How much interest do you earn on one million dollars?

Immediate Annuities Advantages

For retirees who worry about running out of money at some point, an immediate annuity offers perhaps the single most attractive feature of any retirement product: a fixed-income stream that is guaranteed for life—whether the purchaser dies the day after buying the annuity or lives to be 120.

Immediate annuities are sold by life insurance companies. They are not classified as investments but as contracts by which the retiree places a lump sum into the annuity, which draws interest. The annuity’s principal and interest balance are amortized with a series of fixed, regular payments to the retiree. A couple of factors determine the amounts of these payments. One is prevailing interest rates; when interest rates are high, annuities pay more. The other factor is the retiree’s life expectancy. The longer they are expected to live, the lower the monthly payments. For this reason, women, who generally outlive men, receive smaller annuity checks on the same balance.

While life expectancy is used to calculate benefit amounts, the checks do not stop coming once that age is reached and the annuity balance is amortized. Rather, the retiree receives checks for as long as they live. “Purchasing an immediate annuity is like buying a pension. You exchange a lump sum for the insurance company promising to pay you for the rest of your life,” says Georgia Bruggeman, CFP, Meridian Financial Advisors LLC, Holliston, Mass.

An annuity is essentially insurance against outliving one's money, with the insurance company assuming the risk of the individual living too long. A retiree who prioritizes peace of mind in this regard, knowing that their parents and grandparents all lived to 100, should consider an annuity.

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Bottom Line

If you have $1 million and are interested in growing it on interest, there are many ways you can consider investing your money. Interest-bearing assets can be a very smart way to invest $1 million while also keeping it safe. Bonds are generally your best choice for maximizing returns, but assets like a certificate of deposit or an annuity can be useful if you want to minimize risk.

8. Consider Balancing with CDs and Securities

Of course, even millionaires have to worry about keeping a balanced portfolio and ensuring that not all of their capital is in riskier investments. That’s where options like CDs and securities come in. These have traditionally been a way to out-earn inflation so you aren’t losing money with it sitting around. But they’re also much safer than any other type of investment. So be sure you talk to your financial advisor about the best way to utilize tools like these to bring balance to your portfolio.

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What is the Interest on 1 Million Dollars a Month?

If you had a had that huge pile of cash, then what is the monthly interest on 1 million dollars?  Put another way, how much interest does 1 million dollars earn monthly?

Using the same investment figures as above, here’s how much you’d earn each month on one million dollars:

  • 0.5% savings account: $417 a month
  • 1% government bond: $833 a month
  • 3% annuity: $2,500 a month
  • 7% real estate: $5,833 a month
  • And, 10% in S&P 500: $8,333 per month

 

Track Your Investments

As you begin pulling together your various investments, it’s important to figure out how you’re going to keep track of it. Sure, you could pay someone to do it all for you. But that would just eat into your returns and your ability to grow your money. If you’d prefer to keep an eye on your investments yourself, check out services like Personal Capital, which help you pull together all the various threads of your financial life, from your budget to your investments on different platforms.

Learn More: Personal Capital Review: A Free Wealth Management Tool

Personal Capital can help you track your investment performance, spot potential problems, and keep an eye on your overall portfolio balance. It can also run your day-to-day budget, so it’s a very flexible platform that’s worth using once you’re ready to start keeping track of all this money.

The most important thing to remember is once you hit that million-dollar goal mark you’ve been saving for, the work isn’t over. You could easily lose it with celebratory spending. Have a plan in place for how you want to make this money work for you. With the right investment vehicle, you’ll be cruising down the road towards financial freedom.

How To Retire On A Million Dollars By Age

The following guaranteed income amounts are annual and do not include Social Security Benefits.

Retire At Age 55 With $1 Million

The following table estimates the guaranteed annual income a 55-year-old can retire with $1 million. This does not include Social Security Benefits

Annuity Purchase DateAnnual Income At 55
Age 40$98,750
Age 45$97,670
Age 50$69,999
Age 55$49,375

Retire At Age 60 With $1 Million

This table estimates the guaranteed annual income a 60-year-old can retire with $1 million. This table does not include Social Security Benefits.

Annuity Purchase DateAnnual Income At 60
Age 40$126,167
Age 45$113,732
Age 50$106,219
Age 55$77,875

Retire At Age 65 With $1 Million

The following table estimates the guaranteed annual income a 65-year-old can retire with a $1 million annuity. This table does not include Social Security Benefits.

