approximately 70% of individuals over the age of 65 will need some form of long-term care in their lifetimes, whether at home, at an assisted living facility or in a nursing home. The average stay in a nursing home is about 2.2 years for men and 3.7 years for women. 19 Others hold the mistaken view that the government will pay for it. But the reality is that the government pays for long-term care only under special circumstances, typically when somebody has depleted their assets. Even in this unfortunate event, the longterm care provided through Medicaid offers limited choices. The need for long-term care can cause more than financial strain. It can place a burden on loved ones. Investors with substantial assets may prefer to self-insure against this risk. But for many other investors nearing retirement, long-term care insurance can help mitigate the risk and cost of care. 20 Longterm care insurance is most available and affordable for people who are in their 50s or 60s and in relatively good health. Options for funding long-term care include self-funding and traditional long-term care insurance. In addition, recent innovations include hybrid life insurance with long-term-care benefit riders and permanent life insurance with long-term care benefit riders. Hybrid and permanent life insurance policies can offer reassurance to clients because they provide either a death benefit or cash value if long-term care benefits are not used. Your Financial Advisor can help you identify the appropriate solution for your particular circumstances For further details on sustainable withdrawal rates and asset allocation, see the Merrill Lynch report: Determining Sustainable Retiree Spending Rates Merrill Lynch Wealth Management ibid. 19 U.S. Department of Health & Human Services. National Clearinghouse for Long-Term Care Information. How Much Care Will You Need? Data as of February 21, 2017, longtermcare. acl.gov/the-basics/how-much-care-will-you-need.html (accessed September 14, 2017). 20 Long-term care insurance coverage contains benefits, exclusions, limitations, eligibility requirements and specific terms and conditions under which it may continue in force or be discontinued. Not all insurance policies and types of coverage may be available in all states. 21 See Healthcare Costs in Retirement: Preparing Today to Protect Your Wealth Tomorrow, Merrill Lynch Wealth Management, Tackling Retirement Risks 5

6 CONCLUSION Many who are near or in retirement worry about covering their health care costs and not outliving their wealth. Crucially, they want to avoid burdening loved ones. This paper sets out four strategies that can help to mitigate the key personal and market risks that retirees face. Waiting to claim Social Security boosts your guaranteed monthly income, potentially reducing your risk of outliving your wealth. By waiting to claim Social Security, retirees increase their share of income from guaranteed sources, thus limiting their exposure to future market volatility. Social Security also provides an inflation hedge. This is because, under current law, the level of benefits rises each year to reflect increases in the cost of living. Boosting retirement income by allocating assets to a lifetime income annuity or through a systematic withdrawal program can likewise help to mitigate the risk of outliving your wealth. Lifetime income annuities can also help to cushion a retiree s portfolio from adverse movements in markets just after she retires. An awareness of long-term care options can aid in alleviating a major source of uncertainty regarding health care costs in retirement. Options for financing long-term care include selffunding, traditional long-term care insurance and hybrid or permanent life insurance with a long-term-care benefit rider. Taken together, these strategies can help you mitigate key personal and market risks (Exhibit 9). Work with your Financial Advisor to understand these risks and evaluate your options for enhancing your retirement security. Exhibit 9: Summary of strategies to help mitigate key retirement risks Retirement risks addressed Potential solutions Personal Market Longevity Health care Sequence of returns Inflation Consider waiting to claim Social Security p p p Lifetime income through annuities p p Lifetime income through a SWP p p Preparing for long-term care needs p Source: Merrill Lynch Wealth Management, GWIM CIO Office APPENDIX: CAPITAL MARKET, AND PLANNING HORIZON ASSUMPTIONS The analysis builds on assumptions regarding market risk, returns and mortality to provide guidance crafted to reflect age, and spending needs. The analysis is based on GWIM CIO s Capital Market Assumptions for a 20-to-30 year horizon (Exhibit 10). Exhibit 10: Capital Market Assumptions Asset Class Geometric Return (%) Asset Class Assumptions Arithmetic Return (%) Arithmetic Volatility (%) US Large Cap Growth US Large Cap Value US Small Cap Growth US Small Cap Value International Equity Emerging Markets U.S. Government & Quasi Government U.S. Mortgage Backed U.S. Corp Master USD High Yield International Fixed Income Cash/Near Cash Inflation Source: GWIM CIO, 2018 Notes: The arithmetic mean, a simple average, provides an unbiased estimate of an uncertain variable such as future returns. If, however, when we seek to estimate future compound returns, the more appropriate measure is the geometric mean return. This is the return that, when compounded over the period of time in question, produces the actual realized cumulative return. The arithmetic return of a variable will always be greater than or equal to its geometric return. The greater the volatility, the wider the gap between the arithmetic and geometric returns. Volatility, which reflects future return expectations, is measured as the standard deviation of annual returns. Standard deviation is a common statistical measure that conveys the deviation of a variable (such as asset returns) around its mean. Asset class proxies: US Large Cap Growth: Russell 1000 Growth TR, US Large Cap Value: Russell 1000 Value TR, US Small Cap Growth: Russell 2000 Growth TR, US Small Cap Value: Russell 2000 Value TR, International Equity: MSCI Daily TR Net World Ex USA USD, Emerging Markets: MSCI Daily TR Net EM USD, U.S. Government & Quasi Government: ICE BofAML AAA U.S. Treasury/Agency Master, U.S. Mortgage Backed: ICE BofAML Mortgage Master, U.S. Corp Master: ICE BofAML U.S. Corp Master, USD High Yield: ICE BofAML High Yield Cash Pay, International Fixed Income: ICE BofAML Global Broad Market TR ex USD (Hedged), Cash/Near Cash: ICE BofAML U.S. Treasury Bills 3 months, Inflation: IA SBBI US Inflation. Note: This exhibit does not reflect the performance of any specific investment. Assumptions are for a 25-year planning horizon. Returns are before expenses and taxes. Actual returns cannot be predicted and will fluctuate. Your returns may be higher or lower. The planning horizon assumptions are shown in Exhibit 11 below. Exhibit 11: Planning Horizon Assumptions Age Time horizon Source: IRS single life expectancy table +5 years (Table 1 in Appendix B in Publication 590-B at (page 42), December Note: Time horizon is measured in years. Tackling Retirement Risks 6

