Generating Portfolio Income - Merrill Lynch

[Pages:8]Generating Portfolio Income

Office of the CIO

MAY 2015

Most people think of investment income solely as the cash flow they receive from bond coupons and stock dividends. However, this is an incomplete view. We encourage investors to consider both cash flow and growth in the value of their investments. By adopting a total return approach, one that generates income from both cash flow and capital growth, investors can optimize their spending rate from a portfolio across market cycles to align cheap and expensive investments to their goals.

Investors should consider multiple sources of portfolio income: bond coupons, stock dividends, financial strategies and capital growth. Individually, each source offers some degree of cash flow and opportunity for capital appreciation, and poses some risks from liquidity, volatility and growth. For example, in today's low-yield environment, investors relying excessively on cash flows are squeezing their bond portfolios harder than ever for that last bit of current income, and as a result venturing into riskier areas they normally might not consider. A diversified approach can help mitigate some of these risks.

Karin Kimbrough Managing Director

John Veit Vice President

sUMMARY

In a goals-based approach to wealth management, income is key to an investor's ability to fund essential goals. Investors should consider funding these goals through multiple sources of income, including coupons, dividends, financial strategies and capital growth. Given the current low rate environment, certain sources of income have become quite expensive and may not yield enough to meet spending needs. However, by drawing income from many sources at a sustainable rate and in a tax-efficient way, investors may be able to meet their goals while balancing risks.

The Wealth Allocation Framework

The Wealth Allocation Framework helps you put your goals and aspirations at the center of decisions about allocating your financial resources. This paper focuses on strategies that may be appropriate for Personal and Market asset categories.

Personal: Individual investors have a desire for safety and personal financial obligations they want to meet regardless of market conditions. To safeguard essential goals, investors can hold lower-risk assets--but they have to accept lower returns in exchange.

Market: When we invest, we strive to capture market growth most efficiently. Today, access to a broadening array of asset classes and types makes diversifying beyond stocks and bonds easier than ever before.

To learn more, read the whitepaper, Investing in a Transforming World: The Wealth Allocation Framework

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Are Not FDIC Insured

Are Not Bank Guaranteed

May Lose Value

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Are Not Insured By Any Federal Government Agency

Are Not a Condition to Any Banking Service or Activity

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Exhibit 1: Many sources to meet an investors income needs

n Equities are favored over bonds but come with higher risk of losses

n Sustained and growing dividends preferred

EQUITY DIVIDENDS

n Cash flows paid at discretion of firm management

n Bonds are expensive n Yields are not enough to meet most

income needs

n Cash flows are contractual

BOND COUPON

Income you need

today

Source: ML GWM Investment Management & Guidance. As of May 2015.

CAPITAL GROWTH

FINANCIAL STRATEGY

n Portfolio gains may be harvested adding to current income

n Prudent for retirees to trim profitable positions for income

n Less certain and subject to price fluctuations

n Annuities may provide retirement income

n Option overlay strategies augment equity income

n Annuities are contractual. option strategies that include principal risk

We recommend investors start by using the Wealth Allocation Framework to help set realistic goals and determine specific income needs, taking into account individual risk tolerance, time horizon and liquidity needs. We believe that drawing income from multiple sources, at a sustainable withdrawal rate and in a tax-efficient way, can provide an investor with a more optimal income portfolio (see Exhibit 1).

MULTIPLE SOURCES OF PORTFOLIO INCOME Once an investor has determined the income needed for systematic withdrawals, he or she should consider multiple sources of portfolio income. Bonds have traditionally been the main source of portfolio income for individuals. However, after a 30-year bull market and ultra-accommodative central bank policies, bonds have become richly valued and generally don't yield enough to meet income needs (see Exhibit 2). Dividend-paying stocks are the natural next step for income-seeking investors, though they come with a higher risk of losses, and currently also look somewhat expensive.

