Accumulation Period: What it Means, How it Works, Example

An accumulation period (or accumulation phase) is a period of time during which regular payments to an investment are made or premiums on an insurance product, such as an annuity, are paid. The contract enters the annuitization phase when payments begin on an annuity.

Understanding the Accumulation Period

An accumulation period is the time period in which an investor accumulates funds and the value of their investment portfolio, typically with the goal of establishing a retirement nest egg. As the name suggests, the money in your account, or the value of your investment capital, grows over time until you are ready and able to use it. The length of the accumulation period may be selected when the account is opened, or it may be determined by when you withdraw funds depending on your retirement schedule.

The accumulation period in the context of a deferred annuity is the time when the annuitant is contributing to the annuity and increasing the value of their annuity account. This is frequently followed by the annuitization phase, in which the annuitant receives guaranteed payments for a set period of time, which is usually the rest of their life.

Accumulation Period and Retirement Planning

Deferred annuities are a popular method of investing for retirement. Investors can select from a variety of delayed annuities, including variable, fixed, and equity-indexed annuities. Each type has distinct characteristics, and each can have advantages and disadvantages depending on your personal financial condition and long-term investing objectives. They have varied degrees of risk, so the best selection would also depend on your risk tolerance.

The advantages of deferred annuities include the possibility of tax benefits as well as the assurance of knowing you will have income to cover your financial demands during retirement. For people who want to save as much as possible for their retirement needs, a long accumulation period can be a wise financial approach.

Several measures were included in the Setting Every Community Up for Retirement Enhancement (SECURE) Act to encourage employers to offer annuities as part of their 401(k) retirement plans to their employees. These elements include establishing an ERISA fiduciary safe harbor, which provides plan fiduciaries with certain liability protections when offering annuities through their 401(k) plan. The SECURE Act also makes 401(k) annuities transferable, which means that employees who move jobs or retire can transfer their annuity into another direct trustee-to-trustee plan without incurring surrender charges and fees.

Individuals accumulate savings by deferring expenditure until later in life, which can then be invested in the market and grow over time. Individuals can construct a very long accumulation period during which their savings can increase to large proportions if they invest money on a regular basis throughout their working careers. In a delayed annuity, the higher your contributions throughout the accumulation period and the longer the accumulation period, the higher your income stream will be once the annuitization phase begins.

Example of Annuity

A fixed annuity is a policy in which an individual pays a fixed sum each month for a predetermined time period (usually until age 5912) and receives a fixed income stream during their retirement years.

For example, suppose an annuity provides $1,000 of monthly income for the annuitant's lifetime beginning at the age of 65. To receive that future payout, the annuity holder must contribute $100 per month until the age of 60. The accumulating period begins with this payment in.