how much interest on $1 million

how much interest on $1 million

Once you have $1 million in assets, you can look seriously at living entirely off the returns of a portfolio. After all, the S&P 500 alone averages 10% returns per year. Setting aside taxes and down-year investment portfolio management, a $1 million index fund could provide $100,000 annually. However, there are more conservative approaches that could benefit your financial goals for the long term, and we discuss some of the best in this article. If you’re not sure what investments are best for you, consider speaking with a financial advisor to build out a long-term financial plan.

Why Invest In Interest-Bearing Assets?

With $1 million, you can plan pretty well for potential returns. However, as with all investments, we first need to consider your goals. What, ultimately, are you saving for and how do you feel most comfortable about getting there? In this case, we should look particularly at the issue of certainty.

Investors tend to seek interest-bearing investment not just because they tend to be more secure than other investment, but because they tend to be more knowable. With a stock or options contract, the best you can realistically have is a sense of average performance over time. The S&P 500 tends to return 10% annually. A given stock can have a historic rate of return per year. This is good information, but past performance is no guarantee of future results.

Interest-bearing investments, on the other hand, come packaged with a promise. With any given asset you have a relationship with another party, and they have promised to make specific, detailed payments on a set schedule. A company might promise to pay you 5% per year on any bonds you hold, for example, delivered in quarterly installments. Or a bank might promise to pay you 2% on its certificate of deposit.

There is still some degree of uncertainty here since borrowers can still default on their debt, but otherwise, your returns are known and knowable. This is ultimately one of the biggest reasons to invest for interest. Not only do you control your risk, but you can make a much more detailed financial plan in advance.

Interest vs. Returns

The flip side of investing for interest is that you simply don’t make as much money. For example, just in the context of comparative yields, interest-bearing assets tend to average a 2-3% rate of payment per year. At the same time, stock dividends tend to average between 2 and 5% per year. We can literally be talking about making half as much by investing in bonds.

Or take capital gains and current performance. At the time of writing, as noted below, bonds are running hot with a 4.66% average interest rate. Your $1 million investment, then, will kick back $46,600 in returns. On the other hand, in 2021 the S&P 500 returned 26.61%. One year’s worth of returns on that investment would have netted you $266,100.

That’s a lot of money to pay for the feeling of security. On the other hand, if you have $1 million to invest, there’s a good chance that you’re approaching your financial goals. That’s often a strong argument for accepting lower returns in exchange for a more stable portfolio.

This is how we recommend considering the issue. What’s your plan for this $1 million portfolio, and how close are you to getting there? (For most readers holding a portfolio that size, the odds are good that it’s a retirement account.)

The closer you are to reaching your target, the more money you might want to shift toward interest-bearing accounts. You can put that $46,600 away each year, comfortably knowing that you don’t need to take any risks. The farther you are from your target, the more risk you might have to accept in exchange for getting where you want to go.

Interest-Bearing Investments to Consider

how much interest on $1 million

how much interest on $1 million

Now, let’s take a look at some of the best interest-bearing investments that you can consider for your portfolio. Each carries a different level of risk and opportunity, so keep that in mind and align the right investments with your financial goals.

Bonds

  • Average Interest At Time Of Writing: 4.66%

  • Value of $1 Million In Five Years: $1,255,751

Bonds are assets that companies and other institutions issue to borrow money. Each bond comes with two main features: its maturity and its coupon rate. The maturity is how long until the institution repays your money. The coupon rate is the interest that the bond will pay on that debt in the meantime. So, say you purchase the following bond:

  • Value: $1,000

  • Maturity: 10 Years

  • Coupon Rate: 5%

You will receive $50 per year (5% of the bond’s value) while the bond remains active, typically paid in four or six month installments. Once 10 years have passed from when the bond was issued, the company will repay your original $1,000.

Bonds tend to offer the highest rate of return on any interest investment. They also tend to offer the most risk. While it is very rare that a company defaults on its debts, this happens more often than a bank or an insurance company doing so.

Certificates of Deposit (CDs)

  • Average Interest Rate At Time Of Writing: 0.03% – 0.39% 

  • Value of $1 Million In Five Years: $1,019,653

Certificates of deposit are offered by banks to their customers. With a CD, you put a given amount of money on deposit with the bank for a fixed period of time. You cannot withdraw this money during the period of the CD. In exchange, the bank pays you a higher interest rate than normal.

The amount you can receive through a CD depends on the duration of your deposit. At the shortest, the average interest rate on a 30 day certificate of deposit is currently 0.03%, roughly that of a checking account. At the longest, five year CDs offer an average interest rate of 0.39%. These are standard CDs, however. Some institutions can offer certificates of deposit with interest rates of 2% or higher depending on the circumstances and investor. (In this case your investment value after five years would be $1,104,081.)

A certificate of deposit offers security in exchange for liquidity. You receive a low rate of return and can’t access your money, but you also know that it is not only on deposit with a bank but it is also FDIC insured just in case of disaster.

High-Yield Accounts

  • Average Interest Rate: 1%

  • Value of $1 Million in Five Years: $1,051,010

Checking and savings accounts trade liquidity for value. Checking accounts, which have the most liquidity, pay an average 0.03% interest rate at the time of writing. Savings accounts, which have a few more rules around making withdrawals, pay an average of 0.07%. Some alternative banks and other financial institutions have begun to compete with traditional banks on these products by offering better terms.

A high-yield savings account is a savings account that offers better than average interest rates. These tend to be ordinary accounts, meaning that you have the usual liquidity balanced with some rules around making withdrawals. They also tend to be managed by nontraditional institutions, meaning that they are not FDIC insured in case something goes wrong.

A high-yield account can be a good idea for someplace to store your money on a daily basis. While the rate of payment here isn’t good enough to consider it an investment asset, it’s worth noting that they currently outperform most CDs by a fair amount.

Annuities

  • Average Interest Rate: 3%

  • Value of $1 Million in Five Years: $1,075,380

Annuities are contracts sold by insurance companies and financial institutions. To buy an annuity, you give the institution an amount of money upfront. At a set date, the company begins repaying you both the principal that you invested and the interest.

Like any loan, the interest on your annuity compounds even while the company pays you back. This means that each year the company will pay you compounded interest on the principal in your account, then each month they’ll make payments until they have paid back the full value of the contract.

Most annuities tend to be longer contracts, paying you back over 10, 20 or 30 years. This reduces your monthly returns, but it can significantly increase the value of your investment. You can also maximize the value of an annuity by purchasing in advance of repayment. Since interest begins to accrue in your account from the day of your investment, the longer you wait to begin repayment the more money you will collect back.

Bottom Line

how much interest on $1 million

how much interest on $1 million

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.

Tips for Investing

  • Like every strategy, balancing an aggressive approach against conservative investments is a judgment call. You can use the help of a financial advisor to figure out the right balance for your portfolio. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

  • While we wrote this article, the S&P 500 was in the middle of a significant dip. That’s not always a problem for investors. In fact, it can be a very significant opportunity. Read our article on buying the dip to learn more.

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Source: finance.yahoo.com