The next source involves certain specialized approaches that provide income solutions to address specific goals. For example, annuities can provide retirement income and certain options may help generate income and manage risks. Finally, an investor should also consider harvesting capital growth by selling portions of appreciating assets to enhance an incomegenerating portfolio. These capital gains are taxed at a lower rate than other types of income such as equity dividends.

BOND INCOME IS A GOOD FOUNDATION Bond income typically comes in the form of coupon payments ? contractually guaranteed streams of interest income paid at predictable intervals. With many kinds of bonds available to generate income, investors must choose between limiting risk and stretching for a higher yield. All bonds are not equal, and the biggest variables are credit risk and interest rate risk. Credit risk is the risk that a bond issuer fails to meet its contractual obligations to pay coupon interest and repay the principal to an investor. It can be minimized by selecting the relative safety

Exhibit 2: Both bond coupons and equity dividends are low and expensive

Percent Percent

10-Year Govt Bond Yield Average 16.0 14.0 12.0 10.0

8.0 6.0 4.0 2.0 0.0

1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012

7.0

S&P 500 Dividend Yield Average

6.0

5.0

4.0

3.0

2.0

1.0

0.0 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012

Sources: FactSet, Haver Analytics and ML GWM Investment Management & Guidance. Quarterly data as of 1Q 2015. Past performance is not indicative of future results.

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of Treasuries and high-quality municipal bonds, with the latter being an attractive choice for taxable investors. Alternatively, investors can select riskier bonds that pay higher coupons to compensate for the potential for default. Investment-grade corporate bonds, high-yield bonds and emerging market bonds carry varying degrees of credit risk.

Another way to get a higher yield is to invest in longer maturity bonds as they pay higher coupons to compensate for longer holding periods. However, they also have greater interest rate risk (also called duration risk), which is the risk that a bond's value declines as prevailing interest rates rise.

Laddering is a popular strategy in this environment that enhances cash flows while helping to reduce longterm interest rate exposure. It involves building a portfolio of bonds with staggered maturities where cash flow from currently maturing bonds is reinvested at regular intervals in new ones with higher interest rates.

To baIance the risk and return of a fixed income portfolio, investors also can apply a core/satellite portfolio construction approach. In this strategy, the core is made up of Treasuries, municipals and high-quality corporate bonds, while the satellite consists of the more risky varieties. The core typically makes up the majority of the portfolio, and the size of the "satellite" varies depending on the risk tolerance of the investor.

EQUITY DIVIDENDS OFFER BOTH CURRENT AND POTENTIALLY GROWING INCOME Dividend-paying equities or funds can play an equally important role as a source of income in a diversified portfolio. Dividends are regular, often quarterly, payments by companies or funds to shareholders. However, unlike coupon payments on bonds, dividends are not contractually guaranteed and can fluctuate over time.

High-dividend equities can typically be found in more mature industries, such as utilities and telecom, or issued by lowgrowth firms where profits do not need to be reinvested into the company. Dividend-growth stocks offer the advantage of expected increases in dividends, and therefore greater income for the investor over time. While rising dividends can be attractive, they can also be very popular and consequently the stocks can be expensive. However, the risk this poses can be mitigated by diversifying across various sectors.

In addition to stocks, there are other sources of dividends though they may not be suitable for all investors. Other types of equity instruments that pay dividends include Master Limited Partnerships (MLPs) and Real Estate Investment Trusts (REITs). It also may be worthwhile to look abroad for dividend income opportunities. Global markets can provide relatively attractive options for further diversifying an incomegenerating portfolio. Suitable global opportunities for an investor's specific goals can be identified through advice from a Financial Advisor.

Like coupons, dividend income is also relatively expensive at this time, although given the accumulation of cash on corporate balance sheets (see Exhibit 3), it may be set to grow (see Exhibit 4). Even with a portfolio of coupon and dividend income, the yields still may be in the range of only 2% to 3%. Investors can accept the market rate and move on, or, as we suggest, consider diversifying into additional sources of income.

