Once you have $1 million in assets, you can seriously look at living entirely off a portfolio’s returns. After all, the S&P 500 alone delivers an average of 10% return per year. Excluding taxes and past year investment portfolio management, a $1 million index fund could make $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 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. However, as with all investments, we must first consider your goals. What do you end up saving for and how do you feel most comfortable getting there? In this case, we should especially look at the issue of security.
Investors tend to seek interest-bearing investments not only because they are safer than other investments, but also because they are better known. With a stock or options contract, the best you can realistically have is a sense of average performance over time. The S&P 500 tends to return 10% annually. 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 a particular asset, you have a relationship with another party, and they have promised to make specific, detailed payments on a set schedule. A company can promise to pay you 5% per year on all the bonds you own, for example in quarterly installments. Or a bank promises to pay you 2% on its certificate of deposit.
There is still a degree of uncertainty here as borrowers can still default on their debts, but otherwise your returns are known and knowable. This is ultimately one of the biggest reasons to invest against interest. Not only do you control your risk, but you can also make a much more detailed financial plan in advance.
Interest versus yield
The downside of investing for interest is that you simply don’t make that much money. For example, in the context of comparative returns alone, interest-bearing assets tend to have an average payment rate of 2-3% per annum. At the same time, the stock dividend averages between 2 and 5% per year. We can literally talk about earning half as much by investing in bonds.
Or take capital gains and current performance. At the time of writing, as noted below, bonds are hot with an average interest rate of 4.66%. Your $1 million investment will then yield $46,600 in returns. On the other hand, the S&P 500 returned 26.61% in 2021. A year’s worth of return on that investment would have earned you $266,100.
That’s a lot of money to pay for the sense of security. On the other hand, if you have $1 million to invest, chances are you are approaching your financial goals. This is often a strong argument for accepting lower returns in exchange for a more stable portfolio.
This is how we recommend considering the problem. What is your plan for this $1 million portfolio and how close are you to achieving it? (For most readers who have a portfolio of that size, chances are it’s a retirement account.)
The closer you are to achieving your goal, the more money you would like to shift into interest-bearing accounts. You can put that $46,600 aside each year knowing you don’t have to take any chances. The further you are from your goal, the more risk you have to accept in exchange for achieving your goal.
Interest-bearing investments to consider
Now let’s look at some of the best interest-bearing investments to consider for your portfolio. Each carries a different level of risk and opportunity, so keep that in mind and align the right investments with your financial goals.
Average interest rate at the time of writing: 4.66%
Value of $1 million in five years: $1,255,751
Bonds are assets that companies and other institutions issue to borrow money. Every bond has two main features: the maturity and the coupon rate. The term is how long it takes for the institution to pay back your money. The coupon rate is the interest the bond pays on that debt in the meantime. So suppose you buy the following bond:
Maturity: 10 years
Coupon rate: 5%
You receive $50 per year (5% of the bond’s value) while the bond remains active, usually paid in four- or six-month installments. Once 10 years have passed from when the bond was issued, the company will repay your original $1,000.
Bonds usually offer the highest return on any interest rate investment. They also tend to present the most risk. While it is rare for a company to pay off its debts, it happens more often than a bank or an insurance company.
Certificates of deposit (CDs)
Average interest rate at the time of writing: 0.03% – 0.39%
Value of $1 million in five years: $1,019,653
Certificates of deposit are offered by banks to their customers. With a CD you put a certain amount of money on deposit with the bank for a certain period of time. You cannot withdraw this money during the term of the CD. In return, the bank pays you a higher interest rate than usual.
The amount you can receive through a CD depends on the duration of your deposit. At its shortest, the average interest rate on a 30-day certificate of deposit is currently 0.03%, roughly 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 receive low returns and can’t access your money, but you also know that it’s not only on deposit with a bank, but also FDIC insured in case disaster strikes.
Average interest rate: 1%
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 lines for withdrawing money, 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 above-average interest rates. These are mostly regular accounts meaning you have the usual liquidity in balance with some rules for withdrawing funds. They are also usually operated by non-traditional institutions, meaning they are not FDIC insured in case something goes wrong.
An account with a high yield can be a good idea to store your money on a daily basis. While the payment rate here isn’t good enough to consider it an investment asset, it’s worth noting that they are currently outperforming most CDs by a fair amount.
Average interest rate: 3%
Value of $1 million in five years: $1,075,380
Annuities are contracts sold by insurance companies and financial institutions. To buy an annuity, you give the institution an amount of money upfront. At a certain date, the company will start paying you back both the principal you invested and the interest.
As with any loan, the interest on your annuity accrues even as the company pays you back. This means that the company pays you compound interest each year on the principal in your account, and then makes payments each month until the full amount of the contract is repaid.
Most annuities tend to be longer contracts, paying you back in 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 buying for amortization. As interest accrues in your account from the day you invest, the longer you wait to repay, the more money you will get back.
It boils down
If you have $1 million and are interested in growing it on interest, there are many ways you can consider investing your money. Interest-bearing assets can be a very smart way to invest $1 million while keeping it safe. Bonds are generally your best bet for maximizing returns, but assets such as a certificate of deposit or annuity can be useful if you want to minimize risk.
Tips for investing
As with any strategy, it’s a trade off to balance an aggressive approach against conservative investments. You can use the help of a financial advisor to find the right balance for your portfolio. Finding a qualified financial advisor doesn’t have to be difficult. SmartAsset’s free tool pairs you with up to three financial advisors serving your area, and you can interview your advisor matches for free to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
As we wrote this article, the S&P 500 was in the middle of a major dip. That is not always a problem for investors. In fact, it can be a very important opportunity. Read our article on buying the dip for more information.
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