The accumulation phase is when an individual saves money for retirement or a long-term goal, often through annuity products. Contributions are invested in securities or savings accounts, and tax-deferred growth is enjoyed. However, the value of securities can fluctuate, and insurance policies can protect against losses.
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 the accumulated funds are converted into an income stream. Investors must ensure that they raise enough money during the accumulation phase to meet their projected income needs during their disbursement phase.
Most annuity products are classified as deferred annuities, which means that investors do not receive an immediate return on their investment. Typically, an annuity has a specific accumulation period that can last several years or even decades. The contract purchaser can make periodic contributions to the annuity during this phase. In some countries, the national government or the contract owner’s employer may also make contributions to the account. Accumulated funds are invested in securities such as stocks and bonds or in savings accounts that pay interest.
In general, 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on interest or dividend payments, as long as those amounts of money are reinvested in the account instead of being withdrawn. Consequently, during the accumulation phase, an investor enjoys tax-deferred growth; This means that the money grows faster than it would if it were invested in a standard taxable account.
While many retirement account and annuity products are individually owned, some companies market accounts that can have multiple owners. Typically, these products are marketed in pairs so that both contract owners can make regular contributions to the account. In general, the owners retire at about the same time, and both owners rely on the disbursements from the account as a 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 the name, the buildup phase does not always generate positive results. Securities such as stocks can go up and down in value over time. Consequently, 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 against such losses. Policyholders generally pay for insurance by making periodic premium payments during the accumulation period.
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