Annuity Purchase DateAnnual Income At 65
Age 40$154,665
Age 45$141,971
Age 50$147,762
Age 55$121,450

Bank Account

The interest rates you get with checking or savings accounts are modest and will not generate high returns in a hurry.

The average checking account interest rate is about 0.03%. And for savings accounts, it’s about 0.06%. Check here for tips on how to get and earn high interest savings account. And now there are many online bank accounts with zero or low maintenance fees.

Depending on your bank, your deposit will generate compound interest. Compound interest is the generation of interest on interest as well as the principal. Interest can be compounded on a daily, weekly, biweekly, monthly, quarterly, or annual basis, depending on the bank.

So, let’s keep this as simple as possible. Let’s imagine you have $1 million in a bank account. If the daily compound interest was 5%, and you don’t contribute, then you would have $1,051,268 after a year.

Sounds great. But remember, it will take you a year to accrue that interest. You couldn’t begin to live off that $51,268 interest on $1 million for a year at least.

And you would need to live on a budget to live on $50,000 annually in a big city. And that is assuming $50,000 would support one person. It may not be enough to pay the living expenses for a couple or family for an entire year.

But if you can wait a decade, you will generate over $648,665 at 5% daily compound interest on that $1 million.

Still, 5% interest on a bank account is not the norm. At 0.03% annual compound interest, you will generate $300 on $1 million. Or, about $3,000 after a decade.

How about 0.06% compound interest? it would be $600 after a year or $6,017 after a decade. If you want to know “How much interest will I earn on $1 million?” well, it will be modest.

Here is a handy compound interest calculator for you to calculate yourself and compare rates.

Conclusion

To sum up, if you had two million dollars to invest, you could potentially earn anywhere from $833 to $16,667 per month in interest. Obviously, these numbers vary depending on the terms of your loan and other factors, but this will give you a good idea of all the possibilities and limits.

By understanding the basics of interest, you can make more informed decisions about your finances and hopefully save yourself some money in the long run.

Interest on 1 Million Dollars for a Sustainable Retirement

$1 million is a decent amount of money if you’re retiring in the next few years. You can likely survive quite nicely on that amount.

Let’s look at your “safe” withdrawal rate if you think about the interest on 1 million dollars in your 401(k), for example. 

Generous Retirement Example

  • $1 million starting balance at 4% rate of return
  • 30-year retirement (a pretty lengthy retirement)
  • $55K withdrawal per year

Using Bankrate’s calculator, in that example, you’d still have $63K left in your accounts by year 30. It’s not an insanely cushy retirement, but it’s certainly not a shabby one! Especially if you entered retirement completely debt free!

More Frugal Retirement Example

  • $1 million starting balance at 4% rate of return
  • 30-year retirement
  • $30,000 withdrawal per year

You’ve cut your spending in half and kept the rest the same, leaving you with over $1.5 million after 30 years! This would enable you to live a decent lifestyle in retirement, and you can even leave a robust inheritance behind. 

Super-Early Retirement Example

  • $1 million starting balance at 4% rate of return
  • 50-year retirement (retire at 40 and live to be 90!)
  • $30K annual withdrawals

End up with $2.5 million even after 50 years of retirement! Or withdraw/spend a bit more and be totally fine. Your spending likely wouldn’t stay exactly at the $30K number every year in an early retirement, but you get the idea. 

If you play with the numbers, looking at the interest on $2 million, $1 million, or $500K, you can check out different scenarios. Maybe you plan on working until age 70 and you anticipate living to be 90. You’d only need to finance 20 years of retirement in that case. 

Or if $30K annual spending sounds too low for you, maybe $40K is a good middle ground. Withdrawing $40,000 a year for 50 years after retiring early would still net you $860K at the end of your life!

Total return

Investors love income. We’re excited by high interest rates and big stock dividends, and we consider them different from the money we make when a stock or bond goes up in value.

A $100 dividend or interest payment feels like money we can spend; a $100 increase in the value of our stock holdings doesn’t induce us to sell; it might encourage us to buy more.

This mental distinction is usually a mistake, because what matters is how much money you have and how it’s invested, not whether the source of the money was dividends, capital appreciation, or a $25 check from Grandma.

