To have saved or earned $1 million is admirable, but “a million” is just a big number. What can you actually do with it? The first decision you need to make is to either spend the money, set up a million-dollar bank account or turn the money into an asset, such as an investment.
Of course, the first choice is tempting, but the last can provide significant long-lasting income. If it’s put to work, money will earn more money, in the form of compounding interest. When carefully managed, a nice financial snowball begins rolling downhill.
How much interest does $1 million make per year? Forbes reports that, on average, investors can expect about a 10% annual return on the S&P 500 — that’s $100,000 per year, provided you reinvest at least some of the dividends.
However, your return depends on several different factors. Your time horizon, the type of investment you make and the risk associated with that investment will all affect the interest earned on your million-dollar bank account.
Here are some of the ways you can build interest on your $1 million and how much you might earn.
A savings account or certificate of deposit is probably the safest place to put $1 million to work. These accounts are protected by the Federal Deposit Insurance Corporation (FDIC).
- Certificates of Deposit: The top interest paid on a CD or other “time” account runs about 3.5% to 5% as of late 2022. A million-dollar bank account would earn $35,000 to $50,000 a year at that rate.
- High-Yield Savings: The average savings account interest rate, according to the FDIC, is just 0.24% — just $2,400 annually for a $1 million balance — but high-yield savings accounts offer rates around 3% to 4%, with a yield of $30,000 to $40,000 per year.
FDIC insurance covers a maximum of $250,000 per depositor, per institution. That means if the bank fails, and can no longer return customer deposits, the FDIC will make up any loss to the depositors. It also means that to be fully covered, the $1 million would have to be evenly split between four different banks. If the money is deposited into a joint account, then each individual account holder would be insured up to $250,000.
It’s also important to note that savings account interest rates change frequently, so these interest rates might not hold up for a full year.
Bonds are generally considered comparatively safe investments, but they do come with more risk than savings accounts — and varying interest rates, depending on the type of bond.
US Treasury Investments
A relatively safe parking place for that cool million would be U.S. government debt, in the form of Treasury bonds, bills or notes. The amount of interest returned on these investments varies. In mid-November 2022, for example, 10-year Treasuries yielded 3.82%, which means $38,200 a year for a $1 million investment. A 30-year T-bond yielded 3.93%, paying $39,300 annually.
Although not guaranteed, U.S. government debt is considered among the safest investments you can make. The debt is backed by federal taxes and other government income.
U.S. savings bonds are also guaranteed by the federal government. In November 2022, Series EE savings bonds issued by the U.S. Treasury paid 2.1%, returning $21,000 a year for a $1 million investment. These savings bonds must be purchased through a Treasury Direct account and can only be bought electronically. The government stopped issuing physical savings bonds in 2012.
A step up the yield ladder would be state and municipal bonds. These are debts issued by public agencies, for operating and other expenses. The bonds are backed by the local taxes and fees raised by the issuers. Since they’re considered a bit riskier than Treasuries, they generally pay a higher rate of interest.
It’s important to note that municipal bonds are free of federal income tax on the interest. In many states, they are also free of state income tax for residents. This makes “munis” an attractive investment for those in higher tax brackets.
According to the financial information source Bloomberg, yields on 30-year municipal bonds reached 3.65% as of November 2022. At that rate, a $1 million investment in a 30-year muni would pay interest of $36,500 a year.
Corporate bonds are debts of private companies. Bonds vary greatly in safety and return to the investor. A large company with rock-solid financials will pay a relatively low rate of interest to borrow money. Smaller and riskier companies have to pay more, so their bonds yield a higher rate.
It’s important to gauge safety and risk in the corporate bond market. Corporate bonds are rated by three big rating agencies: Moody’s, Fitch and Standard and Poor’s. The agencies assign their ratings on a letter scale, with AAA being the safest and C the riskiest.
The interest yield on corporate bonds varies with their price, which fluctuates with supply and demand. As the price of a bond falls, its yield rises. If the price of a bond rises, its interest yield will fall.
On Dec. 9, 2022, Moody’s AAA-rated bonds paid an average of 4.31%, which translates to an annual interest of $43,100 on a $1 million investment. Unlike municipal bonds, however, corporate bond interest is taxed by the IRS.
First Step: Assessment
Can you live off $1 million? Yes, depending on your lifestyle and your choice of investments. A reasonable annual return of 7% would bring in annual income of $70,000. In most parts of the country, that’s enough for a comfortable home and necessities: food, utilities, auto expenses and the like. But to achieve that return, you’ll also have to accept some investment risk — and understand that your interest income might not be steady.
The first step in the process is to assess your risk tolerance and consider your age and goals. Call a financial advisor to go over things. A lot of people can go it alone, but hiring a money manager might also be a good option.