Is it possible to live a comfortable life from the interest in our bank account? For most of us, the answer is probably not. But, what if we had a million dollars in the bank? Would that generate enough interest to be considered a passive income?
Maybe. The ability to live off a million dollars, or at least the interest earned from it in 2021, is a common question for 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 off the interest of a million bucks.
Things To Consider if You Want To Live off Interest
Interest Rates
Today, most savings accounts offer much lower interest rates than in the past. Currently, the national average is around 0.05% APY. That’s not a lot, especially considering that your money depreciates over time. However, according to Magnify Money, the bank with the best interest rate for saving accounts this month is Marcus by Goldman Sachs, and they only offer 0.5% APY.
That means if you put $1 million in your savings account today, you would only make $5,000 after the first year. The second year, taking inflation into account — which is usually around 2.9 percent — you would earn another $5,025. Even for the most frugal of people, a million dollars would not earn enough interest to live off of in 2021.
Living Expenses
To live off the interest from a million dollars, you’ll need to budget. The federal poverty line for a single person is $12,880. So, based on current rates of return, this plan is not feasible unless you have other supplemental income.
However, if you’re hell-bent on living off your interest, then you might want to consider moving. Places like Tennessee, Texas, and Arkansas consistently rank high among America’s most affordable places to live.
For example, Memphis, Tennessee is one of the best markets right now for both renters and prospective homebuyers. The average home value is $103,782 and average monthly rent is about $825. However, it’s the city’s extremely low cost of living that puts it at the top of this list.
To really minimize your spending though, you will want to live in a state with low taxes. Wyoming’s average state and local sales tax is 5.42 percent and there is no state income tax. Although it might be hard to find housing in Alaska, local sales tax in the Last Frontier is only 1.78%. There are also many other countries that offer incentives and similar quality of life for American expats with a much lower cost of living.
Inflation
Another thing people often forget to take into account is increased inflation rates. Even though you have a million dollars in your account today, inflation reducing your purchasing power over time. While you can estimate inflation rates through your lifetime based on past trends, there is no way to predict exactly how much it will depreciate your assets.
APIs It Possible To Live off the Interest on a Million Dollars in 2021?
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 tally up to roughly $13,590. CDs are a slightly better bet — with an average 2.25% APY. So, 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.
While it is extremely difficult, it is possible to live off the interest generated from a million dollars. However, it can’t be done through savings accounts alone. In order to achieve this, most financial advisors will recommend that you boost your portfolio’s yield by laddering bonds.
This allows you to stagger the maturity dates on your bonds so you can protect yourself against large market fluctuations. But, most experts will advise you to diversify your portfolio to maximize your returns and shield against market volatility.
Read More:
- How to Live Solely on Interest
- How Much Interest Does 1 Million Dollars Earn Per Year?
- There is No Need to Live Outside Your Means
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Jenny Smedra is an avid world traveler, ESL teacher, former archaeologist, and freelance writer. Choosing a life abroad had strengthened her commitment to finding ways to bring people together across language and cultural barriers. While most of her time is dedicated to either working with children, she also enjoys good friends, good food, and new adventures.