What Are the Two Phases of an Annuity?
The Accumulation (or Investment) Phase:
This is the phase in which you add money to the annuity and collect interest in some form. A purchased deferred annuity is necessary when this option is utilized. You can purchase one in one lump sum. You can make investments periodically over time.
The Distribution Phase:
This occurs when you begin distributions from the annuity. Two general options for receiving distributions are available.
The first option allows some or all of the money in the annuity to be withdrawn in a lump sum. The full contract value can be “rolled” into another agreement without paying taxes. This is called a 1035 exchange. The second option while using an income rider is to turn on the income rider. A lot advisors positioned variable annuities win the past with very expensive riders (3-4%). Their clients have never turned on the rider.
If you have an income rider and you have either not turned it on or just turned it on, you should have it reviewed as soon as possible. Most of the time you can LOWER your fees from 3-4% to 1% and get 10-30% more income! Contact me for more information. I’m here to help you.
Doing your annuity homework? Start with our free comparison guide and the 7 questions to ask any advisor. Ready for real numbers? Talk to a licensed advisor in your state — we serve all 50 states.
Choosing the Right Strategy for Each Annuity Phase
The timing of when you transition from the accumulation phase to the distribution phase can significantly affect your overall retirement income. Waiting longer before activating distributions allows your contract value or income base to grow, potentially resulting in higher guaranteed payments when you do begin withdrawing.
During the accumulation phase, the type of annuity you hold — fixed, fixed indexed, or variable — determines how your money grows. Fixed and fixed indexed annuities offer downside protection, making them a popular choice for conservative savers who want predictable growth without market risk.
In the distribution phase, annuitization converts your contract into a stream of guaranteed payments, but it permanently surrenders control of the principal. Using an income rider instead preserves more flexibility, since your remaining contract value may still be accessible for emergencies or passed on to beneficiaries.
Understanding how these two phases interact with your broader retirement plan — including Social Security timing and required minimum distributions — is essential before committing to any annuity strategy.