7 Anil Suri, Managing Director, Chief Investment Office, leads the development of frameworks and solutions for asset allocation, portfolio construction and management, goalsbased 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, Chief Investment Office, 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. Tackling Retirement Risks 7

8 Retirement Publications from the Chief Investment Office Spring 2018 Tackling Retirement Risks Suri/Vrdoljak Spring 2018 Pitfalls in Retirement Suri/Vrdoljak Winter 2018 Financial Security for the Caregiver Rappaport/Vrdoljak Winter 2018 Target Date Asset Allocation Methodology Suri/Vrdoljak/Wang Winter 2018 Determining Sustainable Retiree Spending Rates Suri/Vrdoljak/Wang Fall 2017 Claiming Social Security Suri/Vrdoljak Fall 2017 Women and Life-Defining Financial Decisions Rappaport/Vrdoljak Important Information Investing involves risk, including the possible loss of principal. Any investment plan should be subject to periodic review for changes in your individual circumstances, including changes in market conditions and your financial ability to continue purchases. The opinions expressed are those of the Global Wealth & Investment Management Chief Investment O ffice (GWIM CIO) only and are subject to change. While some of the information included draws upon research published by BofA Merrill Lynch Global Research, this information is neither reviewed nor approved by BofA Merrill Lynch Global Research. This information and any discussion should not be construed as a personalized and individual recommendation, which should be based on your investment objectives, risk tolerance, and financial situation and needs. This information and any discussion also is not intended as a specific offer by M errill Lynch, its affiliates, or any related entity to sell or provide, or a specific invitation for a consumer to apply for, any particular retail financial product or service. Investments and opinions are subject to change due to market conditions and the opinions and guidance may not be profitable or realized. Any information presented in connection with BofA Merrill Lynch Global Research is general in nature and is not intended to provide personal investment advice. The information does not take into account the specific investment objectives, financial situation and particular needs of any specific person who may receive it. Investors should understand that statements regarding future prospects may not be realized. It is not possible to invest directly in an index. Asset allocation, diversification, dollar cost averaging and rebalancing do not ensure a profit or protect against loss in declining markets. Past performance is no guarantee of future results. Neither Merrill Lynch nor any of its affiliates or financial advisors provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions. This article is provided for information and educational purposes only. 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. The case studies presented are hypothetical and do not reflect specific strategies we may have developed for actual clients. They are for illustrative purposes only and intended to demonstrate the capabilities of Merrill Lynch and/or Bank of America. They are not intended to serve as investment advice since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances. Results will vary, and no suggestion is made about how any specific solution or strategy performed in reality. 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 591/2, a 10% additional federal tax may apply. IMPORTANT INFORMATION ABOUT VARIABLE ANNUITIES: Variable annuities are long-term investments designed to help meet retirement needs. A variable annuity is a contractual agreement where 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 later date. Variable annuities typically offer (1) tax-deferred treatment of earnings; (2) a death benefit; and (3) annuity payout options that can provide guaranteed income for life. The return and principal value of variable annuities are subject to market fluctuations, investment risk and possible loss of principal so that, when redee med, variable annuities may be worth more or less than the original amount invested. There are contract limitations, fees and charges associated with variable annuities which include, but are not limited to mortality and expense risk charges, sales and surrender charges, administrative fees, charges for optional benefits as well as charges for the underlying investment options. Early withdrawals may be subject to surrender charges, and taxed as ordinary income, and in addition, if taken prior to age 59½ an additional 10% federal income tax may apply. 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The current contract prospectus and underlying fund prospectuses contain more complete details on the investment objectives, risks, fees, charges and expenses, as well as other information about the contract and the underlying portfolios which should be carefully considered. Please read the prospectuses carefully before investing. 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 Bank of America Corporation. All rights reserved. ARFS7NNG