Tackling Retirement Risks

Transcription

1 Tackling Retirement Risks GWIM CIO Office SPRING 2016 David Laster Managing Director, Head of Retirement Strategies Nevenka Vrdoljak Director, Retirement Strategies Anil Suri Managing Director, Head of Portfolio Analytics & Innovation Develoment Center 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 2013, that figure had fallen to a meager 18%.1 This discouraging statistic suggests an imortant question: What can you do to create a more secure retirement? Fortunately, there are stes you can take to hel boost your retirement finances. Doing so involves mitigating key retirement risks. Our revious aer Pitfalls in Retirement discussed common mistakes to avoid, such as: oversending, investing in an overly conservative way and not adhering to a retirement lan.2 This aer addresses several key retirement risks that are due neither to oor lanning nor to inadequate disciline, and can rove even tougher to address. The aer first describes four imortant risks that retirees face: longevity, health care, sequence of returns and inflation. It then examines four strategies that can hel you mitigate these risks. THE CHALLENGE: KEY RETIREMENT RISKS Research reveals a remarkable uniformity in the ersonal risks that eole deem imortant as they aroach retirement. Nearly three-quarters of re-retirees exress concern about health care costs in retirement; two-thirds are concerned about deleting their savings; and most lace a riority on maintaining a reasonable standard of living.3 Thus, the two salient ersonal risks in retirement relate to longevity and health care. Retirees are also exosed 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, ossibly due to living longer than anticiated. Calculations based on data from the Society of Actuaries show that a 65-year-old coule has a 50% chance of one souse living to 92 and a 10% chance of one souse living to 100 (Figure 2). Prudence suggests that you should not lan to averages; after all, living to 100 is a real ossibility for many Figure 1: Key retirement risks Longevity PERSONAL Health Care MARKET Sequence of Returns Inflation Source: Merrill Lynch Wealth Management, GWIM CIO Office Emloyee Benefit Research Institute and Mathew Greenwald & Associates, Inc., 2007 and 2013 Retirement Confidence Surveys. David Laster, Anil Suri and Nevenka Vrdoljak, Pitfalls in Retirement, Merrill Lynch Wealth Management, Winter Society of Actuaries, 2013 Risks and Process of Retirement Survey, December Merrill Lynch makes available roducts and services offered by Merrill Lynch, Pierce, Fenner & Smith Incororated ( MLPF&S ), a registered broker-dealer and member SIPC, and other subsidiaries of Bank of America Cororation ( BofA Cor ). Investment roducts offered through MLPF&S and insurance and annuity roducts offered through Merrill Lynch Life Agency Inc.: Are Not FDIC Insured Are Not Bank Guaranteed May Lose Value Are Not Deosits 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 Cor Bank of America Cororation. All rights reserved.

2 Figure 2: Longevity risk For a coule, both age 65, at least one souse can exect to reach... AGE 92 50% CHANCE 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 areciate just how long they might live. When asked to estimate how long the average erson of their gender and age can exect to live, four in ten underestimate by five years or more. Only one in eight similarly overestimates his or her life exectancy. 4 Health care risk But surely affluent Americans are insulated from the shock of unforeseen health care exenses to their retirement security, right? Alas, wrong. Three-quarters of affluent Americans say they are highly concerned about the rising costs of health care Figure 3: Long-term care risk Of Americans now turning AGE 97 25% CHANCE 7 in 10 will need some form of long-term care in their lifetimes AGE % CHANCE Source: Centers for Medicare & Medicaid Services, 2015 Medicare & You, National Medicare Handbook, Setember and their otential to delete their retirement savings. 5 The risk associated with a long-term-care event is of articular concern (Figure 3). According to the U.S. Deartment of Health and Human Services, at least 70% of eole over 65 will need long-term care at some oint. 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 rovided 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 $91,250 er year for a nursing home stay. An assisted living facility costs $43,200 er year on average, and a home health aide $45, Thus, an extended long-term care event can severely strain the resources of all but the wealthiest. It s imortant to start lanning for long-term care now to maintain your indeendence and to make sure you get the care you may need, in the setting you want, in the future. Sequence of returns risk The erformance of a retirement ortfolio from which assets are regularly drawn deends 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 lans. Consider the examle of an investor who retired at the end of 1988 with $500,000 invested 60% in stocks, 35% in bonds and 5% in cash. Over the next twelve months, the investor sends $25,000 (a 5% drawdown). In each subsequent year, she rebalances the ortfolio and increases her annual sending in line with