Cash on Corporate Balance Sheets in Billion USD

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

S&P 500 Dividends in Billion USD

Exhibit 3: Corporate cash and dividends

1,600 1,400 1,200 1,000

800 600 400 200

0

Cash Dividends

400

350

300

250

200

150

100

50

0

Sources: FactSet, Haver Analytics and ML GWM Investment Management & Guidance. Quarterly data as of 1Q 2015. Past performance is not indicative of future results.

S&P 500 Dividend Payout Ratio

Exhibit 4: Dividend payout ratios low but likely to rise

160%

140%

120%

100%

80%

Avg = 54%

60%

40%

20%

'00 '05 '10 '15 '20 '25 '30 '35 '40 '45 '50 '55 '60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10

Source: S&P, BofA Merrill Lynch US Equity & US Quant Strategy. Data as of April 2015. Past performance is not indicative of future results.

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FINANCIAL STRATEGIES SUCH AS ANNUITIES AND OPTION OVERLAYS Financial strategies encompass a potentially broad range of income solutions. These include investments such as annuities, market-linked securities and options, among others. Often income from these sources depends not on a dividend or a coupon, but on something else such as the creditworthiness of an insurance company. Yet these strategies can be valuable to investors in diversifying the sources of income. Owing to their somewhat more complex nature, these forms of income generation often offer higher rates of return than coupons and dividends, but also carry special risks.

An annuity can complement a traditional investment portfolio as a financial instrument that could provide lifetime income.1 Numerous research studies have shown that allocating a portion of investors' portfolios to annuities could help them reduce the risk of outliving their retirement assets. Income annuities convert assets into lifetime income commencing immediately or at a defined point in the future. Deferred fixed or variable annuities with optional living benefit riders (available for an additional cost) can help protect retirement income regardless of how the annuity investment performs. There are specific risks unique to different types of annuities that a Financial Advisor can help explain.2

Selling options also presents an opportunity to generate income in a portfolio. Typically, an investor seeking income will sell an option to collect the premium, generating income. A classic example is selling covered calls. In this case, an investor sells an option to buy equities he owns. The investor earns the premium and has limited principal risk if the option is exercised given that he already holds the stock. Selling covered calls on securities that appear susceptible to short-term declines may be a smart strategy, as the premiums earned can help offset any volatility. As always, the use of derivatives requires a complete understanding of the risks and limitations of a particular strategy, and can benefit from the guidance of a Financial Advisor.

Market Linked Investments (MLI) can also generate portfolio income. Certain structures such as STEP Income Securities (STEPS) can provide an investor with regular income in addition to growth potential. However, these are unsecured securities of an issuing company and should be used appropriately.

HARVESTING CAPITAL GROWTH: SELLING SOME PORTION OF A PORTFOLIO TO PROVIDE INCOME Most investors only consider the cash flows like dividends and coupons when planning for income. However, this approach is incomplete. Investors should also consider the capital appreciation of investments in their portfolio as a source of income. By harvesting capital gains in addition to relying on cash flows, the investor can work toward a total return strategy. The simple approach is for the investor to generate income by selling a portion of the portfolio at regular intervals to meet liquidity needs. Historically, total returns have varied over time, so an investor should maintain a spending rate below the average total return of the portfolio to avoid unintended shortfalls (see Exhibit 5). While there are potential tax and fee implications with this approach, the simplicity and ability to tie asset sales to a consistent portfolio rebalancing process are key to success. An added benefit of this portfolio rebalancing as part of an active management approach is mitigating the risk that the portfolio drifts from strategic allocations to ones with a different risk profile (see Exhibit 6).

Exhibit 5: Average portfolio return should exceed an investor's spending rate

30.0%

Total Return (annual) Average Return 4% Spending Rate

20.0%

10.0%

0.0%

-10.0%

-20.0%

-30.0%

Percent 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013

Source: ML GWM Investment Management & Guidance and Consolidated Investment Analytics. Annual data as of 2014. Note: 60% / 40% - Indices are represented as 60% S&P 500 Index and 40% Barclays U.S. Aggregate Index. Rebalancing is done annually.

