The second step in the investment process where an individual begins to save to increase their investment.
How an Accumulation Phase Works
Before the accumulation phase takes place, the planning phase occurs. Before an individual can invest, an individual will need to plan for the accumulation of savings. They may review their current financial situation and determine ways to save more in the future. Once the planning phase of investment is complete, the individual will move onto the accumulation phase.
The accumulation phase begins when a person starts to save for the desired investment and ends when they begin to make distributions. The accumulation phase implicitly affects the final investment's size and the size of the payments made from the sum after being accumulated. Since several factors in the accumulation phase are under the investor's influence, it is critical to make logical investment decisions at all times.
Example of Accumulation Phase
Joe began working at the age of 16 and is now ready to retire. He began saving for retirement later in life at the age of 35 after starting his family. While Joe did not save for retirement on his own, by paying his taxes, the government accumulated some money for Joe after his years in the workforce. Joining the workforce marks the beginning of the accumulation phase for Joe.
During the accumulation phase, Joe may have a variety of income sources, beginning when he first joined the workforce. Here are some more popular options that Joe could have made contributions to so to increase his accumulation phase:
- Social Security: This is a contribution that is deducted directly from each paycheck.
- 401(k): This is a tax-deferred contribution made on a paycheck-to-paycheck, monthly, or annual basis if the company provides it. You can only set aside a particular amount per year, determined by your salary, age, and marital status.
- IRAs: An Individual Retirement Account (IRA) can be pre-tax or post-tax, depending on your preference. The sum you can spend varies year to year, depending on your salary, age, and marital status, as specified by the Internal Revenue Service (IRS).
- Deferred payment annuities: These annuities enable you to accumulate your money tax-free at a fixed or variable rate of return. Individuals may pay a monthly or lump-sum premium to an insurance provider in return for guaranteed income in the future, usually for ten years or more.
- Investment portfolio: An investor's investment portfolio includes stocks, government, corporate bonds, Treasury Bills, real estate investment trusts (REITs), exchange-traded funds (ETFs), mutual funds deposit certificates. The list can also include options, futures, and physical commodities such as real estate, property, and gold.
- Life insurance policies: Some life insurance plans, such as those in which a person pays an after-tax, fixed sum per year rises depending on a specific market index, may benefit after retirement. The policy will have to be of the kind that allows the owner to withdraw the principal and appreciate the policy tax-free in retirement.
Significance of the Accumulation Phase
Investors who consider their current and potential consumption needs will take advantage of the accumulation phase by growing their savings to a level that will be valuable as their income levels decline. Many people's lives show that income levels are higher for most people before retirement, and consumption levels are higher than income levels after retirement.
Most individuals who begin saving early in life make better use of their time in the investment process, allowing them to accumulate a more significant amount of money than those who start later in life. This reality emphasizes the importance of investing as soon as possible, and it allows you to increase your investments by relying on compound interest accumulation.