inflation. By year-end 2008, the ortfolio would have more than doubled, to a value of $1.23 million (Figure 4, see next age). Now imagine the same retirement ortfolio in 1988, but with the annual returns realized in reverse chronological order. By the end of the eriod, the ortfolio s value would have actually declined to $330,000. Thus, the identical set of annual returns would have resulted in very different outcomes deending on the order in which they occurred. The ractical imlications of sequence of returns risk are readily aarent. Amid the financial crisis of , many Americans were forced to ostone retirement because of a shar, unexected decline in the values of their ortfolios. Inflation risk Inflation threatens everyone, but esecially retirees. Wages tend to rise with rices over time, heling to insulate most workers from inflation risk. Once they retire, eole lose this crucial rotection. Because retirees often rely on sources of 4 Society of Actuaries, 2013 Risks and Process of Retirement Survey, December Just as eole tend to underestimate how long they can exect 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 lan to retire before age 60, comared with 36% of retirees who reort they retired that early. The take-away for re-retirees is that it s valuable to save while you can because retirement might last far longer than you exect. 5 Merrill Lynch Affluent Insights Survey, Setember Centers for Medicare & Medicaid Services, 2015 Medicare & You, National Medicare Handbook, Setember 2014, HealthView Inc. data are licensed by Merrill Lynch and used with ermission for this reort. 8 Source: Genworth 2015 Cost of Care Survey. The costs for assisted living and nursing home care are for a rivate room. The cost estimate for a home health aide is based on 44 hours er week for 52 weeks. Tackling Retirement Risks 2

3 Figure 4: Sequence of returns risk Evolution of the value of a diversified ortfolio, when inflation gathers ace. So inflation reresents a unique and, if not managed with forethought, otentially devastating variable in financial lanning for retirement. $1.8 $1.6 $1.4 $1.2 $1.0 Actual history $1.23M ADDRESSING RETIREMENT RISKS Although you cannot avoid longevity, health care, sequence of returns and inflation risks, you can mitigate them. Four strategies can hel: $0.8 $0.6 $0.4 $0.2 $ Actual sequence of returns ( ) Source: Merrill Lynch Wealth Management, GWIM CIO Office Reverse history $330,000 Notes: Assumes a $500,000 investment that at year-end 1988 was allocated 60% to U.S. stocks (roxied by the S&P 500 Index), 35% to U.S. bonds (Merrill Lynch Broad Market Index) and 5% to cash (1-month Treasury bills) and rebalanced annually. It is not ossible to invest directly in these unmanaged indexes. Annual sending 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: Merrill Lynch Wealth Management, IMG Retirement Strategies Returns realized in reverse order ( ) income that do not grow with inflation, even a gradual increase in the cost of living can ose a challenge. At a 2½% rate of inflation, for examle, consumer rices end u doubling after 28 years. Moreover, health care costs, which disroortionately burden older Americans, have historically outaced the overall rate of inflation. Inflation can also sike suddenly: Prices more than doubled from 1972 to 1980 (Figure 5). Millions of seniors rely on stocks and bonds for financial security, but both tend to erform oorly 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 imortant financial decisions that you will make. For many families, the lifetime exected value of Social Security benefits can exceed $700,000. Recent Merrill Lynch research shows that waiting to claim Social Security can otentially boost the exected lifetime benefits for an individual by as much as $55,000 to $70,000. Coules stand to benefit more from waiting than singles. 9 Peole routinely claim Social Security when they retire, but many stand to benefit from searating 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 examle, will raise your monthly benefits by onethird (Figure 6). Figure 6: Trade-off between claiming age and annual benefits: An illustrative examle $40,000 Figure 5: Inflation risk Consumer Price Index (1972 = 100) 250 $30,000 $20,000 $31,680 $29,760 $27,840 $25,920 $24,000 $22,400 $20,800 $19,200 $18, $10, $ Claiming age Source: Merrill Lynch, GWIM CIO Office calculations based on Social Security Administration data available at <htt:// html#drctable>, accessed Aril Source: Calculations by Merrill Lynch Wealth Management, GWIM CIO Office, based on CPI data from the Bureau of Labor Statistics. 9 David Laster and Anil Suri, Claiming Social Security, Merrill Lynch Wealth Management, Winter Tackling Retirement Risks 3

