How Much Money Do You Need Saved to Live Entirely off Interest?

PeopleImages / iStock.com

Commitment to Our Readers

GOBankingRates' editorial team is committed to bringing you unbiased reviews and information. We use data-driven methodologies to evaluate financial products and services - our reviews and ratings are not influenced by advertisers. You can read more about our editorial guidelines and our products and services review methodology.

20 Years
Helping You Live Richer

Reviewed
by Experts

Trusted by
Millions of Readers

A goal for many people is to have enough money saved so that they never have to work another day in their lives. In this scenario, their money is invested in things that generate income, with this income replacing that which they currently earn doing their job. Depending upon the lifestyle you have in mind, this could be nothing more than a dream. Then again, with some planning and a realistic outlook, it could be possible. Just how much money do you need saved to live entirely off interest?

Interest-Bearing Investments

Different types of investments generate different rates of return. Returns depend upon risk, liquidity and term: How likely you are to lose your money, how easy it is to sell the investment and how long you need to leave your money in one place. When deciding what to invest in, you’ll need to come up with a reasonable estimate of what you can expect, while keeping in mind that what has happened before is no guarantee of what will happen next.

These are four of the best choices for stable, long-term interest investing as recommended by YahooFinance. You’ll find information in the current returns by checking with a broker, or visiting the FDIC Rate Caps site.

• High-Yield Savings Accounts: “As rock-solid as you can get in terms of reliability,” per YahooFinance. The downside? With an average interest rate of .6%, they don’t generate a lot of income.
• One-Year Treasury Bills: “The safest place in the world for your money,” because they’re backed by the U.S. Treasury. Additional terms and information are available at TreasuryDirect.
• Certificates of Deposit: “Like a savings account, this is about as good as you can get in terms of reliability.” You can also access your principal in an emergency. 
• S&P 500 Index Funds: YahooFinance noted that these “have returned an average of between 10% and 14% per year over the past several decades through mutual funds and ETFs.” The higher return comes to you because there is a higher risk.

Don’t Forget Dividends

Dividends are another source of cash in your hand. They are not a form of interest; they are a portion of a company’s profits. Playbook estimated a return of 3.5% annually for stocks. The higher return is again due to a higher risk. While most companies that pay dividends pay them consistently, it is also possible that a company will cut the dividend or eliminate it entirely when business is bad. 

How Much Principal You’ll Need

The most important factor in any of your calculations for the future is remembering that you can’t touch the principal. Each of your calculated returns depends upon the principal remaining constant; you’re spending the interest and dividends rather than cashing in securities for the amount invested.

In an article published on January 4, 2024, Playbook estimated that you could generate the followinf:

• $49,000 per year with a principal of $1,000,000 and an interest rate of 0.049%. 
• $40,480 per year with a principal of $826,000 invested at the same 4.9% annual return.

To estimate your income for yourself, they recommend using this formula: Balance x Interest rate = Annual interest-only salary.

Is It Enough?

Can you live off $49,000 per year in interest income? What if you add in your Social Security benefits? And your dividends? And include the cost of health insurance, housing and transportation in your calculations? The net of all of those will give you a starting point for calculating what you’ll need to live off the interest. It’s possible $1,000,000 will do the trick.

Share This Article: