It is admirable to have saved or earned $1 million, but “a million” is simply a large number, not a comprehensible amount of money. What can you do with it, short-term or long term? The first decision you need to make is whether to spend the money, open a million-dollar bank account, or convert it into an asset, such as an investment.
The first option is appealing, but the latter can result in significant long-term income earned per year. If money is put to work, it will earn more money through compound interest. When properly managed, a nice financial snowball starts rolling downhill.
How to Calculate Annual Interest on $1 Million
How much interest does $1 million generate each year? According to Forbes, investors can expect an average annual return of 10% on the S&P 500—oor $100,000 per year if they reinvest at least some of their dividends.
However, there are a number of factors that affect your return. Your time horizon, the type of investment you make, and the risk involved with that investment all affect the interest you receive on your million-dollar bank account. Here are some of the ways you can generate interest on your $1 million and how much you could earn:
- Savings accounts
- Mutual funds
- U.S. Treasury investments
- Municipal bonds
- Corporate bonds
1. Savings Accounts
A savings account, money market account, or certificate of deposit is probably the safest place to put $1 million to work. In most financial institutions, the Federal Deposit Insurance Corporation, or FDIC, is responsible for protecting these accounts and insuring your investment up to $250,000.
- Certificates of deposit: Higher interest rates paid on a CD or other time account can run about 3.5% to 5%. A million-dollar bank account would earn $35,000 to $50,000 a year at that rate, according to a simple compound interest calculator.
- Money market account: The average annual interest rate on a money market account falls between 0.01% APY and 3.45% APY, depending on your balance.
- High-yield savings: The average savings account interest rate, according to the FDIC, is just 0.47%—just $4,700 annually for a $1 million balance—bbut high-yield savings accounts offer rates around 3% to 4%, with a yield of $30,000 to $40,000 per year.
2. Mutual Funds
If you were to factor in that the average return for a mutual fund is around 4.67%, a simple calculation for the interest earned would be to multiply $1 million by 4.67%. This means you would get $46,700 in interest per year with that amount of money at that rate. This is a solid retirement income option, as it is less risky than other types of investments.
3. US Treasury Investments
A relatively safe parking place for that cool million would be U.S. government debt, in the form of Treasury bonds, bills, or notes. The amount of interest returned on these investments varies. For example, if 10-year Treasury bonds yielded 3.82%, as they did on average last year, this would mean you would earn $38,200 a year for a $1 million investment. A 30-year T-bond yielding 3.93% would pay $39,300 annually.
Although not guaranteed, U.S. government debt is considered among the safest investments you can make. Federal taxes and other government income serve as the debt’s security.
4. Municipal Bonds
A step up the yield ladder would be state and municipal bonds. These are debts that public organizations have issued to cover operating costs and other expenses. The local taxes and fees that the issuers have raised serve as security for the bonds. Since they’re considered a bit riskier than Treasury bonds, they generally pay a higher rate of interest.
Here are a few key takeaways:
- It’s important to note that municipal bonds are free of federal income tax on interest. In many states, residents are also free of state income tax for residents.
- This makes “munis” an attractive investment for those in higher tax brackets.
- If you earned an interest rate of 3.65%, a $1 million investment in a 30-year muni would pay interest of $36,500 annually.
5. Corporate Bonds
Corporate bonds are debts of private companies. Bonds vary greatly in safety and return to the investor. A large company with rock-solid financials will pay a relatively low rate of interest to borrow money. Smaller and riskier companies have to pay more, so their bonds yield a higher rate.
It’s important to gauge safety and risk in the corporate bond market. Moody’s, Fitch, and Standard & Poor’s are the three major rating agencies that rate corporate bonds. The agencies assign their ratings on a letter scale, with AAA being the safest and C being the riskiest.
The interest yield on corporate bonds varies with their price, which fluctuates with supply and demand. As the price of a bond falls, its yield rises. If the price of a bond rises, its interest yield will fall.
Can You Live Off the Interest of $1 Million?
Depending on your lifestyle and your choice of investments, it is possible to live off of $1 million. A reasonable annual return of 7% would bring in an annual income of $70,000. In most parts of the country, that’s enough for a comfortable home and necessities like food, utilities, auto expenses, and the like. But to achieve that return, you’ll also have to accept some investment risk and understand that your interest income might not be steady.
Final Take-To-Go
The first step in the process is to assess your risk tolerance and consider your age and goals. Call a financial advisor to go over your portfolio, assets, and the like. Many people can go it alone, but hiring a money manager might also be a good option. Make sure to do the math before you invest, as if done correctly, you can figure out if you can live off the interest earned on investing $1 million alone.