Past performance is not indicative of future results.

Exhibit 6: The risk and return of rebalanced versus

nonrebalanced portfolios

12.4%

Risk 13.2%

13.8%

Return

9.5%

9.5%

9.4%

10.4%

11.0%

9.9%

10.2%

8.7%

7.5%

Jan 1970? Jan 1980? Jan 1990? Dec 2013 Dec 2013 Dec 2013

Nonrebalanced portfolio

Jan 1970? Jan 1980? Jan 1990? Dec 2013 Dec 2013 Dec 2013

Rebalanced portfolio

Sources: Morningstar. *For further explanation please see the appendix on page 7.

1 All annuity guarantees and payout rates are backed by the claims paying ability of the issuing insurance company. 2 Please see the appendix on page 7 for note detail.

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Exhibit 7: Stylized lifecycle timeline of income-generating investments

Investor in her 30's

Dividends Global growth stocks

Capital Growth Harvest capital gains

Coupons Investment grade bonds

Investor in her 50's

Dividends High quality global dividend growth stocks

Coupons Investment grade bonds

Investor in her 70's

Dividends Stable dividend stocks

Financial Strategies Annuities

Coupons U.S. Treasuries, Munis, CDs

Time Horizon to

Retirement

Harvesting Capital Growth to Augment Income

Source: ML GWM Investment Management & Guidance.

PERSONAL GOALS AND THE BUSINESS CYCLE MATTER TOO While we recommend assembling a well-diversified portfolio of income-generating investments consistent with one's investment objectives, it is important to consider how well each instrument aligns with an investor's goals within the Wealth Allocation Framework.

For example, in the case of retirement income, a natural tendency would be to consider relatively secure strategies such as government bonds. However, retirees in their 70s also may need to invest in dividend-paying equities that can provide growth of capital (see Exhibit 7). By contrast, an incomeseeking investor in her 30s may favor much higher allocations to dividend-growth stocks and capital appreciation.

In addition, the optimal allocation of income investments can change with the business cycle. For example, in an economic expansion, a balanced menu of income-generating investments may call for greater emphasis on dividends from sectors that do well in the early phase of an economic expansion-- Consumer Discretionary and Staples as well as Technology and dividend-growth stocks. By contrast, if the economy is approaching a recession, an investor might emphasize income sources from coupons with lower credit risk, such as Treasuries and municipal bonds (see Exhibit 8). When interest rates rise, as we expect in late 2015, it could be prudent to avoid extended interest rate risk by selecting bonds with shorter maturities, higher coupons or variable rates, and to favor bluechip dividend-paying equities. Rising rates may also present headwinds to equity price appreciation.

Exhibit 8: Select income-generating options along a stylized business cycle

Bonds: Treasuries

Munis

Dividend Growth Equities

Income Equities: Utilities

RECESSION

High-quality Equities: Consumer Staples Technology

EXPANSION

Source: ML GWM Investment Management & Guidance.

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CHOOSE WISELY AMONG INCOME INSTRUMENTS Income instruments offer different combinations of risk and reward and various levels of liquidity. Working with a Financial Advisor can help you choose wisely among them based on the following considerations.

n Loss of Capital: Investors who may have an imminent need for the capital in a portfolio may want to take less capital risk as the impact of a market selloff can be longlasting. While yields on Treasuries are generally unattractive compared to other classes of fixed income, they continue to help diversify portfolios and principal repayment is virtually guaranteed. Risk-averse investors with a focus on capital preservation may have to be content with investments offering a lower yield.

n Greater Volatility and Correlation: Certain instruments may offer higher income but also inject more volatility into a portfolio, which may not align with an investor's risk tolerance. In addition, some income instruments may be relatively safe on their own but their price movements can be highly correlated with those of other investments, making an overall portfolio more vulnerable to broad changes in value.

n Income Stability: Counting on income from equity or bond instruments is not always reliable as the cash flows from coupons and dividends can be cut if the issuer runs into financial difficulties.

