Becoming a millionaire is a huge financial milestone and a testament to your financial prudence. But is a million dollar nest egg enough to leave the workforce and retire comfortably? It largely depends on how you invest the money. If your nest egg is parked in a bank account, it won’t generate enough interest to live on. But if it’s invested in a mixture of stocks and bonds, the returns will likely cover your expenses as long as you live somewhat frugally. If you’re wondering exactly how much interest does 1 million earn in a year, just keep reading.
Exactly How Much Interest Does 1 Million Earn In A Year?
How much interest does 1 million earn in a year? The answer is, it depends on how you manage your nest egg. Money kept in a savings account will yield much less interest than funds invested in the stock market. Here’s an overview of how much interest you can expect to earn on $1 million based on your chosen financial management strategy.
Standard savings accounts typically yield the lowest amount of interest—about 0.16% on average. That means in a year, you’d only earn about $1,600, which isn’t enough to live on.
High-yield savings accounts offer better interest rates than regular bank accounts. Right now you may be able to get a high-yield savings account with an APY as high as 2.5%, which means you’d earn $25,000 in interest on your nest egg each year.
Certificates of Deposit
A jumbo certificate of deposit with a one-year term length is another safe, FDIC-insured option. Jumbo CDs offer interest rates as high as 3.50%, so you’d earn about $35,000 in interest in a year. CDs with longer terms of 24 to 36 months offer even higher interest rates.
However, CDs usually tie up your principal and don’t allow you to access it without paying some kind of early withdrawal penalty. Interest rates on savings vehicles like savings accounts and CDs also fluctuate, so you can’t expect to earn the same amount of interest every year.
Combined with other sources of income like Social Security, the $2,000 or $2,500 per month you could earn from a high-yield savings account or jumbo CD might be enough to live on. But most retirees invest their money in the stock market, which yields much higher returns.
Most retirees invest their nest egg in the stock market, which generates much more income than a bank account or CD. The average stock market return has been about 10% for almost 100 years, or 7% when adjusted for inflation. So a $1 million dollar nest egg could generate $70,000 in inflation-adjusted returns each year when invested in the stock market.
However, your asset allocation (the mixture of stocks, bonds, and other securities you own) matters. If your portfolio is mostly made up of bonds, for example, your nest egg may not generate as much income because bonds only yield an average of 5% per year. If you want to reduce the risk of your portfolio while earning higher returns, index funds that track the S&P 500 or mutual funds could be good options for you.
Mutual funds pool money from investors to purchase a wide range of securities like stocks, bonds, and short-term debt for diversification purposes, which helps spread out risk. Mutual funds are considered a safer investment than individual stocks while still yielding a relatively high average annual return of around 8%.
If you had a million dollars, how would you invest it? Let me know in the comments section below!
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