The average person might wonder if it’s possible to live off the interest income from a million dollars.
Namely, deposit the 1 million in principal in a regular savings account and let it generate income for you to spend in perpetuity.
It depends on a variety of factors.
What Is The Interest Rate?
Obviously, the higher the interest rate, the more beneficial it is to you.
Interest is how banks make their money.
You lend a bank or someone else your money in exchange for charging interest, the borrowing cost of money.
Over What Period of Time?
The longer your investment horizon is, the better.
How Often Is The Money Compounded?
It is often said that the power of compounding interest is the eighth wonder of the world and for good reason.
The more often your money is compounded, the better.
You’ll either have more interest income to spend or it can be added back to the principal, ultimately, generating more interest income than before.
If left to grow, your money will increase exponentially.
Here is an example of how much interest you can earn from a principal of 1 million dollars if compounded annually.
- 1 year – $40,000
- 5 years – $216,653
- 10 years – $480,244
- 20 year – $1,191,123
These days the average interest rate on a savings account is less than 1%. Inflation alone would eat away any gains you might have. Even high-yield savings accounts are not enough.
So what are your other options?
Some Alternatives To Low-Yield Savings Accounts
Here are some ways to earn more interest:
Certificates of Deposit
In exchange for locking in your money for a period of time, you’ll earn a higher rate of interest than a savings account.
However, a five-year CD would probably still only give you 2% in interest, at best. This does not beat inflation.
Keep reading on.
U.S. Government Bonds
Currently, the yield curve for U.S. government bonds is inverted, meaning the long-term rate is lower than the short-term. Therefore, this is not a good time to invest in government bonds.
With 30-year Treasury bonds at 2% at the time of this post, you’re not much better off than putting your money in CDs.
Bonds issued by corporate bonds tend to have a higher yield than the equivalent government bond.
Foreign bonds are similar in risk to U.S. corporate bonds, but introduces an element of currency risk which can also hurt your yield.
Other than by earning interest, you can still potentially generate enough investment income off of 1 million dollars.
First, you need to determine your annual spending. Then, figure out your financial independence number. Follow our retirement guide for step-by-step instructions.
You can also earn investment income from stock dividends and capital gains.