4 Your Financial Advisor can hel you identify the most financially oortune time to claim Social Security benefits, a determination that varies widely among retirees in different circumstances. Some guidelines to consider: 10 Those who (due to oor health or other reasons) have very short life exectancies should consider claiming benefits at 62, the earliest ossible age. Unmarried eole whose life exectancy is average should consider waiting until age 69 or 70 to claim. Doing so boosts exected lifetime benefits by an estimated 14-18%. Many married coules stand to gain from coordinating when they claim benefits. For many married coules 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 rearing for retirement is whether your guaranteed lifetime income from Social Security, ension and annuities will cover your essential living exenses. If not, consider buying a lifetime income annuity to close the ga. Suose, for examle, you will be receiving annual ension and Social Security income of $40,000, but will need $50,000 to cover essential exenses. You can urchase an annuity that will ay, in monthly installments, $10,000 er year for the rest of your life. A lifetime income annuity is a financial contract with an insurance comany that ays a stream of income over the lifetime of an annuitant. These ayments can be monthly, quarterly, semiannual or annual. Annuities are the only financial instruments available today that, like Social Security and ensions, can offer a lifetime income regardless of how long a erson lives. 11 Two common tyes of lifetime income annuity are immediate annuities and variable annuities with guaranteed lifetime withdrawal benefits (VA+GLWB). An immediate annuity can rovide a higher level of guaranteed lifetime income than a VA+GLWB, but the latter offers greater flexibility and uside otential. 12 What does research on annuities suggest? After surveying hundreds of research articles on annuities, Moshe Milevsky concludes that: Most financial, ublic and insurance economists would agree (something that is rare) that life annuities, longevity insurance and guaranteed ensions have an imortant role to lay in the otimal retirement ortfolio [A]ll of these researchers agree that life annuities are a legitimate and core roduct for the otimal retirement ortfolio. 13 Wade Pfau, another leading retirement exert, exresses a similar oinion: The income annuity rovides rotection on the downside. You can invest enough that the annuity ayouts will cover your essential sending, and the rest of your ortfolio you can invest more aggressively. The annuity effectively relaces 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: Exerts we interviewed tended to recommend that retirees draw down their savings strategically and systematically and that they convert a ortion of their savings into an income annuity to cover necessary exenses. 15 Our own research uses simulation analysis to examine whether a variable annuity with a guaranteed lifetime withdrawal benefit (VA+GLWB) can hel mitigate longevity and sequence of returns risk. 16 We find that eole who live long lives or who endure low returns during the first five years of retirement are articularly at risk of outliving their wealth (Figure 7). Allocating art of their ortfolios to a VA+GLWB reduces their risk of having a sending shortfall later in life. Even in scenarios where retirees exhaust their wealth, a lifetime income annuity will continue to make ayments for life. Figure 7: VA+GLWB can hel mitigate key retirement risks Probability of shortfall 20% 15% 10% 5% 0% Longevity risk 16.8% 13.1% Sequence of returns risk 18.6% 0% VA+GLWB allocation 30% VA+GLWB allocation 11.1% Source: Nevenka Vrdoljak, David Laster and Anil Suri, The Role of Variable Annuities in Addressing Retirement Risks. Journal of Retirement, Vol. 2, No. 2 (Fall 2014), For further details, see Laster and Suri, o. cit. 11 All annuity guarantees and ayout rates are backed by the claims-aying ability of the issuing insurance comany. They are not backed by Merrill Lynch or its affiliates, nor do Merrill Lynch or its affiliates make any reresentations or guarantees regarding the claims-aying ability of the issuing insurance comany. 12 Guaranteed income may be based on urchasing an otional benefit that is available for an additional cost. Withdrawals under the otional benefit may be taken only while it is in effect, and they are determined by, and subject to, the otional benefit s terms and conditions. Annuity assets may be limited to secified investment otions, including limited access to more aggressive investment otions or required allocation to stable value otions, reducing both the range and number of allocation otions under the VA when a GLWB is elected. 13 Moshe A. Milevsky, Life Annuities: An Otimal Product for Retirement Income, CFA Monograh, 2013, Reshma Kaadia, Retirement Rules: Rethinking a 4% Withdrawal Rate, Barron s. 11 Aril U.S. Government Accountability Office, Retirement Income: Ensuring Income throughout Retirement Requires Difficult Choices, June 2011, Nevenka Vrdoljak, David Laster and Anil Suri, The Role of Variable Annuities in Addressing Retirement Risks, The Journal of Retirement, Vol. 2, No. 2 (Fall 2014), Tackling Retirement Risks 4

