Broker Check

Accumulation vs. Distribution

January 11, 2017

The goal of any investment strategy is to generate funds to support you and your family members during your retirement years. The generation of funds through investing are dispersed through dividends and other payouts, such as withdrawals from your standard and Roth IRA plans. The question most individual's face during retirement is what to do with those funds. The most common decision revolves around continued accumulation and distributions from your accounts.


Accumulation Defined

Accumulation is defined in many ways, but the simplest of these is the idea of allowing your money to accumulate within a fund, and any income generated will be used to continue to invest in the fund. Over the course of time, reinvesting your income back into the fund (accumulation) has the potential to provide the bulk of your returns for retirement.


The thinking here is that the more you invest with time, the greater the potential becomes for growth. This growth occurs not just in the form of more money going into the fund, but having a greater base for compound interest within the account. Generally speaking, there is an accumulation phase to your investing that occurs when you are younger and can afford to take more risks because you have more time to recover your losses.


As far as the pros and cons of accumulation:


     -Process is free of charge

     -Occurs automatically with many accounts

     -Ideal for long-term goals like retirement  



     -No regular earnings paid out



Distribution Defined

Conversely, distribution is when the money generated from your investments is paid out to you as income in the form of cash. Different types of funds provide different payout intervals, with some funds (for example) offering annual or bi-annual payouts. As you get closer to your financial investing goal, such as retirement, you are nearing a common distribution phase of investments.


The distribution phase is often defined as the ten-year period before retirement, a period in which it is tougher to absorb losses and hope for a rebound in your investments. This is the time when your investing approach needs to be refocused to meet the new realities in your life.


The pros and cons of distribution include:


     -Provides additional income on a regular basis

     -Value rises over time

     -Reinvesting a distribution payout would come with sales charges



     -Lowers the value of a fund's assets

     -Funds growth do not match the rapid growth of accumulation



Proper Financial Advice is Key

The plain and simple facts are that today, Americans are living longer than at any point in history. USA Today cited, with the most recent data, in 2012 that life expectancy in the United States has hit the highest rate in recorded history. The average American now lives 78.8 years, with those who were 65 years old in 2012 expected to live an average of 19.3 years from that point.


It is important to consult your financial advisor about the benefits and drawbacks of accumulation and distribution, and decide which one is best suited for you and your lifestyle as you approach and ultimately enter retirement.


For more information please contact Manhattan Ridge Advisors.