What Is the Accumulation Period of an Annuity?

If you plan to rely on steady income from an annuity for retirement, it’s important to understand how accumulation works. Essentially, an annuity’s accumulation period is the initial stage when you are funding the annuity. The length of this phase can vary depending on a number of factors, including how you decide to fund the annuity and how you choose to receive payments. Your annuity contract will specify the particulars of your annuity accumulation period, so you’re aware of this information when you open the annuity.

If you’re considering an annuity, a financial advisor can help decide whether this investment option is right for you.

What Is an Annuity?

An annuity is a financial contract with an insurance company that’s designed to provide a guaranteed income stream in retirement. You can choose to fund your annuity either with a lump sum or with a payment plan that allows you to fund the annuity over time. In return, you receive payments from the insurance company on a schedule determined ahead of time.

Annuities can be fixed or variable. Fixed annuities offer guaranteed payments over the length of the contract, intended to return the principal of the annuity plus a fixed amount of interest. Variable annuities also return the principal on a set schedule, but the interest is based on the annuity’s underlying investments. As a result, the interest can vary, making variable annuities a bit riskier than their fixed counterparts.

Annuities can also have different terms or lengths of time over which they will produce payments. Some will be for a set number of years – say 20 or 30 – and some will last until your death. You can also set up your annuity so it starts paying out immediately or choose to defer those payments until a later date, such as retirement.

What Is an Accumulation Period?

The accumulation period is simply the time when you are making payments to the insurance company. If you fund your annuity with a lump sum, the accumulation period also covers the period of time wherein the annuity is increasing in value.

The accumulation period ends when the annuity starts paying out per your contract. You may receive your payment as a lump sum, but it’s more common to receive a series of payments over the schedule you determined when you created the annuity.

How Do Accumulation Periods Work?

The accumulation period is when you pay into your annuity and it grows in value before payouts begin.

When you go to buy an annuity, you will determine whether to fund it with a lump sum or with payments that are made over time. You’ll also decide if you want the annuity’s payments to begin as soon as the annuity is fully funded or if you want to defer them until a later date.

If you opt to fund your annuity with a payment plan and defer those payments, the accumulation period will begin when you start making payments. It will continue when you have finished making all the necessary payments but are still deferring the annuity’s payments. You might fund it with a lump sum and opt to take payments immediately, in which case the accumulation period would be brief.

Annuities can be a great way to both save for retirement and turn your existing savings into a steady income stream. In the former case, annuities allow you to accumulate interest and earnings in a tax-deferred account. That means you won’t owe taxes until you start getting payments from the annuity.

Just keep in mind that there are risks associated with annuities. Annuity payments stop when you die, so you run the risk of never recouping your principal investment if you don’t live long enough.

What an Annuity Accumulation Period Might Look Like

Let’s say you purchase an annuity with a set payout structure. You agree to invest $500 a month for 15 years and take payments when you turn 65.

The accumulation period in this case would begin when you make your first payment to the insurance company. It would end when you turn 65 and start taking payouts from the annuity.

The accumulation period would be clearly delineated when you open the annuity, so it won’t come as a surprise. It’s important that you understand it upfront as part of the contract you agree to.

Factors That Influence the Accumulation Period

The way you fund an annuity has a direct impact on the length of the accumulation period. If you purchase an annuity with a lump sum, the period may be short, covering only the time before payouts begin. But if you choose to make regular contributions over many years, the accumulation period will last much longer and allow the account to grow steadily before it shifts into the payout phase.

The terms of the contract play an equally important role in determining an annuity’s accumulation period. Immediate annuities have almost no accumulation period, since payouts begin right away. Deferred annuities can delay payouts for years or even decades, extending the accumulation period and allowing more time for earnings to compound. The choice between immediate and deferred structures depends on whether you need income now or later.

Finally, your own financial goals also determine when the accumulation period ends. If your plan is to retire at 65, you may set contributions to stop and payouts to begin at that age. If you want to continue working and delay income, you can extend the accumulation period further. Aligning this stage with your retirement timeline ensures the annuity provides income when it is most needed.

Bottom Line

Before buying an annuity, research your options and consider professional guidance to choose one that fits your retirement goals.

While an annuity’s accumulation period is relatively easy to understand, choosing which one works for you might be a little more complicated. Do your research and consider talking to an expert financial advisor to understand how an annuity can fit into your larger retirement plan before you make a purchase. The length of the accumulation period can vary to align with the specifics of your financial needs and situation.

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