n Liquidity: In certain cases, income-generating investment vehicles, such as closed-end funds (CEFs), may be infrequently traded (or "illiquid"). They may also trade at a price different from the collective value of the underlying holdings.

n Concentration Risk: Many equity income products have a high proportion of their assets allocated to a few sectors (such as Utilities and Telecom), which may increase the risk in a balanced portfolio from those sectors experiencing a

downturn. The concentration of risk can come in several forms--country or style, for example--and investors must be aware of the unique issues associated with those investments.

n Unintended Risks: Equity segments that have recently become favorite sources of income have a greater sensitivity to interest rates. REITs and MLPs have historically underperformed broad equity markets in rising rate environments, and have exhibited greater volatility relative to fixed income.

n Tax Implications: Of all of the variables that could affect investment income in the years ahead, we believe one of the most certain is rising taxes. Neutralizing taxes at the investment level is a proven strategy, but requires attention to all applicable tax laws and a thoughtful approach that combines active tax management of positions with overall risk management of the portfolio. We strongly urge investors to consult with advisors and tax professionals for specific advice on their individual situation.

PORTFOLIO STRATEGY The quest for income is unlikely to end soon as Fed policy is expected to remain accommodative even after the first rate increase, keeping government bond yields low for longer and valuations unattractive. Beyond bonds, high-dividend equity valuations remain elevated relative to history, limiting the capacity for dividend yields to increase. A blind reach for an income target pushes investors further out on the risk spectrum.

We encourage investors to adopt a more holistic, total return approach to generating income to meet sustainable spending needs. To this end, we believe that an optimal portfolio should include many income sources that can provide both cash flow and capital growth. The appropriate blend must be tied to one's overall financial goals, taking into consideration an individual's risk tolerance, time horizon, income and liquidity needs with a spending rate that sustains the investor's wealth.

Generating Portfolio Income

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Sources, References and Further Reading Ashvin B. Chhabra, "Stretching for Income," Merrill Lynch Wealth Management CIO Monthly Letter, March 2014.

Yago Gonzalez, Himanshu Almadi, and Rajesh Kohli. "Income Solutions Framework," Merrill Lynch Wealth Management Institute Whitepaper, Summer 2014.

Rajesh Kohli, "Using Dividend Growth Stocks to Pursue Financial Goals," GWM Investment Management & Guidance, Spring 2015.

David Laster, Anil Suri and Nevenka Vrdoljak. "How Immediate Annuities Can Help Meet Retirement Goals," Merrill Lynch Wealth Management Institute Whitepaper, Summer 2013 (Updated Spring 2015).

David Laster, Anil Suri and Nevenka Vrdoljak. "Systematic Withdrawal Strategies for Retirees," Merrill Lynch Wealth Management Institute Whitepaper, Spring 2015.

Christopher J. Wolfe, Nikhil Mehra, and John Veit. "Upside Down Investing," Merrill Lynch Private Banking & Investment Group CIO Monthly Letter, June 2013.

APPENDIX Note (from page 4): All contract and rider guarantees, optional benefits and any fixed subaccount crediting rates or annuity payout rates, are backed by the claims paying ability of the issuing insurance company. They are not backed by Merrill Lynch or its affiliates, nor do Merrill Lynch or its affiliates make any representations or guarantees regarding the claims paying ability of the issuing insurance company. It is possible to lose money in a variable annuity purchased with an optional protection rider. Variable annuities have holding periods, limitations, withdrawal charges, exclusions, termination provisions, and terms for keeping them in force. Optional riders may be irrevocable and expire without use.

