The length of time when contributions are regularly made to an investment or premiums on an insurance plan. These investments or insurance plans are usually part of a retirement plan.
Accumulation Period Details
An accumulation period is the length of time an investor uses to build up a savings portfolio. The money in the account or investment continues to grow as you add money, accumulating until you access it. The portfolio is usually meant to be a retirement fund. Sometimes the accumulation period is set for a certain amount of time from the moment you open the account. Other times it is dependent on certain events happening, like the investor reaching the age of retirement.
There are different types of accounts that can have accumulation periods. A few examples include a 401k, a life insurance policy, or an annuity. Each type of account or investment has pros and cons. Some are riskier than others, and some have shorter accumulation periods. The one that you choose should depend on your circumstances and what you feel comfortable with.
Example of an Accumulation Period
One example of an accumulation period would be a 401k. Johnny opens a 401k when he is 35 years old. He sets the account up so that $250 from each paycheck is automatically placed in his 401k. This continues until he retires and begins accessing the funds. The accumulation period commences when he first opens the account and continues until he starts withdrawing the funds.
A life insurance policy is an investment that has a fixed annuity. It's referred to as fixed because you pay a set amount each month for a certain number of years, and you'll receive a certain amount during retirement. This timeline is determined when you set up the policy. Once you start receiving payments, the account enters the annuitization phase.
Significance of an Accumulation Period
The length of the accumulation period highly influences the amount in the account or investment when you start to access the funds. If you have a longer accumulation period, you have a longer amount of time to put money aside or grow your funds and investment. This is popular with investors who open an account early.
But not everyone starts planning for their retirement when they're young. If you're nearing retirement, then a longer accumulation period might not be as beneficial for your portfolio. If you feel comfortable having an annuity with a higher risk, then a shorter accumulation period might be a better fit. Of course, many different factors will affect how your account or investment grows.
You need to make sure that the amount you are putting into your account or investment is big enough and the accumulation period is long enough for you to get the amount you want. This is especially true if this account or investment is for your retirement. Thankfully, if you open a retirement plan with your employer, you do not have to stay with that employer for the rest of your working life. There is protection in place that if you switch employers or retire early, you can transfer the money to another annuity, account, or investment without incurring any surrender charges or fees.