What is the accumulation phase?
The accumulation phase has two meanings for investors and those who save for retirement. It refers to the period when an individual works and plans and ultimately increases the value of his investment through savings. The accumulation phase is then followed by the distribution phase, during which retirees begin to access and use their funds.
Key points to remember
- The accumulation phase refers to the period in a person’s life during which they save for retirement.
- Accumulation occurs before the distribution phase when they are retired and spend the money.
- The accumulation phase also refers to a period during which an annuity investor begins to accumulate the commuted value of the annuity.
- The annuity phase, when payments are distributed, follows the accumulation period.
- The length of the accumulation phase will vary depending on when a person starts saving and when the person plans to retire.
How the accumulation phase works
The accumulation phase is also a specific period where an annuity investor is in the early stages of building up the cash surrender value. This construction phase is followed by the annuity phase where payments are made to the annuitant.
The accumulation phase essentially begins when a person begins to save money for retirement and ends when he begins to receive distributions. For many people, it starts at the start of their working lives and ends when they retire from the workforce. It is possible to start saving for retirement before you even start the work phase of your life, for example when someone is a student, but this is not common. In general, integration into the labor market coincides with the start of the accumulation phase.
Importance of the accumulation phase
Experts claim that the sooner an individual begins the accumulation phase, the better, with the long-term financial difference between starting to save in their twenties and in the substantial thirties. The postponement of consumption by saving during an accumulation period will most often increase the amount of consumption that we can have later. The earlier the accumulation period in your life, the more benefits you will have, such as increased interest and protection from economic cycles.
In terms of annuities, when a person invests money in an annuity to provide income for retirement, they are in the accumulation period of the life of the annuity. The more it is invested during the accumulation phase, the more it will be received during the annuity phase.
Example from the real world
There are many income streams that an individual can build up during the accumulation phase, from entering the labor market or, in some cases, earlier. Here are some of the more popular options.
Social security: a contribution automatically deducted from each pay check you receive.
401 (k) s: an optional tax-deferred investment that can be made from check to check, monthly or annually, provided that your employer offers such an option. The amount you can reserve has annual limits and also depends on your income, age and marital status.
IRAs: is an individual retirement account that can be before tax or after tax, depending on the option you choose. The amount you can invest varies from year to year, as indicated by the tax office, and depends on your income, your age and your marital status.
Investment portfolio: an investor’s portfolio, which may include assets such as stocks, government and corporate bonds, treasury bills, real estate investment trusts (REITs), exchange-traded funds ( ETF), mutual funds and certificates of deposit. Options, derivatives and physical products like real estate, land and timber can also be included in the list.
Deferred payment annuities: these annuities offer tax-deferred growth at a fixed or variable rate of return. They allow individuals to make monthly or lump sum payments to an insurance company in exchange for guaranteed income over time, usually 10 years or more.
Life insurance policies: Certain policies can be useful for retirement, for example if a person pays a fixed amount after tax each year which increases according to a particular market index. The policy should be of the type that allows the person to withdraw retirement capital and any appreciation of the policy that is essentially tax-exempt.