Despite recent opinions, $1 million dollars still seems like a lot of money (unless, of course, you’re a billionaire). When you invest your money into a retirement fund or put your money into savings, you are often rewarded with interest that accrues over time on the amount. How much that accrues, though, depends on the length of time in the account, who you’re investing or saving with, and so on. But, if you wanted to stop working, would this be enough to live comfortably? So, today we answer the question: Can I live off the interest of $1 million?
Can I live off the interest of $1 million?
Even though $1 million is not what it used to be, it’s still more than what nine in 10 Americans possess, according to this 2013 New York Times article by Jeff Sommer. This sum of money could potentially change someone’s life (for better or worse). Imagine, then, how much interest would accumulate on $1 million. After all, the more money you invest into an account, the more money you will gain from interest. All of this is still dependent on the type of investment and the time the money spends in the account though.
When you choose to invest or save money with the intent of using it to live off of, it is important to do your research on the type of investment that will be best suited for your financial goals. For example, a certificate of deposit (CD) earns more interest on your money in a shorter period of time with an average of a 0.27% interest rate for 12 months, while a standard savings account only averages about 0.06%, as noted by the Federal Deposit Insurance Corporation (FDIC). On the other hand, retirement funds can earn you around 5% interest on your deposit.
The short answer is yes, you could live off the interest of $1 million, but it is a bit more complicated than that. For one, you won’t live a lavish lifestyle that you may imagine. If you’re debt free (or plan to be by the time you retire) you’ll be much better off, but you still have to monitor your finances and spend wisely. In fact, you would likely need to be extremely frugal if you wanted it to last as long as possible. Not to mention, inflation and taxes could also affect the amount you would actually have to work with as well as cost of living in any given location.
As far as what to expect each year, you could expect the annual pay you’ll receive to be $27,000 to $40,000. In a Quora commentary, one user noted this is because of you can take out about 4% each year from your investment. If you are lucky enough to invest in an account that offers 4-5% interest, you will be in a decent situation. At 4%, you’d earn another gross amount of $1,222,582.09 after 20 years with monthly compound interest, as shown with this money calculator. The younger you are, however, the less money you can expect to be able to have as you will have more and larger expenses.
When trying to determine whether or not you can live off the interest of $1 million, you need to also look at your current debt. What are your yearly expenses now, and could your annual pay from your investment cover these costs among other surprises that may occur along the way (health issues, car replacements, etc.)?
There is no cookie-cutter answer to answer the question, “Can I live off the interest of $1 million?” Alternately, with the right investment decisions and starting to invest that amount now, you will be better off than many of your peers in the future.
What are your thoughts? Weigh in on the conversation in the comments below.