Is it possible to live a comfortable life from the interest in our bank account? Most likely not. But, what if we had a million dollars in the bank? Would that generate enough interest to be considered a passive income? Maybe.
“Can I live off interest of $1 million?” is a common question asked by people on the cusp of retiring or anyone trying to get creative with their finances. The answer to this query depends on several factors – many of them having to do with a person’s lifestyle and bank policies. Here’s what to consider when trying to figure out if you can live of the interest of a million bucks.
Interest rate. Today, most savings accounts only offer an interest rate of around one percent. That’s not a lot. According to Magnify Money, the bank with the best interest rate for saving accounts this month is Synchrony Bank, and they only offer 1.05% APY. That means if you put $1 million in their savings account today, you would only make $10,500 after the first year. The second year and third years, taking inflation into account — which is usually around 2.9 percent — you would earn another $10,610.25 and then $10,721.66.
CDs and Treasury Bonds. Although there is more freedom with a savings account, it obviously doesn’t generate enough income. Consider opening up a 30-year U.S. treasury bond. With 3.33% interest, you’ll collect $33,000 a year. However, that’s after 30 years, and in the meantime, you can’t touch the funds. Bonds don’t take into account inflation, so in 30 years that $1 million will probably only worth about $412,000, and money accrued will probably ring in at only $13,590. CDs are a slightly better bet — with an average 2.25% APY, after five years, you’ll rake in $25,000. However, interest rates can fluctuate, and they might dip over the course over five years. These are all factors to keep in mind when weighing CDs and treasury bonds.
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