Whether you’re saving to retire, or have just come into a nice windfall, knowing where to put your money to grow it is essential. There are multiple ways money can build interest, but how much interest does $1.5 million earn per year? We break down several ways you can save your $1.5 million, starting with the lowest yield and lowest risk, and moving on to higher yield and higher risk. If you’re wanting to automate the asset allocation of your portfolio, consider working directly with a financial advisor.
How Much Interest $1.5 Million Can Earn Per Year
Earning interest in your investments is how most people are able to grow their wealth and increase their available funds during retirement. The amount that you can earn is going to depend on how much money you have to invest and what types of investments that you choose. Riskier investments have a higher potential to return more interest on your money than safer investments, but the risk might be too much for some.
If you’re looking to invest $1.5 million to maximize the amount of interest you can earn, the answer to how much that will be depends on your investment choice. We’re going to cover some of the most popular choices to invest your money in order to earn interest and talk about how much you could earn from each. Here are five popular asset options to earn interest on $1.5 million.
1. High-Yield Savings Accounts and Money Market Accounts
High-yield savings accounts are savings products offered by some banks with a return up to 1%, unlike regular savings accounts, which only earn around 0.06%. They are incredibly safe, with the FDIC insuring them up to $250,000. While you may not want to put your full $1.5 mill in one of these, if you did, you’d earn $15,000 annually in interest.
Money market accounts are similar to high-yield savings accounts. Unlike a savings account, they come with a debit card and you can write checks. Withdrawals are usually limited to six a month, and you may have to keep an account minimum or pay account fees. Still, some accounts can generate up to 2% yearly with hardly any risk. For $1.5 million, that’s $30,000 a year.
Chances are, you could use a savings account like one of these, but if you really want to grow that money, you’ll need to put at least some of it elsewhere. A balanced investing approach is going to provide you an excellent opportunity to maximize interest without sacrificing the safety of investments like a savings account.
2. Certificates of Deposit (CDs)
The next step up the ladder in terms of risk/reward is a certificate of deposit (CD). With a CD, you deposit your money with a bank or credit union for a set term with the agreement that they will pay out at a specified annual percentage yield (APY) after the term is up.
How much interest does $1.5 million earn per year on a CD? Assuming you deposit for two years at an APY of 3% you’d receive $90,000, or $45,000 per year. That sounds like a great deal, right? Well, that depends on the market. If inflation outpaces your CD, you’re losing purchasing power.
For example, the rate of inflation in 2021 was 7.1%. If your money was tied up in a CD producing 3% APY, your money still had 4.1% less value at the end of the year. While CDs are low risk, in a high-inflation environment there are better places to put your money.
3. Annuities
Annuities are long-term investments that can give you a slightly higher return on your money. They’re typically used in retirement planning. They allow you to save tax-free and only pay taxes when you withdraw. Annuities are financial contracts you sign with an insurance company, usually with the agreement that they’ll pay you out on a recurring basis.
Not all annuities are the same. Some defer payment for a long time, while others pay out almost immediately. There are a few different types of annuities, each with its own level of risk and return. Let’s break down how much interest you could earn with $1.5 million per year with each kind of annuity.
Fixed Annuities
A fixed annuity is the most basic version of an annuity. Annuity rates change on a daily basis. For the sake of simplicity, let’s talk about an immediate fixed annuity. At the time of this article, for an annuity that pays out over five years, you can get a rate of around 4%.
How much interest does $1.5 million make per year with a fixed annuity? At 4% over five years, around $30,909 in interest per year, or $154,584.11 total. That gives you a monthly withdrawal of $27,576.40. While it’s better than a savings account, you could still be treading water – or sinking – if inflation outpaces it.
Indexed Annuities
An indexed annuity is a next notch up in terms of risk and returns of annuities. An indexed annuity is tied to the performance of a specific stock market index, like the S&P 500. This means the value of the annuity can go up if the market performs well.
There’s more risk involved, but many guarantee a minimum percentage of the principal, plus a small amount of interest. The upside is that, if the market performs well, you could see more returns. Beware though, indexed annuities come with caps that will limit your return. Each annuity has different terms. Even if the index performs at 12%, you won’t receive that rate of return.
Variable Annuities
Variable annuities are annuity contracts that offer the highest potential for return. However, unlike a fixed annuity, their return is not guaranteed. With a variable annuity, you will choose where the money gets invested. Depending on your choice you could see a large return, or you could lose money.
So, how much interest does $1.5 million earn per year in a variable annuity? For example, let’s say you put your $1.5 million into a variable annuity that earned 10% annually and paid out over 10 years. You’d earn $835,958.34 in interest, with a monthly payout of $19,466.32. That’s a good return and means you picked a solid investment. However, just because you could get a 10% return, doesn’t mean you will. The market can be unpredictable.
4. Funds and Stocks
Of course, you could invest your $1.5 million in the stock market. The aforementioned S&P 500 is a leading index that has shown an average rate of return of around 8% to 12% over the years. You can’t directly invest in the index, but an easy way to get in on the action is to invest your money in an index fund or exchange-traded fund (ETF) that follows the S&P 500 performance.
It should go without saying that nothing is guaranteed in the stock market. A boon year with a 15% return could earn you $225,000 in interest off of $1.5 million. On the other hand, a recession could hit and the market could swing the other way, turning your $1.5 million into $1.25 million, or worse.
However, given the rule of thumb that the stock market grows around 10% on average yearly, if you invest and hold, you could make out over time well despite dips along the way. Let’s say you put your $1.5 million into various funds and keep them there for 20 years. With an average annual return of 10% compounding over those 20 years, your $1.5 million will turn into over $10 million.
5. Real Estate
Real estate is another place you could put your $1.5 million. But don’t take that to mean the housing market. Specifically, an investment where you could see a decent return is what’s called a real estate investment trust (REIT). While real estate can be volatile, some REIT markets have outpaced the S&P 500.
On top of that, REITs are known for their dividend payouts, often more than double that of the S&P 500. That means that, on top of your interest return, you can get an extra annual payout of 2% to 4% on average.
So, say your REIT grows by 13% in a year, with a 3% dividend on top. That’s growing your $1.5 million by 16%, or an extra $240,000, in one year. Of course, if the real estate market falters, or if the REIT you invest in is mismanaged and goes belly-up, you could lose it all.
The Bottom Line
How much interest does $1.5 million earn per year? It really depends on where you put it. If you stash it in a low-risk account, your return isn’t going to be high. However, if you invest it in assets, your return isn’t guaranteed. This underpins why it’s important to allocate assets based on your needs. The younger you are, the more risk you may be willing to take. However, if you’re already retired or nearing retirement, you want to keep that nest egg safe.
Tips for Investing
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If you’re looking to maximize the interest or income that your investments are earning in retirement, you may want to consider working with a financial advisor. Your advisor can help you create the right asset allocation mix to meet your financial goals. 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.
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It’s important to diversify your portfolio and know what your risks are. Use our asset allocation calculator to start building the right portfolio to meet your needs.
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Source: finance.yahoo.com