When I started saving for retirement, I wasn’t sure how much money I should save, so I set my first milestone at one million dollars. I’m not there yet, but I’m working on it. Of course, the more I save, the more I earn in interest. But how much interest does one million dollars earn per year?
Well, that all depends on your interest rate. If you can match the average annual inflation rate, which is around 3%, you can earn around $31,400, if your interest rate compounds monthly. (At that rate, you can double your one million dollars in just under 25 years.)
But how do you get that rate? Right now, US interest rates are relatively low. They’re rising, but they’re still low. Low interest rates are great when you’re getting a mortgage, but they’re not great when you’re trying to get your savings to grow.
Right now, a one year Treasury Bond is at about 1%. That’s not great. So one million dollars would earn about $10,000 in interest in a year. That’s not bad, but you can do better.
I do online banking at Capital One 360 (formerly ING Direct), so I took a look at their rates to figure out how much interest one million dollars could earn there. It looks like I could get a 1% rate on a Money Market account, but I could get 1.3% on a 12 month CD. That takes me up to an interest rate of $13,000 per year. Not bad, and pretty darn safe. If I’m willing to put my money away for longer, I can earn a higher rate, but rates are relatively low right now and should continue to go up, so locking away my hypothetical million dollars for more than a year isn’t the best plan.
To really make my money work for me, I’m going to have to do more than stick my money into a savings account. It’s time to look into investing your money. Personally, if you are looking to invest that much money, I would recommend finding a financial advisor to help you with your decisions. It will cost you some money, but I think it’s a worthwhile expense.
Were I not using a financial advisor, I would first look into mutual funds. A mutual fund is a collection of stocks, bonds, and other securities packaged together into a portfolio. These are managed by portfolio managers, so with a mutual fund, you do pay extra for that work. But the benefit here is that the portfolio managers buy and sell securities for the portfolio and work to ensure that each shareholder’s investment continues to grow.
So to answer the question of how much money does one million dollars earn in a year, the answer is “It depends.” You can easily earn $10,000, but with a bit of work, you can earn quite a bit more. And remember, for each year that you continue to save, your money will continue to grow. And if you’re like me and still working towards your first million, remember the value of compounding interest. Instead of pulling that interest out and spending it, let it continue to grow. Your money will grow, interest rates will grow, and by the time you reach retirement age, you will hopefully have a nice sum of money to spend as you enjoy your life.