Accumulation Phase

What is the Accumulation Phase?

The term accumulation phase means two different things for investors and those saving for retirement. It refers to a period where an individual is working and planning to build their investment through savings. This is then followed by the distribution phase. In this phase, the retiring individuals can access funds.

Accumulation phase also refers to a period when an annuity investor is building up the cash value of the annuity. This phase is then followed by the annuitization phase. In this phase, the payments are paid out to the annuitant.

In layman’s terms, the accumulation phase refers to the period where a person is saving for retirement. It also means different for retired individuals because the accumulation phase for them comes after the distribution phase where they spend the money.

This process starts for many individuals when they have started working in their lives and ends when they retire. However, an important aspect to note is that it is always possible to save for retirement when one is yet to begin work. A student can also start saving for retirement. But this is not common and the usual trend is the work-life begins the savings for retirement life.

Example of Accumulation Phase

The accumulation phase is where an individual starts saving for retirement. The Income streams for this savings could be many. Here are some trending options.

1. Life Insurance policy

If a person pays an after-tax, the fixed amount annually grows based on a specific Market index. This policy would be useful for post-retirement if it allows the person to withdraw in retirement from the policy tax-free.

2. Investment Portfolio

Investor’s holdings in stocks, Bonds, funds, treasury bills, etc., are included here. Essentially, his/her assets are useful.

3. Individual Retirement Account

An individual retirement account depends on what is chosen. It could be pre-tax or after-tax. The Internal Revenue Service (IRS) decides the amount you may invest year-to-year. This depends on your income, age and marital status.

4. Social Security

A set amount is deducted from every income you get. This can serve as a good addition to your retirement plan.

5. Deferred Payment Annuities

Such types of annuities offer tax-deferred growth. This is at a fixed or variable rate of return. Monthly lump-sum payments to Insurance companies can be made for a certain period of time by individuals here.

Significance of Accumulation Phase

Various experts have noted that an individual who begins the accumulation phase sooner in his life can reap the benefits. Saving what you spend in the present for the future could help you have more spending power in the future. The earlier an individual start with the accumulation period, the greater benefit he will have with compounding interest and protection from business cycles.

When it comes to annuities, when an individual invests money in the annuity for retirement, the accumulation period for annuity’s life span is done. The more you invest, the more will be availed during annuitization phase.