5 3. Draw down assets from a balanced ortfolio If your guaranteed sources of income cover essential exenses, you might consider following a systematic withdrawal rogram (SWP) to generate additional income. A SWP regularly draws down a ercentage of a ortfolio s assets to rovide income and then rebalances the remaining assets to a target allocation. Our research indicates that it is overly simlistic to recommend, as some do, a single sending rate for all retirees. Sustainable sending rates deend critically on your age, gender and risk tolerance. Table 1 shows our estimates of sustainable sending levels for retirees seeking a moderate level of confidence (90%) that they will not outlive their wealth. 17 Table 1: Rethinking the 4% Rule: Achievable sending rates Age Achievable Sending Rate Male 3.4% 4.2% 5.5% 7.8% Female 3.2% 3.9% 5.2% 7.5% Joint 3.0% 3.7% 4.9% 7.2% Notes: The achievable sending rate is the maximum initial share of wealth that a client can send while attaining a 90 ercent robability of success. The robability of success measures the likelihood that a retiree will be able to send according to lan without exhausting her wealth. Sending is assumed to rise each year with inflation. Clients are assumed to choose the allocation to stocks, bonds and cash that minimizes their exected lifetime shortfall the amount, on average, they can exect to undershoot their lifetime sending lans. For caital market, fee and mortality assumtions underlying these estimates, see the Aendix. Source: David Laster, Anil Suri and Nevenka Vrdoljak, Systematic Withdrawal Strategies for Retirees, Journal of Wealth Management, Vol. 15, No. 3 (Winter 2012), For women retiring at age 65 the sustainable sending rate is 3.9%, very close to the four ercent benchmark commonly used in the industry. But a 75-year-old can safely send at a 5.2% rate, and a 55-year-old who may have many more years to live should send at a more modest 3.2% rate. Men, because they have shorter life exectancies, can safely send a bit more than women of the same age. But coules, who should lan over the lifetimes of both souses, should send a bit less than singles. Finally, let s consider what asset allocation may minimize the risk of outliving your ortfolio. It s imortant to note that retirees of all ages stand to benefit from having some equity exosure. Holding a ortfolio comrising 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 send should allocate roughly 40% of their ortfolio to equities. 18 Your Financial Advisor can hel you in determining the aroriate allocation to equities when building a balanced ortfolio based on your secific investment objectives and risk tolerance. 4. Plan ahead for future ossible long-term care needs Many eole harbor misconcetions about long-term care. Some believe, It won t haen to me! But as reviously noted, aroximately 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 ay for it. But the reality is that the government ays for long-term care only under secial circumstances, tyically when somebody has deleted their assets. Even in this unfortunate event, the long-term care rovided through Medicaid offers limited choices. The need for long-term care can cause more than financial strain. It can lace a burden on loved ones. Investors with substantial assets may refer to self-insure against this risk. But for many other investors nearing retirement, long-term care insurance can hel mitigate the risk and cost of care. 20 Longterm care insurance is most available and affordable for eole who are in their 50s or 60s and in relatively good health. Otions 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 ermanent life insurance with long-term care benefit riders. Hybrid and ermanent life insurance olicies can offer reassurance to clients because they rovide either a death benefit or cash value if long-term care benefits are not used. Your Financial Advisor can hel you identify the aroriate solution for your articular circumstances For a fuller exlanation and more comlete guidance, see: David Laster, Anil Suri and Nevenka Vrdoljak, Systematic Withdrawal Strategies for Retirees, Journal of Wealth Management, Vol. 15, No. 3 (Winter 2012), Laster, Suri and Vrdoljak, o. cit. 19 The MetLife Market Survey of Long-Term Care Costs, November Long-term care insurance coverage contains benefits, exclusions, limitations, eligibility requirements and secific terms and conditions under which it may continue in force or be discontinued. Not all insurance olicies and tyes of coverage may be available in all states. 21 See Healthcare Costs in Retirement: Prearing 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 aer sets out four strategies that can hel to mitigate the key ersonal and market risks that retirees face. Waiting to claim Social Security boosts your guaranteed monthly income, otentially 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 exosure to future market volatility. Social Security also rovides 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 rogram can likewise hel to mitigate the risk of outliving your wealth. Lifetime income annuities can also hel to cushion a retiree s ortfolio from adverse movements in markets just after she retires. An awareness of long-term care otions can aid in alleviating a major source of uncertainty regarding health care costs in retirement. Otions for financing long-term care include selffunding, traditional long-term care insurance and hybrid or ermanent life insurance with a long-term-care benefit rider. Taken together, these strategies can hel you mitigate key ersonal and market risks (Table 2). Work with your Financial Advisor to understand these risks and evaluate your otions for enhancing your retirement