Once you have $1 million in assets, you can seriously consider living entirely off the returns of a portfolio. The S&P 500 alone yields an average of 10% per year. If we ignore taxes and down-year investment portfolio management, a $1 million index fund could yield $100,000 annually. However, there are more conservative approaches that can benefit your long-term financial goals, and we’ll discuss some of the best ones in this article. If you’re not sure which investments are best for you, consider talking to a financial advisor to create a long-term financial plan.
Why invest in interest-bearing assets?
With $1 million, you can plan pretty well for potential returns. But as with all investments, we need to think about your goals first. What are you ultimately saving for, and how do you feel most comfortable achieving that? In this case, we need to look specifically at the issue of security.
Investors typically seek out yielding investments, not only because they tend to be safer than other investments, but also because they tend to be more knowable. With a stock or options contract, the best you can realistically have is a sense of average performance over time. The S&P 500 typically returns 10% per year. A given stock may have a historical return per year. This is good information, but past performance is no guarantee of future results.
Interest-bearing investments, on the other hand, come with a promise. With any given asset, you have a relationship with another party, and they have promised to make specific, detailed payments on a set schedule. A company might promise to pay you 5% per year on bonds you own, delivered in quarterly installments, for example. Or a bank might promise to pay you 2% on its certificate of deposit.
There is still some uncertainty here, as borrowers can still default on their debt, but otherwise your returns are known and knowable. This is ultimately one of the biggest reasons to invest for interest. Not only are you managing your risk, but you can also create a much more detailed financial plan in advance.
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Interest versus return
The downside to investing for interest is that you simply don’t make as much money. For example, just in the context of comparative yields, interest-bearing assets tend to average a payment rate of 2-3% per year. At the same time, stock dividends tend to average between 2-5% per year. We could literally be talking about making half that by investing in bonds.
Or consider capital gains and current performance. As of this writing, as noted below, bonds are hot, with an average yield of 4.66%. Your $1 million investment would then yield $46,600 in return. On the other hand, in 2021, the S&P 500 returned 26.61%. A year’s worth of returns on that investment would have earned you $266,100.
That’s a lot of money to pay for a sense of security. On the other hand, if you have $1 million to invest, chances are you’re approaching your financial goals. That’s often a strong argument for accepting lower returns in exchange for a more stable portfolio.
So we suggest looking at the problem. What is your plan for this $1 million portfolio, and how close are you to getting there? (For most readers with a portfolio of that size, chances are it’s a retirement account.)
The closer you are to your goal, the more money you may want to move into interest-bearing accounts. You can put that $46,600 away each year, knowing that you don’t have to take any risk. The further away you are from your goal, the more risk you may have to accept in exchange for reaching your goal.
Interest-bearing investments to consider
Now, let’s take a look at some of the best interest-bearing investments you can consider for your portfolio. Each carries a different level of risk and opportunity, so keep that in mind and match the right investments to your financial goals.
Bonds
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Average interest rate at the time of writing: 4.66%
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Value of $1 Million in Five Years: $1,255,751
Bonds are assets that companies and other institutions issue to borrow money. Each bond has two main characteristics: the term and the coupon rate. The term is how long it takes for the institution to pay your money back. The coupon rate is the interest the bond pays on that debt in the meantime. Suppose you buy the following bond:
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Value: $1,000
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Adulthood: 10 years
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Coupon rate: 5%
You will receive $50 per year (5% of the bond value) as long as the bond remains active, usually paid in four- or six-month installments. Once 10 years have passed since the bond was issued, the company will pay back your original $1,000.
Bonds typically offer the highest return on any interest rate investment. They also typically offer the most risk. While it is very rare for a company to default on its debt, it happens more often than a bank or insurance company.
Certificates of Deposit (CDs)
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Average interest rate at the time of writing: 0.03% – 0.39%
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Value of $1 Million in Five Years: $1,019,653
Certificates of deposit are offered by banks to their customers. With a CD, you deposit a certain amount of money with the bank for a fixed period. You cannot withdraw this money during the term of the CD. In return, the bank pays you a higher interest rate than normal.
The amount of money you can receive in a CD depends on the length of your deposit. At its shortest, the average interest rate on a 30-day certificate of deposit is currently 0.03%, about the same as that of a checking account. At its longest, five-year CDs offer an average interest rate of 0.39%. However, these are standard CDs. Some institutions may offer certificates of deposit with interest rates of 2% or higher, depending on the circumstances and the investor. (In this case, your investment value after five years would be $1,104,081.)
A certificate of deposit offers security in exchange for liquidity. You get a low return and can’t get to your money, but you also know that it’s not just sitting in a bank, it’s also FDIC-insured in case of disaster.
High yield accounts
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Average interest rate: 1%
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Value of $1 million in five years: $1,051,010
Checking and savings accounts trade liquidity for value. Checking accounts, which have the most liquidity, pay an average of 0.03% interest at the time of writing. Savings accounts, which have a few more rules around making withdrawals, pay an average of 0.07%. Some alternative banks and other financial institutions have begun to compete with traditional banks on these products by offering better terms.
A high yield savings account is a savings account that offers better than average interest rates. These are typically regular accounts, meaning you get the usual liquidity balanced with few rules around making withdrawals. They are also typically managed by non-traditional institutions, meaning they are not FDIC insured in case something goes wrong.
A high-yield account can be a good idea to store your money on a daily basis. While the payment speed here is not good enough to consider it an investment asset, it is worth noting that they currently outperform most CDs by a fair amount.
Annuities
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Average interest rate: 3%
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Value of $1 Million in Five Years: $1,075,380
Annuities are contracts sold by insurance companies and financial institutions. To purchase an annuity, you give the institution an amount of money up front. On a set date, the company begins paying you back both the invested capital and the interest.
As with any loan, the interest on your annuity will continue to accrue even as the company pays you back. This means that the company will pay you compound interest on the capital in your account each year, and then make monthly payments until they have repaid the entire value of the contract.
Most annuities are typically longer contracts, paying you back over 10, 20, or 30 years. This reduces your monthly return, but can significantly increase the value of your investment. You can also maximize the value of an annuity by purchasing it before repayment. Since interest on your account begins to accrue from the day you invest, the longer you wait to repay, the more money you’ll get back.
Conclusion
If you have $1 million and are interested in making it grow with interest, there are many ways you can consider investing your money. Interest-bearing assets can be a very smart way to invest $1 million and keep it safe at the same time. Bonds are generally your best bet for maximizing returns, but assets like a certificate of deposit or an annuity can be useful if you want to minimize risk.
Tips for investing
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Like any strategy, balancing an aggressive approach with conservative investments is a matter of judgment. You can enlist the help of a financial advisor to help you find the right balance for your portfolio. Finding a qualified financial advisor doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisors for free to determine which one is the best fit for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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As we wrote this article, the S&P 500 was in the midst of a significant dip. That’s not always a problem for investors. In fact, it can be a very significant opportunity. Read our article on buying the dip to learn more.
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