Exhibit 6 Details: E ach portfolio consists of 60% stocks, 30% bonds, and 10% cash at the portfolio begin date. The 60% stock allocation consists of 30% large, 15% small, and 15% international stocks at each portfolio begin date. The bond allocation consists entirely of five-year U.S. government bonds, while the cash allocation consists of 30-day U.S. Treasury bills. The portfolios have been rebalanced annually. Large stocks in this example are represented by the Standard & Poor's 500?. Small stocks are represented by the fifth capitalization quintile of stocks on the NYSE for 1970?1981 and the performance of the Dimensional Fund Advisors, Inc. (DFA) U.S. Micro Cap Portfolio thereafter, international stocks by the Morgan Stanley Capital International Europe, Australasia, and Far East (EAFE?) Index, government bonds by the five-year U.S. government bond, and cash by the 30-day U.S. Treasury bill. The data assumes reinvestment of income and does not account for taxes or transaction costs. Risk and return are measured by annualized standard deviation and compound annual return, respectively.

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SaSmamanatnhtaha AzAzzazraerlelollo

VicVeicPerePsriedseidnet nt

Office of the CIO

Ashvin B. Chhabra

Chief Investment Officer, Merrill Lynch Wealth Management Head of Investment Management & Guidance

Mary Ann Bartels

CIO, Portfolio Solutions, U.S. Wealth Management

Emmanuel D. "Manos" Hatzakis

Director

Karin Kimbrough

Head of Macro and Economic Policy

Niladri "Neel" Mukherjee

Managing Director

Christopher J. Wolfe

CIO, Portfolio Solutions, PBIG & Institutional

Adon Vanwoerden

Asst. Vice President

JoJhonhn VeViet it

VicVeicPerPesreidseidnetnt

GWM Investment Management & Guidance (IMG) provides investment solutions, portfolio construction advice and wealth management guidance.

The opinions expressed are those of IMG 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 ML 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 Merrill 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.

No investment program is risk-free, and a systematic investing plan does not ensure a profit or protect against a loss in declining markets. 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.

Asset allocation and diversification do not assure a profit or protect against a loss during declining markets.

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. The investments discussed have varying degrees of risk. Some of the risks involved with equities include the possibility that the value of the stocks may fluctuate in response to events specific to the companies or markets, as well as economic, political or social events in the U.S. or abroad. Bonds are subject to interest rate, inflation and credit risks. Investments in high-yield bonds may be subject to greater market fluctuations and risk of loss of income and principal than securities in higher rated categories. Investments in foreign securities involve special risks, including foreign currency risk and the possibility of substantial volatility due to adverse political, economic or other developments. These risks are magnified for investments made in emerging markets. Investments in a certain industry or sector may pose additional risk due to lack of diversification and sector concentration. Investments in real estate securities can be subject to fluctuations in the value of the underlying properties, the effect of economic conditions on real estate values, changes in interest rates, and risk related to renting properties, such as rental defaults. There are special risks associated with an investment in commodities, including market price fluctuations, regulatory changes, interest rate changes, credit risk, economic changes and the impact of adverse political or financial factors. Income from investing in municipal bonds is generally exempt from federal and state taxes for residents of the issuing state. While the interest income is tax exempt, any capital gains distributed are taxable to the investor. Income for some investors may be subject to the federal alternative minimum tax (AMT).

Options involve risk and are not suitable for all investors. Before engaging in the purchase or sale of options, investors should understand the nature and extent of their rights and obligations and be aware of the risks involved in investing with options.

Investments in MLPs in the energy sector will be subject to more risks than if the investment were broadly diversified over numerous sectors of the economy. A downturn in the energy sector of the economy could have a larger impact than on an investment that does not concentrate in the sector. At times, the performance of securities of companies in the sector may lag the performance of other sectors or the broader market as a whole. In addition, there are several specific risks associated with investments in the energy sector, including the commodity price risk, depletion risk, supply and demand risk, and catastrophic event risk, among others.

Market-linked investments have varying payout characteristics, risks and rewards. Investors need to understand the characteristic of each specific investment, as well as those of the linked asset.

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 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 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 59? an additional 10% federal income tax may apply. Withdrawals reduce annuity contract benefits, values and optional guarantees in any amount that may be more than the actual withdrawal.

Variable annuities are sold by prospectus only. Your Financial Advisor can provide you with more information, including a current prospectus. 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.

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