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To many people, a million dollars sounds like a lot. However, it doesn’t go anywhere near as far as it used to, thanks to inflation and other factors. In fact, people living in areas with an above average cost of living question whether you can still live comfortably off of the interest on $1 million.
Whether you can live comfortably off the interest on $1 million depends on where you live and what you consider to be a comfortable lifestyle.
While there are 10.8 million millionaires across the U.S., that’s about 3 percent of the population
One of the biggest variables is what you consider to be a comfortable lifestyle. Do you need $50,000 per year to feel confident? What about $100,000? Or $30,000?
Ultimately, your expenses and where you live play a big role in determining how much you need to feel comfortable. If you live in a low-cost area, have already paid off your home, and have little to no debt, then you won’t need as much as a person managing a mortgage in New York City.
You’ll need to determine what you need annually as income before you can decide if the interest off of a million dollars is enough.
How is Your Money Earning Interest?
Where you stash your cash also plays a part in determining whether you can live off of the interest.
For instance, if you keep that one million in a high-interest savings account, you’ll generally find an annual percentage yield of 1.65 percent or lower as of 2018. At that rate, you’d only make $16,625 in interest each year, so living off of it would be a challenge.
According to the Federal Deposit Insurance Corp., certificates of deposit (CDs) won’t treat you better. In fact, the 12-month CD national rate is only 0.37 percent.
In comparison, an independent retirement account may earn around 5 percent annually. If it compounds monthly, that brings in between just over $51,000.
High yield bonds can experience similar rates, sometimes reaching higher than 6 percent. However, you do need to be careful with high yield bonds.
Rates above that point (and sometimes even below), can drift into junk bond territory. These come with a substantial amount of risk, meaning you could lose it all.
Can You Still Live Comfortably off the Interest on $1 Million?
In order to even attempt to live off of the interest of $1 million, you need to invest it wisely — and live in an area with a below-average cost of living.
If you live in a major metropolitan area, or you insist on putting the money in overly conservative investments, then $2 to $3 million is closer to the amount you need.
An important thing to factor into the amount of money you need to retire on: a single significant health issue could easily erode $1 million, if not wipe it out altogether.
Chronic Illness Can Cost $1 Million
For example, cancer drugs can cost up to $65,000 a month per medication, but the cost to treat the disease could easily mushroom to a size large enough to take out the entire $1 million you set aside.
Here’s why: most patients need to take multiple medications at the aforementioned price point; then there’s hospitalization, surgeries, and supportive care provided by doctors and nurses whose hourly rates are included in billing. Finally, factor in that hospitals in major cities tend to charge a lot more money than ones in areas with lower average costs of living.
And don’t just presume that insurance will take care of these bills, or you’ll be in for a rude awakening. With Medicare paying an eroding share of medical costs and private insurers also covering less, there are very strong odds that out-of-pocket medical costs might eat into your $1 million.
So while it’s possible to live on the interest from $1 million, it might not end up being the comfortable life you were hoping to have.
Readers, do you think $1 million is enough money to retire on — or would you need a different amount? Tell us about your retirement goals in the comments section below.
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