security. Table 2: Summary of strategies to hel mitigate key retirement risks Potential solutions Longevity Source: Merrill Lynch Wealth Management, GWIM CIO Office Retirement risks addressed Personal Health care Sequence of returns Market Inflation Consider waiting to claim Social Security Lifetime income through annuities Lifetime income through a SWP Prearing for long-term care needs gender and sending needs. It is based on return simulations for three asset classes: stocks, bonds and cash, as well as inflation. The simulations, based on historical exerience, are calibrated so that the exected return and risk for each asset class matches Merrill Lynch s Caital Market Assumtions for a 20-to- 30 year horizon (Table 3). Stocks, the riskiest asset class, have the highest exected return. Bonds, which are assumed to have a long-run exected return of 5.1%, currently yield substantially less than this. Cash, the safest, earns the lowest exected return. The analysis further assumes annual asset management fees in line with the Lier averages for mutual funds. It does not, however, take account of taxes. Table 3: Asset class and fee assumtions Exected Return Exected Volatility Fees U.S. Stocks 8.0% 18.0% 1.5% U.S. Bonds 5.1% 6.1% 1.1% U.S. Cash 3.0% 0.9% 0.5% Notes: The roxy for U.S. stocks is the S&P 500 Index; for U.S. bonds, is the Ibbotson U.S. Intermediate Government Bond Index; for cash it is 1-month Treasury bills. Sources: Caital Market Assumtions: Merrill Lynch, CIO Portfolio Analytics & Innovation Develoment Center 2016; Fee Assumtions: Lier data One unique feature of the analysis is how it accounts for longevity risk. Rather than assuming a fixed lifesan, e.g., 30 years, the analysis recognizes that eole retire at, and live until, a range of ages. For examle, in a reresentative samle of 100, year-old women, 62,000 will live to age 85 and 19,000 will live to 95 (Figure 8, red line). The green line in Figure 8 dislays joint mortality. It shows, for examle, that in a grou of 100, year-old coules, 10,000 are exected to have at least one souse live to age 100. Figure 8: Mortality Assumtions Survivors 100,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 Male Female Joint 10, Age Note: Number of survivors from among a cohort of 100, year-olds. Source: Society of Actuaries, Annuity 2000 Mortality Table APPENDIX: CAPITAL MARKET, FEE AND MORTALITY ASSUMPTIONS The analysis builds on assumtions regarding market risk, returns and mortality to rovide guidance crafted to reflect age, Tackling Retirement Risks 6

7 David Laster, Managing Director, Head of Retirement Strategies, is resonsible for develoing analytical solutions and thought leadershi in the area of retirement investing. In 2013, David conceived of, and heled Institutional Investor Journals launch, The Journal of Retirement, a quarterly sonsored by Bank of America Merrill Lynch. David s research has aeared in the Financial Analysts Journal, Journal of Investing and Journal of Wealth Management and has been discussed in The Wall Street Journal, Financial Times and Fortune. Before joining Merrill Lynch, he was a senior economist at Swiss Reinsurance Comany and a financial economist at the Federal Reserve Bank of New York. David earned a Ph.D. in economics from Columbia University and a B.A. in mathematics Nevenka Vrdoljak, Director, Retirement Strategies, holds analytical resonsibilities in the areas of asset allocation and retirement investing. Nevenka develoed Merrill Lynch Wealth Management s target date asset allocation aroach for institutional lan sonsors. Her research has been ublished 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 Scholarshi where she comleted advanced studies in econometrics at Georgetown University. Nevenka graduated from Columbia University with a master s in mathematics of finance. Anil Suri, Managing Director, Head of Portfolio Analytics & Innovation Develoment Center, leads the develoment of frameworks and solutions for asset allocation, ortfolio 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 reviously 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 ublished in several academic and ractitioner ublications such as the Journal of Portfolio Management and has been discussed in Barron s and The Wall Street Journal. His rior exerience includes roles as a senior AI strategist at Citigrou, 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. Tackling Retirement Risks 7

8 Recent Publications from Wealth Management Institute Sring 2016 Tackling Retirement Risks Laster/Vrdoljak/Suri Sring 2016 How Immediate Annuities Can Hel Meet Retirement Goals Laster/Suri Sring 2016 Can Variable Annuities Hel You Meet Your Retirement Goals? Laster/Suri Winter 2016 Claiming Social Security Laster/Suri/Vrdoljak Winter 2016 Pitfalls in Retirement Laster/Suri/Vrdoljak Winter 2016 Target Date Asset Allocation Methodology Vrdoljak/Laster/Suri Sring 2015 In Practice: A Path to Retirement Success Laster/Suri/Vrdoljak Summer 2015 A Path to Retirement Success Laster/Suri/Vrdoljak Merrill Lynch s Wealth Management Institute offers clients among the world s best intellectual caital on toics that comlement our traditional investment management and ortfolio construction advice. The Wealth