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Can you live off the interest of 2 million dollars?

At $200,000 per year in average returns, this is more than enough for all but the highest spenders to live comfortably. You can collect your returns, pay your capital gains taxes and have plenty left over for a comfortable lifestyle.

finance.yahoo.com - $2 Million Makes This Much Monthly - Yahoo Finance
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SmartAsset: How Much Interest Does $2 Million Pay Monthly?

For older Americans, living off the interest and returns of your retirement account is how retirement is structured. The goal is that by the time you hit your late 60s you will ideally have enough saved up to coast indefinitely. For younger Americans, the goal is to build up enough of a nest egg to retire early. But building up that kind of nest egg isn’t easy. And when thinking about how much money you will need to get there, you may be asking: Is $2 million enough? And, can you live off the returns of a $2 million account? The answer is yes, if you’re smart about it. Here’s what you need to know. A financial expert could help you create a financial plan for your retirement needs and goals.

How to Live Off Interest

The first thing to understand is how you live off interest. When we talk about living off of interest payments, we’re referring to what’s called “passive income.” This means that your various assets generate enough money on their own to provide your monthly income. You don’t have supplemental income or other work (beyond portfolio management) that adds to either your portfolio or your monthly budget. Ideally, you also don’t draw down on the core principal. You can do so, of course. For example, someone who took $75,000 per year out of a $2 million account could coast for more than 25 years before the account ran dry. But when we talk about living on the interest, we’re trying to decide if you can live indefinitely. This means that you don’t touch the principal, only the interest and returns.

Step One: How Much Money Do You need?

To figure out if you can live off the interest of an account, the first step is understanding your own expenses. To put it another way, first you need to know how much money you’ll need each month. Then you can figure out what kind of savings can get you there. Living off the interest of your savings is an excellent goal, and many younger Americans increasingly target it. The best way to start on this project is to focus on debt. Nothing will erode your ability to out-earn your expenses faster than the fixed monthly overhead of a credit card, student loans or other forms of interest-bearing loans. Pay off those as quickly as you can and this project will be much easier.

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When you do this math, it’s important to balance your needs and wants. First, how much money do you absolutely need per month? Do you have fixed expenses, like medical costs or other bills that can’t go away? Do you support anyone?

Then, take a realistic look at your lifestyle. What you want to do here is balance two competing needs: On the one hand, the more lavish your lifestyle the higher your bills, and the more money you’ll need before a portfolio can generate those returns. On the other hand, the point here is to be happy. Set a target lifestyle that lets you have the things you want in life, otherwise you’ll be both more miserable and more likely to blow your budget. Take a whole-picture view of your finances, and be realistic about what you want and need. Social Security provides a stable source of income for elderly Americans and is a fantastic supplement to just about any retirement plan. The average retiree collects about $1,650 per month from this program. We will not include it in this article, since it skews our answer of whether anyone can live on just $2 million in savings. But if you’re looking toward retirement, definitely don’t forget to include that income in your budget.

Can $2 Million Get This Done?

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SmartAsset: How Much Interest Does $2 Million Pay Monthly?

