Whether you’re saving for retirement, or just got a nice windfall, knowing where to put your money to grow it is essential. There are multiple ways money can accrue interest, but how much interest does $1.5 million earn per year? Here’s an overview of several ways you can save your $1.5 million, starting with the lowest reward and lowest risk, and moving up to higher rewards and higher risk. To automate your portfolio’s asset allocation, consider working directly with a financial advisor.
How Much Interest Can $1.5 Million Earn Per Year?
Earning interest on your investments allows most people to grow their wealth and increase their available funds during retirement. The amount you can earn will depend on how much money you need to invest and what types of investments you choose. Riskier investments have a greater potential to return more interest on your money than safer investments, but the risk may be too high for some.
If you want to invest $1.5 million to maximize the amount of interest you can earn, the answer to how much that will be depends on your investment choice. We’re going to cover some of the most popular choices for investing your money to earn interest and talk about how much you can earn from each. Here are five popular asset options to earn interest on $1.5 million.
1. High Yield Savings Accounts and Money Market Accounts
High-yield savings accounts are savings products offered by some banks with returns of up to 1%, as opposed to regular savings accounts, which earn only about 0.06%. They are incredibly safe and the FDIC insures them for up to $250,000. While you may not want to put your entire $1.5 million into one of these, if you did, you would be earning $15,000 a year in interest.
Money market accounts are similar to high-yield savings accounts. Unlike a savings account, they come with a debit card and you can write checks. Withdrawals are usually limited to six per month and you may be required to maintain a minimum account or pay account fees. Still, some accounts can generate up to 2% per year with minimal risk. At $1.5 million, that’s $30,000 a year.
Chances are, you could use a savings account like that, but if you really want to grow that money, you’ll have to put at least some of it elsewhere. A balanced investment approach gives you an excellent opportunity to maximize interest rates without sacrificing the security of investments such as a savings account.
2. Certificates of Deposit (CDs)
The next step up the ladder in terms of risk/return is a certificate of deposit (CD). With a CD, you deposit your money with a bank or credit union for a specified term with the agreement that they will pay out at a specified annual percentage rate of return (APY) at the end of the term.
How much interest does $1.5 million earn per year on a CD? Assuming you deposit at a 3% APY for two years, you would receive $90,000 or $45,000 per year. That sounds like a great deal, right? Well, that depends on the market. If inflation exceeds your CD, you will lose purchasing power.
For example, inflation in 2021 was 7.1%. If your money was stuck in a CD that produced 3% APY, your money was still 4.1% less valuable at the end of the year. While CDs are low risk, in a high inflation environment there are better places to put your money.
Annuities are long-term investments that can give you a slightly higher return on your money. They are mostly used in retirement planning. This allows you to save tax-free and only pay taxes when you withdraw money. Annuities are financial contracts that you enter into with an insurance company, usually with the agreement that they will pay you on a recurring basis.
Not all annuities are the same. Some postpone payment for a long time, others pay out almost immediately. There are a few different types of annuities, each with their own level of risk and return. Let’s see how much interest you could earn on $1.5 million a year with any type of annuity.
A fixed annuity is the simplest version of an annuity. The annuity rates change daily. For the sake of simplicity, let’s talk about an instant fixed annuity. At the time of this article, for an annuity paid out in five years, you can get a rate of about 4%.
How much interest does $1.5 million earn per year on a fixed annuity? At 4% over five years, about $30,909 in interest per year, or $154,584.11 in total. That will give you a monthly withdrawal of $27,576.40. While it’s better than a savings account, you could still be treading water — or sinking — if inflation surpasses it.
An indexed annuity is the next step in terms of risk and return of annuities. An indexed annuity is linked to the performance of a specific stock market index, such as the S&P 500. This means that the value of the annuity can go up if the market performs well.
There is more risk involved, but many guarantee a minimum percentage of principal, plus a small amount of interest. The advantage is that if the market performs well, you can get more returns. Beware though, indexed annuities come with limits that limit your returns. Every annuity has different conditions. Even if the index performs at 12%, you will not receive that return.
Variable annuities are annuity contracts with the highest return potential. However, unlike a fixed annuity, their return is not guaranteed. With a variable annuity, you choose where the money is invested. Depending on your choice, you can get a big return, or you can lose money.
So, how much interest does $1.5 million earn per year in a variable annuity? For example, let’s say you put your $1.5 million into a variable annuity that earned 10% annually and paid out over 10 years. You would earn $835,958.34 in interest, with a monthly payout of $19,466.32. That’s a good return and means you’ve chosen a solid investment. But just because you could get a 10% return doesn’t mean you will. The market can be unpredictable.
4. Funds and Shares
Sure, you can invest your $1.5 million in the stock market. The aforementioned S&P 500 is a leading index that has shown average returns over the years of around 8% to 12%. You can’t invest in the index directly, but an easy way to take action is to invest your money in an index fund or exchange-traded fund (ETF) that tracks S&P 500 performance.
It goes without saying that nothing is guaranteed in the stock market. A favorable year with a 15% return could net you $225,000 in interest on $1.5 million. On the other hand, a recession could hit and the market could spin the other way, turning your $1.5 million into $1.25 million, or worse.
Given the rule of thumb that the stock market is growing at an average annual rate of about 10%, if you invest and hold it, you can see it well over time, despite dips along the way. Let’s say you put your $1.5 million in various funds and keep them there for 20 years. With an average annual return of 10% over those 20 years, your $1.5 million will turn into over $10 million.
5. Real Estate
Real estate is another place you could put your $1.5 million. But don’t take that as the housing market. In particular, an investment where you could see a decent return is called a real estate investment trust (REIT). While real estate can be volatile, some REIT markets have surpassed the S&P 500.
In addition, REITs are known for their dividend payouts, often more than double those of the S&P 500. That means, on top of your interest return, you can get an additional annual payout averaging 2% to 4%.
Let’s say your REIT grows 13% in a year, plus a 3% dividend. That’s growing your $1.5 million by 16%, or an additional $240,000, in one year. Of course, if the real estate market falters, or if the REIT you invest in is poorly managed and goes out of business, you could lose everything.
It comes down to
How Much Interest Does $1.5 Million Earn Per Year? It really depends where you put it. If you keep it in a low risk account, your returns will not be high. However, if you invest it in assets, your returns are not guaranteed. This underlines why it’s important to allocate assets based on your needs. The younger you are, the more risk you are willing to take. However, if you’re already retired or nearing retirement, you’ll want to keep that nest egg safe.
Tips for investing
If you want to maximize the interest or income your investments will bring in retirement, consider working with a financial advisor. Your advisor can help you create the right asset allocation mix to meet your financial goals. Finding a qualified financial advisor doesn’t have to be difficult. SmartAsset’s free tool match you with up to three financial advisors serving your area, and you can interview your advisors free of charge to decide which one is right for you. If you are ready to find an advisor who can help you achieve your financial goalsstart now.
It is important to diversify your portfolio and understand your risks. Use our asset allocation calculator to start building the right portfolio for your needs.
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