If you have squirreled away a nest-egg you may be wondering now: Can I live off interest on a million dollars?
Depending on how much interest you can earn, your cost of living, and any other sources of income, you may well be able to hang up your boots and retire comfortably.
But before handing in your resignation letter to your boss and buying flip flops for your celebratory trip to a sun-drenched beach, run the numbers.
How Much Interest On
A Million Dollars
Can I Earn From Savings?
The amount of interest on a million dollars that you can earn depends very much on where your money is parked.
Bank Savings Accounts
If the million dollars is in a bank savings account, you may only earn a pittance.
For a decade after the 2008-09 stock market crash, interest rates on money stashed in savings accounts earned next to nothing.
It wasn’t until Fed rate hikes years after the bear market that pensioners and retirees could pocket a little extra cash but even then an extra 0.50% → 1.00% doesn’t move the needle a whole lot.
Individuals weren’t the only ones stuck in the mud earning peanuts on savings, pension funds too were spinning their wheels for years.
Typically, pension funds project growth of 5% or more annually, so a decade of low rates caused pensions to suffer in states like Illinois and California.
For risk-averse investors, who want to preserve capital yet still want to earn interest on a million dollars, certificates of deposit are often a better bet.
Certificates of Deposit
If your cost of living is low, you may be able to live off interest on a million dollars invested in certificates of deposit.
At the time of our research, many of the top banks were paying just shy of 3% annually on 5-year CDs.
This means that you can earn close to $30,000 per year by locking up your money for a 5 year term.
Unlike a bank savings account that is liquid, a certificate of deposit ties up your money for a fixed duration.
So, if you plan to retire soon and will need access to your money, a CD may not be the best choice for the entire amount.
On the other hand, if you have some time on your side, a CD ladder may be a great option to provide liquidity down the road while earning decent interest rates.
How a CD Ladder Works
A CD ladder works by investing your money over different time lengths.
Imagine for a moment that you invested your $1 million into CDs exclusively.
Rather than invest all your money in a 6-month CD, 1-year CD or 5 year CD, you could spread your money equally across certificates of deposit with different durations.
For example, you could place $200,000 in a 1-year CD, and an equal amount in a 2-year CD, 3-year CD, 4-year CD, and 5-year CD.
Then when the shortest term certificate of deposit matures, you could invest the money in a new 5 year CD.
Repeat the process as each CD matures, and each year you will earn the maximum interest rate on a 5-year CD while keeping your funds much more liquid – because each year $200,000 is available to re-invest or dip into as needed.
How Much Interest On
A Million Dollars
Can I Earn From Investing?
If you are on the verge of retiring, bank savings accounts and certificates of deposit may be top of your bucket list when it comes to earning interest on a million dollars because the risk to your nest-egg is very low.
For individuals with a longer timeline to retirement, investing offers more reward potential but also more downside risk.
Usually a combination of stocks and bonds are a wise bet with an increasing weighting towards bonds as you get older.
But what types of stocks and which bonds?
Which Stocks Should You Buy?
Shark Tank’s Mr. Wonderful has stated that a combination of dividend-paying stocks and corporate bonds provide an optimal mix.
As Kevin O’Leary, aka Mr. Wonderful, points out, the only way to make money on such stocks is when someone else is willing to buy your shares at a higher price.
Even more significantly, Professor Siegel from the Wharton School of the University of Pennsylvania points out that 95% of the total stock market return over most of the last century came from reinvested dividends.
So, if you know wealth accumulation largely stems from dividend-paying stocks, why chase the latest trend?
Which Bonds Should You Buy?
So you know which stocks to buy now, but which bonds are best?
Government bonds are favored by many institutions because they are perceived to be low risk.
In fact, governments have a history of defaulting on bond issuances, which is why some financial advisors recommend individuals choose corporate bonds instead.
Unfortunately, there is no risk-free bet as companies are known to run into financial difficulties too from time to time.
But when you buy corporate bonds of companies with rock solid balance sheets, meaning high levels of cash and low levels of debt, and who have a global presence like Coca Cola or Apple, you stand a good chance of recouping your principal and earning a handsome fixed income yield along the way.
The takeaway is that a combination of dividend-paying stock and corporate bonds has the potential to pay you a higher yield than CDs, often as much as 3 → 5% annually for conservative portfolios in addition to any upside from rising share prices or bond prices.
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How Long Will A Million Last Me?
By spreading your money across a bank savings account, certificates of deposit, dividend-paying stocks, and corporate bonds, you may be able to earn between 3% → 5% annually.
Let’s split the difference and pick a 4% yield which would translate to $40,000 of income annually.
But how long will a million last you when earning $40,000 each year?
The answer depends on your tax rate and spending.
Taxes: The Silver Lining
The income you earn in retirement may be less than your salary during your working years, resulting in lower payments to Uncle Sam when you finally hang up your boots.
Even after you factor in income from social security and interest in your nest-egg, you may still qualify for a tax break, which keeps more income from savings and investing in your pocket.
Spending: Track Your Expenses
If you’ve built up a million-dollar nest egg for retirement, planning how your income and savings will support you in retirement is crucial. But earning income that can offset your expenses puts you in an ideal position to live off your interest.
So, it’s important to track the right expenses so you know where your money is going and to save you time and money during your retirement. Take these crucial steps for identifying the expenses you should track and monitoring them:
Know the Best Ways to Track Your Expenses
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Before you focus on what expenses to track, it’s important to have the right tools and strategies for tracking your expenses. Some of the best ways to track your expenses involve using a budgeting app like Mint or Personal Capital and categorizing your expenses.
You can also use budget worksheets and templates if you prefer tracking your expenses from a computer.
Group your expenses into fixed expenses versus variable expenses and use the apps and tools to determine where your money is going every month. Tiller offers great spreadsheet tracking.
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Keep on Eye on Important (and Frequent) Expenses
There are several expenses you can track but the ones you should focus on the most are your frequent and recurring expenses. These expenses build up over time and often go undetected since they can appear minor.
You also want to keep an eye on your variable expenses, including how much you spend on food, travel and transportation. That’s because these types of expenses can change from month to month.
Track Your Expenses Frequently
It’s also important to know how often to track your expenses if you want to ensure you can live off your interest.
There are no set rules to how often you should track your expenses, but it’s crucial to keep up with your expenses often.
Track your daily expenses and review them on a set schedule, such as by the week or month. The more often you track your expenses, the quicker you can spot transactions and spending patterns you can change so you can save more.
Offset Your Expenses With Earned Interest to Enjoy Your Retirement
The great news is that if your income from your savings exceeds the expenses you have, you’ll be able to live off your nest egg sustainably. Consider offsetting your expenses with the interest you earn from your investments.
Knowing what expenses to track helps you to quickly identify spending patterns you can change and make the most out of your retirement nest egg. Just follow these tips to track the right expenses and how to offset them, and you’ll be on your way to enjoying your retirement nest egg for years to come.
Did You Calculate
The Cost Of Healthcare?
Once you leave your job, and depending on your age, you may be required to pay for health insurance.
Look to the short-term and long-term healthcare costs when running the numbers.
If you find that the interest on a million dollars just about covers your lifestyle, it may not be enough to sustain you forever more because one day you may need to spend more on healthcare costs.
For example, you may need to pay for a nursing home or some other long-term medical care.
You can always dip into your nest-egg to pay for emergencies but remember that, by so doing, the interest you earn will be lower in the future because the principal amount will be lower.
Ideally, it is best to have a cushion between what you earn on interest and what you spend so that your nest-egg is growing each year too.
That way if a medical emergency does crop up, you will be able to afford a financial hit.
Did this article Can I Live Off Interest On A Million Dollars help you to think about whether you can afford to live off your nest-egg in retirement? Share your own financial tips, we would love to hear from you.