Whether you are saving for retirement, or have just arrived in a nice windy area, knowing where to grow your money is essential. There are different ways money can build interest, but how much interest does $1.5 million earn per year? We break down several ways you can save your $1.5 million, starting with the lowest yield and lowest risk, and moving on to higher yield and higher risk. If you want 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 is how most people are able to grow their wealth and increase their available funds during retirement. How much you can earn will depend on the amount of money you have to invest and the types of investments you choose. Riskier investments have a higher potential to return more interest on your money than safer investments, but the risk may be too much for some people.
If you’re trying to invest $1.5 million to maximize the amount of interest you can earn, the answer to how much 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 choices 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 certain banks that have a yield of up to 1%, unlike regular savings accounts, which only earn around 0.06%. They are extremely safe, and are insured by the FDIC up to $250,000. While you may not want to put your entire $1.5 mill into one of these, if you did, you would earn $15,000 in interest per year.
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 months, 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 little risk. At $1.5 million, that’s $30,000 a year.
You may be able to use a savings account like one of these, but if you want to grow that money, you’ll need to put at least some of it elsewhere. A balanced investment approach will give you a great opportunity to maximize interest without sacrificing the safety of investments like a savings account.
2. Certificates of Deposit (CDs)
The next step up the ladder in terms of risk/reward is a certificate of deposit (CD). With a CD, you deposit your money with a bank or credit union for a set term and agree to pay out at a specified annual percentage rate (APY) after the term is up.
How much interest does $1.5 million earn per year on a CD? Assuming you deposit for two years at an APY of 3%, you would receive $90,000, or $45,000 per year. That sounds like a lot, right? Well, that depends on the market. If inflation exceeds your CD, you are losing purchasing power.
For example, the inflation rate in 2021 was 7.1%. If you had your money tied up in a CD producing 3% APY, your money was still worth 4.1% less at the end of the year. Although 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 typically used in retirement planning. They allow you to save tax-free and pay taxes only when you withdraw. Annuities are financial contracts that you sign with an insurance company, usually with the agreement that they will pay you out on a recurring basis.
Not all annuities are the same. Some delay payment for a long time, while others pay out almost immediately. There are several different types of annuities, each with its own level of risk and return. Let’s break down how much interest you could earn on $1.5 million per year with each type of annuity.
The most basic form of annuity is a fixed annuity. Annuity rates change on a daily basis. For the sake of simplicity, let’s talk about a fixed annuity right away. At the time of this article, for an annuity that pays over five years, you can get a rate of around 4%.
How much interest does $1.5 million make per year with a fixed annuity? At 4% over five years, that’s about $30,909 in interest per year, or a total of $154,584.11. That gives you a monthly withdrawal of $27,576.40. Although it’s better than a savings account, you could still be treading water – or drowning – if inflation outstrips it.
An indexed annuity is the next best in terms of annuity risk and returns. An indexed annuity is tied to the performance of a specific stock market index, such as the S&P 500. This means that the value of the annuity can increase if the market does well.
There is more risk involved, but many guarantee a minimal percentage of the principal, plus a small amount of interest. The upside is that if the market does well, you could see more returns. Be aware, however, that indexed annuities come with caps that will limit your return. Each annuity has different terms. Even if the index performs at 12%, you won’t get that rate of return.
Variable annuities are annuity contracts that offer the highest potential for returns. However, unlike a fixed annuity, their return is not guaranteed. With a variable annuity, you choose where the money will be invested. Depending on your choice you could see a big return, or you could 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 payment of $19,466.32. That’s a good return and means you’ve chosen a solid investment. However, just because you might get a 10% return, doesn’t mean you will. He can predict the market.
4. Funds and Stocks
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 about 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 must be said that nothing is guaranteed in the stock market. A benefit year with a 15% return could earn you $225,000 in interest on $1.5 million. On the other hand, a recession could hit and the market could swing the other way, turning your $1.5 million into $1.25 million, or worse.
However, taking into account the rule of thumb that the stock market grows about 10% on average per year, if you invest and hold, you could make out over time well despite reductions on the way. Let’s say you put your $1.5 million into different funds and keep them there for 20 years. Compounding an average annual return of 10% over those 20 years, your $1.5 million will turn into more than $10 million.
5. Real Estate
Real estate is another place you could put your $1.5 million. But don’t assume that’s the same as the housing market. More specifically, a real estate investment trust (REIT) is an investment where you could see a good return. Although real estate can be volatile, some REIT markets have outperformed the S&P 500.
In addition, REITs are known for their dividend payouts, often more than double the S&P 500. That means, on top of your interest return, you can get an additional annual payout of 2% to 4% on average.
So, say your REIT grows 13% in a year, with a 3% dividend on top. That’s an increase of $1.5 million by 16%, or an additional $240,000, in one year. Of course, if the real estate market crashes, or if a REIT you invest in is mismanaged and goes bust, you could lose it.
The Bottom Line
How much interest does $1.5 million earn per year? It really depends on where you put it. If you put it back in a low risk account, your return will not be high. However, if you invest it in assets, your result is not guaranteed. This is the basis of 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.
Tips for Investing
If you are looking to maximize the interest or income your investments are earning in retirement, you may want to consider working with a financial advisor. Your advisor can help you create the right asset allocation mix to achieve your financial goals. Finding a qualified financial advisor doesn’t have to be difficult. SmartAsset Free Tool you are matched with up to three financial advisors serving your area, and you can interview your advisor at no cost 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 know what your risks are. Use our asset allocation calculator to start building the right portfolio to meet your needs.
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