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What Is an Accumulation Phase?

K. Kinsella
K. Kinsella

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 accrued funds are converted into an income stream. Investors must ensure that they raise enough money during the accumulation phase to satisfy 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 which may last for 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. The accumulated funds are invested either in securities such as stocks and bonds or in interest paying savings accounts.

Man climbing a rope
Man climbing a rope

Generally, annuities and other types of retirement accounts are tax deferred. This means that the account owner does not have to pay taxes on interest or dividend payments as long as those sums of money are reinvested in the account rather than being withdrawn. Consequently, during the accumulation phase an investor enjoys tax-deferred growth; this means that the money grows faster than it would if invested in a standard taxable account.

While many annuity products and retirement accounts are individually owned, some companies market accounts which can have multiple owners. Typically, these products are marketed to couples so that both of the contract owners can make periodic contributions to the account. Generally, the owners retire at approximately the same time and both owners rely on the account disbursements as a primary or secondary income source during retirement. Some people even purchase longer-term annuities and make contributions throughout the accumulation phase with the intention of creating a future income source for their children or beneficiaries.

Despite the name, the accumulation phase does not always result in positive returns. Securities such as stocks can rise and fall in value over the course of 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 firms sell policies to protect investors against such losses. The insurees typically pay for the insurance by making periodic premium payments during the accumulation period.

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