Growing your retirement savings is an important goal for most investors. When you reach $250,000 in your account, it helps to understand how much income you can earn from your savings. While many people use the 4% Rule to determine a safe withdrawal rate, the answer really depends on how much you’re earning from your investments. So, how much interest does $250,000 earn per year? Let’s take a look at how much you can earn based on how it is saved or invested.
A financial advisor can help you create a stream of income for your needs and goals.
How Much Interest Does $250,000 Pay?
The amount of income that you’ll get from a $250,000 portfolio depends on which investments you’ve chosen. Ideally, you can live off the interest without touching your investment principal. While many investors may not be able to live off the interest from $250,000, it could supplement other sources of retirement income to meet their needs. Here are six common investment choices and the expected income you’d receive each year.
Savings and money market accounts. Savings accounts and money market accounts are bank deposit products that offer a guaranteed interest rate without the risk of losing money. Most of these accounts are offered by banks and credit unions, but some investment companies offer money market accounts, too. While these accounts offer safety, the interest rates earned are generally much less than other investment choices.
Depending on your balances and where you open your account, your interest rate will vary. Many high-yield savings accounts from online banks offer rates from 2.05% to 2.53%. On a $250,000 portfolio, you’d receive an annual income of $5,125 to $6,325 from one of those accounts.
Bank certificate of deposit (CD). Bank certificates of deposit offer higher rates of interest when you agree to local up your money for the term of the CD. The most common CD terms are 30 days up to five years. If you access your money early, most banks charge a penalty of three to six months of interest, depending on how long the original term was. To minimize these penalties, many investors use a “CD ladder” strategy to stagger the maturity dates every three-to-six months so that it is easier to get access to money without paying a fee.
The interest earned from a bank CD depends on the bank and duration. For most banks, you won’t get a higher rate when you deposit more money. A typical CD today offers an interest rate of 2.20% to 3.25%, which provides an annual income of $5,500 to $8,125 per year on $250,000.
Annuity. Annuities are insurance products that offer a higher rate of interest and tax-deferred growth. The earnings from an annuity are not taxable until you start making withdrawals. Depending on how you make withdrawals, you may pay taxes on some or all of the distributions.
Annuities were designed for retirement, so withdrawals made before age 59 1/2 typically incur a penalty. Some insurance companies also charge a fee if you withdraw money before the annuity contract matures. However, most annuities allow smaller withdrawals each year without a penalty.
For a 65-year-old man living in Tennessee, a $250,000 immediate annuity would provide an annual income of about $18,000. When adding a 60-year-old female spouse as a joint annuitant, you’d receive approximately $15,000 per year for the rest of both of their lives.
Bonds. Bonds are a loan from an investor to a company or government agency. Interest rates for bonds vary based on their maturity date and the rating of the issuer. Typically, bonds issued by the federal government, like T-Bills, are considered the safest bonds. Because of their inherent safety, they also tend to offer the lowest interest rates. The longer the term and riskier the bond issuer, the higher the interest rate they must offer to attract investors.
When interest rates change, your bond’s value may fluctuate (higher bond price means lower interest rate and vice versa). However, as long as you hold it to maturity, you’ll receive the face value when it matures.
Bond interest rates vary widely, but an investor can expect to receive between 2.00% and 5.00% interest each year, which provides an income of $5,000 to $12,500 per year on a $250,000 portfolio.
Stock dividend mutual funds and ETFs. In addition to growth in value, many stocks also provide recurring dividend income. Dividends are the return of profits to shareholders. Instead of directly investing in these stocks, you can buy a mutual fund or ETF whose focus is income or growth and income to receive recurring income.
A typical stock dividend portfolio earns between 2.00% and 5.00% in dividends each year. As your portfolio and the underlying investments grow, you may receive higher dividends and capital gains in the future. On a $250,000 portfolio, you may receive $5,000 to $12,500 of dividends per year plus the potential for growth and capital gains.
Real estate investment trust (REIT). A real estate investment trust (REIT) is like a mutual fund for real estate investments. They provide professional management of rental properties and passive income for investors. REITs also provide diversification and access to larger investments even for the smallest investors.
On average, REITs distribute returns of 3.00% to 10.00% each year. This equates to an annual income of $7,500 to $25,000 per year on a $250,000 portfolio.
Expected Income From a $250,000 Portfolio
Based on current interest rates and historical performance, here are the ranges of income you may receive from a $250,000 investment. The actual income from these investment choices varies on the individual selection, duration, amount invested and other factors.
|Account Type||Interest Rate||Annual Income|
|Savings and Money Market Accounts||2.05% to 2.53%||$5,125 to $6,325|
|CDs||2.20% to 3.25%||$5,500 to $8,125|
|Annuity||2.00% to 3.30%||$15,000 to $18,000|
|Bonds||2.00% to 5.00%||$5,000 to $12,500|
|Stock Dividends||2.00% to 5.00%||$5,000 to $12,500|
|REIT||3.00% to 10.00%||$7,500 to $25,000|
* Some choices, like a CD or an annuity, may require that your money is locked up for a minimum time frame or that your account is annuitized.
Factors That Affect Your Retirement Income
In addition to the investment you choose, the amount of interest you’ll actually receive from a $250,000 investment depends on multiple factors. These are five of the most common:
- Taxes. Interest income is typically taxed using ordinary income tax rates. When you invest in tax-free accounts like a Roth IRA or Roth 401(k), you can eliminate taxes on your withdrawals. Contact a financial advisor to discuss strategies to reduce or eliminate your taxable income.
- Diversification. Investments regularly fluctuate in value. Building a diversified portfolio reduces volatility and provides interest income from a variety of sources.
- Interest rate risk. Interest rates change on a daily basis. When interest rates go up, your investments could lose value in the short-term.
- Reinvestment risk. With some investments, you can lock in a set interest rate for a specified term. If interest rates are lower when that investment matures, your interest income will be reduced by investing at lower rates. Consider laddering your CD and bond maturity dates to minimize this impact.
- Dividends. Some companies cut dividends when they face financial difficulties. Minimize this risk by choosing stocks that have a long track record of consistent dividends and avoid companies with highly leveraged balance sheets.
When you have $250,000 to invest, there are many opportunities to earn interest income. The amount of income you’ll receive depends on the current interest rate environment and the types of investments that you choose. While it may seem appealing to invest all of your money into the highest rate product, most investors are better off diversifying their portfolio to minimize risk and create a more consistent income stream. Based on the 4% Rule, you could withdraw $10,000 per year safely on a $250,000 portfolio. However, it is wise to discuss your income needs with a financial advisor to discuss how to structure your investments.
Tips for Creating Income in Retirement
- A financial advisor can help you create additional sources of income to pay for your retirement. 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.
- Calculating how much interest your account will earn helps savers understand how quickly their accounts can grow. By adjusting your savings rate and interest rate, you’ll see how much of an impact small changes can make. Use our free savings calculator to forecast the growth of your savings over time.
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