Management Institute hels clients and Advisors create holistic and customized solutions by combining Merrill Lynch s exertise in managing wealth for individuals, families and institutions with our internal thought leadershi and rofessional network of industry luminaries and leading academics. All Wealth Management Institute thought leadershi is driven and vetted by the Investment Management & Guidance leadershi team. This article is rovided for information and educational uroses only. Assumtions, oinions and estimates are as of the date of this material and are subject to change without notice. Past erformance does not guarantee future results. The information contained in this material does not constitute advice on the tax consequences of making any articular investment decision. This material does not take into account a client s articular investment objectives, financial situation or needs and is not intended as a recommendation, offer or solicitation for the urchase or sale of any security, financial instrument or strategy. Before acting on any recommendation, clients should consider whether it is suitable for their articular circumstances and, if necessary, seek rofessional advice. Diversification, asset allocation and dollar cost averaging do not guarantee a rofit or rotect against a loss in declining markets. Since such an investment lan involves continual investment in securities regardless of fluctuating rice levels, you must consider your willingness to continue urchasing during eriods of high or low rice levels. The case studies resented are hyothetical and do not reflect secific strategies we may have develoed for actual clients. They are for illustrative uroses only and intended to demonstrate the caabilities 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 deendent uon your individual facts and circumstances. Results will vary, and no suggestion is made about how any secific solution or strategy erformed in reality. Annuities are long-term investments designed to hel meet retirement needs. In essence, a contractual agreement in which ayment(s) are made to an insurance comany, which agrees to ay out an income or a lum sum amount at a later date. Annuity contracts have exclusions and limitations. Early withdrawals may be subject to surrender changes, and, if taken rior to age 591/2, a 10% additional federal tax may aly. IMPORTANT INFORMATION ABOUT VARIABLE ANNUITIES: Variable annuities are long-term investments designed to hel meet retirement needs. A variable annuity is a contractual agreement where a client makes ayments to an insurance comany, which, in turn, agrees to ay out an income stream or a lum sum amount at a later date. Variable annuities tyically offer (1) tax-deferred treatment of earnings; (2) a death benefit; and (3) annuity ayout otions that can rovide guaranteed income for life. The return and rincial value of variable annuities are subject to market fluctuations, investment risk and ossible loss of rincial so that, when redeemed, 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 exense risk charges, sales and surrender charges, administrative fees, charges for otional benefits as well as charges for the underlying investment otions. Early withdrawals may be subject to surrender charges, and taxed as ordinary income, and in addition, if taken rior to age 59½ an additional 10% federal income tax may aly. Withdrawals reduce annuity contract benefits, values and otional guarantees in any amount that may be more than the actual withdrawal. All contract and rider guarantees, otional benefits and any fixed subaccount crediting rates or annuity ayout rates, are backed by the claims aying ability of the issuing insurance comany. All guarantees and benefits of an insurance olicy are backed by the claims-aying ability of the issuing insurance comany. They are not backed by Merrill Lynch or its affiliates, nor do Merrill Lynch or its affiliates make any reresentations or guarantees regarding the claims aying ability of the issuing insurance comany. Otional guaranteed benefits tyically require investment restrictions and may be irrevocable once elected. Please refer to the rosectus for additional information. Asset allocation does not ensure a rofit or rotect against loss. Variable annuities are sold by rosectus only. Your Financial Advisor can rovide you with more information, including a current rosectus. The current contract rosectus and underlying fund rosectuses contain more comlete details on the investment objectives, risks, fees, charges and exenses, as well as other information about the contract and the underlying ortfolios which should be carefully considered. Please read the rosectuses carefully before investing. Life insurance olicies contain fees and exenses, including cost of insurance, administrative fees, remium loads, surrender charges and other charges or fees that will imact olicy values. Long-term care insurance coverage contains benefits, exclusions, limitations, eligibility requirements and secific terms and conditions under which the insurance coverage may be continued in force or discontinued. Not all insurance olicies and tyes of coverage may be available in your state Bank of America Cororation AR3JLR6R