| Accumulation Phase - 401(k)
Retirement Glossary & Terminologies
Accumulation phase is the period in which an investor is working
for a firm, contributing to his 401(k) plan and building up or adding
to his retirement nest egg. The sums of money contributed during
the accumulation phase are set to finance one's retirement years.
In the context of annuities, accumulation phase is when an annuity
investor is in the early stages of building up cash value of the
annuity for a specific financial objective. The phase when this
money built up in a retirement 401(k) account or an annuity is withdrawn
is known as the annuitization phase.
Postponing using money now (consumption) in the
accumulation phase and contributing it towards the annuity/401(k)
account means that investor will have more cash upon the annuitization
phase when he/she retires or breaks free from the annuity. Financial
advisors suggest the earlier the accumulation period is created
in life, the more advantages you will have of compounding interest
and protection from financial recessions/changing cycles of business.
During the accumulation phase when an investor
is making contributions to his annuity, he can often make
his own decisions about how to allocate those contributions
among investments such as fixed accounts, stocks, mutual funds,
bonds, etc. Also during the accumulation phase, the investor
is allowed to move funds between different investments without
facing capital gains tax, or income taxes.
Note: The length of your accumulation phase
determines how large your account grows because annuities
with a longer accumulation phase have more time to grow and
take advantage of compounding interest, which becomes really
powerful during later stages of its life.
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