Investors who focus on wringing more income out of their portfolio often end up taking additional risk without realizing it.

Yes, junk bonds, dividend stocks, insurance contracts, and peer lending offer higher yields than CDs.

They also offer higher risk of one kind of another, usually default risk (the risk that your loan won’t be repaid), liquidity risk (you won’t be able to get your money back when you want it without paying a substantial fee), and market risk (the value of the stock or bond goes down, and you have to sell at a loss).

Trying to preserve your capital and earn more income by using these kinds of products isn’t always a bad idea, but it’s a strategy often pursued by people who are averse to owning stocks and believe they’re taking less risk by owning bond-like products.

It’s like driving your car because you’re afraid of flying: it provides the illusion of lower risk.

The sad fact is this: if you want to set aside a large sum of money for five years and be sure of getting your principal back, adjusted for inflation, you can’t do it. It’s not possible. Interest rates are too low.

Keeping Up With Inflation

Some annuities offer a guaranteed lifetime income with the ability to increase regularly to keep up with inflation. Once the income increases, the payment amount is locked in and can never go backward from that point forward.

Example

A 40-year-old purchases a $1,000,000 annuity with a lifetime income rider to retire at age 60. At age 60, the lifetime income amount may be guaranteed $105,380 initially but hypothetically increases to $288,439 by age 67. Once the income has increased to $288,439 annually, this payment is locked in and can never go below $288,439 in the future.

On the other hand, a performance-based annuity may hypothetically generate an income of $381,349 a year for life starting at age 60, increasing to $636,610 a year by age 70. Once the income has increased to $636,610 annually, this payment is locked in and can never go below $636,610 in the future.

How Much Does a $1,000,000 Annuity Pay Per Month?

In today’s low-interest rates environment, a 65-year old person purchasing a 1 million dollar annuity would receive about $5,660 per month. This would last for the rest of your life, though women would receive a bit less due to having longer life spans.

Though it’s a nice amount of money to have guaranteed for the rest of your life, that 1 million will be tied up for as long as you live, so choose carefully!

How Much Interest Can one Million Dollars Earn Per Year?

A $1 million investment can earn interest from $33

A $1 million investment can earn interest from $33,000 per year invested in US Treasury bonds to around $1.2 million invested in real estate after a ten-year investment term. If you want to know how to earn a million dollars to live off the interest, it all depends on where you invest your money. 

There are many roads that will lead you to earn different rates of interest or profits when you invest your 1 million dollars. Before you roll the dice with your money, it’s better to make sure you’re not too averse to risk since your potential profits will vary tremendously.

As you will see from the list below, the stand-out method to grow your million dollars is investing it in real estate. There is never a 100 percent sure winner in any investment, but real estate, time and time again, is a sure-fire way to grow your 1 million dollars because you actually have assets you can rent or sell if necessary.

Traditional Portfolio Advantages

Another strategy to make $1 million last through retirement is to place the money in a diversified portfolio and withdraw a set percentage per year, indexing that amount to inflation. Many retirees who use this strategy follow the 4% rule. They withdraw 4% the first year, or $40,000, and they live on this amount. In the second year, they take out the same 4%, plus the rate of inflation for that year. If inflation were 2%, the second year’s withdrawal would be 102% of $40,000, or $40,800. The third year follows the same pattern, and so forth, with the retiree always taking out 4% plus the accumulated inflation rate. Projecting forward the interest rates and inflation environment of 2020, a retiree can easily make $1 million last more than 30 years using this strategy.

“A globally diversified portfolio allows investors to match their individual risk capacity with their individual risk exposure, provide flexibility in terms of access to their money, potentially provide flexibility in terms of tax exposure, and provide potentially higher payout rates than what is provided by products in the insurance market. While a 4% withdrawal rule is a good start, I usually tell clients they can afford 5% to 6% if they are globally diversified with tilts towards the known sources of expected return, such as small-cap and value stocks,” says Mark Hebner, president and founder of Index Fund Advisors Inc., Irvine, Calif., and author of Index Funds: The 12-Step Recovery Program for Active Investors.

Final Thoughts

It is important to keep in mind that there are coupons that are paid on some bonds that trigger taxes along the way. Also, while it may be an insignificant amount of money, there are capital gains taxes that are assessed on savings and CDs.

>> Read More: How much do you need to live off interest?

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