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 if I save one million dollars, how much interest will I earn?
How does interest work?
How much interest you earn 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 very low. They will rise again, but right now, they’re low. Low interest rates are great when you’re getting a mortgage or refinancing, but they’re not great when you’re trying to get your savings to grow.
Where can I get a good interest rate?
Right now, a five year Treasury bond is at a low 0.36%. That’s not going to get you very far towards your 3%, but it is still guaranteed interest for five years. I’m not sure I would recommend bonds right now, since rates are so low and should rise.
I do online banking at Capital One, so I took a look at their rates to figure out how much interest one million dollars could earn there. Right now, with rates so low, a savings account is at 0.4% interest, and CD rates aren’t much better. Usually you can get a better rate on CDs than on savings accounts, but not in this case. As interest rates have been falling, banks don’t want to let you lock into a higher rate, so the only way to get 0.4% interest would be to put my money in a 60 month CD. I have to believe that in 60 months, the rates will have improved.
But even then, if I put my hypothetical one million dollars into that 60 month CD, at the end of it, I will have earned over $20,000 in interest, which averages out to $4000 a year before taxes. Anytime you end with more money than when you started is a win in my book.
So how do I make that money work for me?
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 a few thousand dollars, 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.
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Megan is a 40-something government employee in the Washington, DC area. She got interested in Personal Finance when she got out of college and realized that her paycheck wasn’t going to go as far as she had hoped. Since starting this blog, she has managed to buy a house and make a solid start on her retirement goals, and hopes to help others do the same. Here is her story:
In 2007, I was a gainfully employed 20-something with no debt but not a lot of knowledge about personal finance. It was a co-worker’s comment about Roth IRAs that sent me to the internet, searching for information. It was then that I realized that I really didn’t know a whole lot about personal finance and that my current financial situation was due a lot to inherent frugal tendencies, generous family members, a fear of debt, and good luck. While that was working for me, clearly I needed a better plan.
While I had no debt, I was also pretty much living paycheck to paycheck and not worrying about going over budget (I say this as if I had a real budget) because I had an emergency fund set aside to cover any overages.
Except that’s not what an emergency fund is for.
So I did a lot of research, read a lot of blogs, and decided that I needed a plan. I needed to budget. I needed to know what I was spending my money on. I needed to prepare for the future.
I decided to create a blog not only to make myself accountable to others but also to share the knowledge that I gained along the way. I’ve learned so much from my fellow bloggers, and I hope that my readers can find something useful in what I have to share as well.