When can investors typically expect to see the effects of compounding in annuities?

Investors can typically expect to see the effects of compounding in annuities during the accumulation phase before payouts begin. This is the period when additional contributions may be made, and any interest or investment gains are reinvested into the annuity. As these returns compound over time, the value of the annuity grows more significantly due to the interest being calculated on both the initial principal and the accumulated interest from previous periods.

This compounding effect allows the investment to grow at an accelerating rate, which is especially beneficial for long-term savings. The growth achieved during this phase is crucial for maximizing the eventual payouts once the annuity enters the distribution phase.

In the payout phase of the annuity, while there may still be growth based on the investment account's performance, the direct compounding effect characteristic of the accumulation phase has already played out and the focus shifts towards withdrawing or managing the distributions.

After surrendering the annuity or once the investment is fully withdrawn, compounding no longer applies, as the investor is realizing the returns rather than allowing them to grow. Thus, the accumulation phase is the critical time to observe the true benefits of compounding.