If you have $2 million saved up, what kind of budget can you live on? The answer to this question depends entirely on how you have this money invested. Investment options for your money range from something as basic as a savings account to options like stocks, bonds and other assets. The key question is reliability and security. The more money an investment returns, the greater the risk of loss as well or at least volatility. If you’re looking to live off the interest of an account you need a balance: The investment needs to be secure enough to minimize your risk of loss, otherwise you’ll be left without the money you need to live; The investment needs to be relatively stable, so that you can generally know what to expect each year or over time; The investment also needs grow enough to generate real income, otherwise you won’t have any meaningful returns off of which to live. While there are a lot of different options out there, here are four of the best choices for stable, long-term income investing: High-Yield Savings Account, 0.60%: $12,000 Income per year. A high-yield savings account is literally just a savings account at the bank, but since you’ve deposited a lot of money they increase your interest rate. While numbers vary, on average you can expect to find interest rates around 0.60 percent. This isn’t a great option for generating income, but it’s about as rock-solid as you can get in terms of reliability. One-Year Treasury Bills, 1.72%: $34,000 Income per year. Government bonds and bills offer a wide variety of options. Their interest rates change based on monetary policy decisions, but at time of writing a 12-month Treasury Bill offered 1.72% in interest. This is the safest place in the world for your money, although the returns tend to be low and that interest rate can change. Certificates of Deposit, 1.2%: $24,000 per year. When you buy a certificate of deposit, the bank holds your money for a defined period, meaning you can’t withdraw it, but in return they pay you an elevated interest rate. With a good bank you should be able to get rates around 1.2%. Like a savings account this is about as good as you can get in terms of reliability, although even the elevated rate of a CD is fairly low and you can’t access your principal if there was an emergency. S&P 500 Index Funds, 10%: $200,000 per year. Over the past several decades, mutual funds and ETFs indexed to the S&P 500 have returned an average of between 10% and 14% per year. Unlike the other options we’ve considered here, index funds come with real risk. With a bank product (like a savings account or a CD) or Treasury debt, you get an extremely high degree of confidence in both your return and your principal. The stock market is much less predictable. It fluctuates, with some years dramatically exceeding the average and other years posting a loss. Still, an index fund is also the most stable higher-yield option we can recommend.

Why You Probably Can Live Off $2 Million

SmartAsset: How Much Interest Does $2 Million Pay Monthly?

Some particularly budget-conscious households might be able to live off the return of Treasury debt at $34,000 per year. Though this is a small amount of money relative to your likely future needs. And even if you can pay your bills, it will almost certainly leave no room for error. An index fund, however, could offer you an alternative to do this. The good news about an index fund is the simple numbers involved. At $200,000 per year in average returns, this is more than enough for all but the highest spenders to live comfortably. You can collect your returns, pay your capital gains taxes and have plenty left over for a comfortable lifestyle.

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The bad news about an index fund is the variability. Over time major indices like the S&P 500 return to their averages. In any given year, though, returns will vary. For example, between 2012 and 2022 alone the S&P 500 posted annual returns of 29.6% (2013), -6.24% (2018) and 26.89% (2021). In between returns of nearly triple the average, the market also spent a year losing almost an entire year’s average gains. What this means is that over time the markets can be reliable enough to count on, but you still need to plan ahead. If you want to live off an index fund, you cannot live paycheck to paycheck. Your budget has to include setting aside cash in one of the safe options like a certificate of deposit or Treasury debt. That safety net needs to be large enough to let you live for a year or more of weak returns, and even to replace capital that your account lost if need be. With $2 million in hand, that is an entirely achievable goal. For example, you could easily set a household budget of $100,000 per year (again a very comfortable amount of money). You could take the other half of your annual returns and use them to pay taxes and build up this preventative war chest. Once this bank of solid savings has several hundred thousand dollars in it, enough to compensate for multiple years of lost earnings, you can reduce your contributions or begin rolling any excess returns back into your index fund.

Bottom Line

Can you live off of $2 million in assets? The answer is yes, if you manage your investment portfolio smartly. One common option is to invest $2 million in an index fund. But you will still need to make absolutely sure that you have a rainy day fund since the market can be reliable over decades but fickle over years.

Tips to Help You Save for Retirement

According to the Federal Reserve, 60% of those with self-directed retirement accounts are not confident about their investment decisions. If you’re one of them, why not hire a financial advisor? SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost 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. Counting on Social Security benefits alone likely won’t provide full support for your current lifestyle. But, benefits can definitely help with your living expenses in retirement. SmartAsset’s Social Security calculator will help you estimate how much of a benefit you can expect. And, if you want to figure out whether you are saving enough for retirement, SmartAsset’s free retirement calculator can help you determine how much you will need.

Photo credit: ©iStock.com/IPGGutenbergUKLtd, ©iStock.com/AlexRaths, ©iStock.com/Drazen_

The post How Much Interest Does $2 Million Pay Monthly? appeared first on SmartAsset Blog.

finance.yahoo.com - $2 Million Makes This Much Monthly - Yahoo Finance
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