The accumulation phase is a period of saving for retirement or long-term goals, often associated with annuity products. Investors should ensure they save enough to meet their income needs during the disbursement phase. Annuities have a specific accrual period and are tax-deferred, with accumulated funds invested in securities. The accumulation phase can have multiple owners, and some people buy annuities for their children or beneficiaries. However, investors can lose money if the market value of securities falls below the original purchase price.
An accumulation phase is a period of years during which an individual attempts to accumulate money for retirement or another long-term goal. While this term can be used in conjunction with any type of investment, it is most closely associated with annuity products. The accumulation phase culminates in the disbursement period during which accrued funds are converted into an income stream. Investors should ensure they raise sufficient funds during the accumulation phase to meet their anticipated income needs during the disbursement phase.
Most annuity products are classified as deferred annuities, meaning investors do not receive an immediate return on their investment. Typically, an annuity has a specific accrual period that can last for several years or even decades. The contract buyer can make periodic contributions to the annuity during this phase. In some countries, the national government or the contract holder’s employer may also make contributions to the account. Accumulated funds are invested in securities such as stocks and bonds or in interest-paying savings accounts.
Generally, annuities and other types of retirement accounts are tax deferred. This means that the account holder does not have to pay taxes on interest or dividends as long as these monies are reinvested into the account rather than withdrawn. As a result, an investor enjoys tax-deferred growth during the accumulation phase; this means that the money grows faster than it would if it were invested in a regular taxable account.
While many annuity products and retirement accounts are individually owned, some companies market accounts that can have multiple owners. Typically, these products are marketed to couples so that both contract holders can make periodic contributions to the account. Typically, owners retire at approximately the same time, and both owners rely on account disbursements as their primary or secondary source of income during retirement. Some people even buy longer-term annuities and make contributions during the accumulation phase with the intention of creating a future source of income for their children or beneficiaries.
Despite its name, the accumulation phase does not always lead to positive returns. Securities such as stocks can go up and down in value over time. As a result, an investor could lose money during the accumulation period if the market value of the securities in the account falls below the original purchase price. In some countries, insurance companies sell policies to protect investors from such losses. Policyholders typically pay for insurance by making periodic premium payments during the accrual period.
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