Whether you’re saving for retirement or you’ve just earned a nice windfall, it’s important to know where to put your money to grow. There are many ways money can build interest, but how much interest does $1.5 million a year earn? We break down several ways you can save $1.5 million, starting with the lowest return and lowest risk and continuing to the highest return and highest risk. If you want to automate your portfolio asset allocation, consider working directly with a financial advisor.
How much interest can earn 1.5 million dollars per year
Earning interest on your investments is how most people can grow their wealth and increase their available funds during retirement. The amount you can earn will depend on how much money you have to invest and the types of investments you choose. Riskier investments are more likely to return more interest on your money than safer investments, but the risk may be too much 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’ll cover some of the most popular options for investing your money to earn interest and talk about how much you could earn from each. Here are five popular asset picks 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 that earn up to 1%, as opposed to regular savings accounts, which only earn around 0.06%. They are incredibly safe, with the FDIC insuring them up to $250,000. While you might not want to put the entire $1.5 million into one of these, if you did, you’d earn $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 typically limited to six per month, and you may be required to maintain an account minimum or pay account fees. However, some accounts can generate up to 2% per year with almost no risk. For $1.5 million, that’s $30,000 a year.
Chances are you could use a savings account like one of these, but if you really want to grow that money, you’ll need to put at least some of it elsewhere. A balanced investment approach will give you an excellent opportunity to maximize interest without sacrificing the safety of investments like a savings account.
2. Certificates of Deposits (CDs)
The next step up in risk/reward is a certificate of deposit (CD). With a CD, you deposit your money with a bank or credit union for a set amount of time, with the agreement that they will pay you a set annual percentage rate (APY) after the term ends.
How much interest does $1.5 million a year earn on a CD? Assuming you deposit for two years at a 3% APY, you’ll get $90,000, or $45,000 per year. That sounds pretty good, right? Well, that depends on the market. If inflation outpaces your CD, you lose purchasing power.
For example, the inflation rate in 2021 was 7.1%. If your money was tied up in a CD that produced 3% APY, your money would still be worth 4.1% less 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 commonly used in retirement planning. They allow you to save tax-free and only pay tax when you withdraw. Annuities are financial contracts you sign with an insurance company, usually with the agreement that they will pay you on a recurring basis.
Not all annuities are the same. Some defer payment for a long time, while others pay almost immediately. There are a few different types of annuities, each with their own level of risk and return. Let’s break down how much interest you could earn on $1.5 million a year with each type of annuity.
A fixed annuity is the most basic version of an annuity. Annuity rates change on a daily basis. For the sake of simplicity, let’s talk about an immediate fixed annuity. At the time of this article, for an annuity paid over five years, you can get around 4%.
How much interest does $1.5 million a year earn in a fixed annuity? At 4% over five years, about $30,909 in interest per year, or $154,584.11 total. This gives you a monthly withdrawal of $27,576.40. While it’s better than a savings account, you could still be treading water – or drowning – if inflation overtakes it.
An indexed annuity is a next tier in annuity risk and returns. An index-linked annuity is linked to the performance of a specific stock index, such as the S&P 500. This means that the value of the annuity can increase if the market performs well.
There is more risk, but many guarantee a minimum percentage of the principal, plus a small amount of interest. On the plus side, if the market is performing well, you could see more returns. Be careful though, indexed annuities come with caps that will limit your return. Each annuity has different terms. Even if the index returns 12%, you won’t get that rate of return.
Variable annuities are annuity contracts that offer 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 could see a great return or lose money.
So, how much interest does $1.5 million a year earn in a variable annuity? For example, let’s say you put your $1.5 million in a variable annuity that earned 10% annually and was paid over 10 years. You would earn $835,958.34 in interest, with a monthly payment of $19,466.32. This is a good return and means you have chosen a solid investment. However, just because you could get a 10% return, doesn’t mean you will. The market can be unpredictable.
4. Capital and Shares
Of course, you could invest your $1.5 million in the stock market. The aforementioned S&P 500 is a leading index that has shown an average rate of return of around 8% to 12% over the years. You can’t invest directly in the index, but an easy way to get in on the action is to invest your money in an index fund or an exchange-traded fund (ETF) that tracks the performance of the S&P 500.
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 reverse, turning $1.5 million into $1.25 million or worse.
However, given the rule of thumb that the stock market grows on average around 10% per year, if you invest and hold, you could do well over time despite the dips along the way. Let’s say you put your $1.5 million in various funds and hold it there for 20 years. At an average annual return of 10% compounded over those 20 years, the $1.5 million will turn into over $10 million.
Real estate is another place you can put your $1.5 million. But don’t take that to mean buying a home. In particular, one investment where you could see a decent return is what is called a real estate investment trust (REIT). While real estate can be volatile, some REIT markets have outperformed the S&P 500.
Additionally, REITs are known for their dividend payouts, often more than double those of the S&P 500. This means that on top of your interest yield, you can get an additional 2% to 4% annual payout on average.
So let’s say your REIT grows 13% in a year, with a 3% dividend on top. That increases 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’re investing in is mismanaged and goes belly up, you could lose it all.
The bottom line
How much interest does $1.5 million earn annually? It really depends on where you put it. If you save it in a low risk account, your return will not be high. However, if you invest it in assets, your return is not guaranteed. This highlights why it is important to allocate assets based on your needs. The younger you are, the more risk you may be willing to take. However, if you are already retired or approaching retirement, you want to keep that nest egg safe.
If you want to maximize the interest or income your investments earn in retirement, you may want to work 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 matches you with up to three financial advisors serving your area, and you can interview your advisors at no cost to decide who is right for you. If you are ready to find an advisor who can help you achieve your financial goalsGet started now.
It is important to diversify your portfolio and know what your risks are. Use our asset allocation calculator to start building the right portfolio to meet your needs.
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