How Much Interest Can $2.5 Million Earn Per Year?

SmartAsset: How Much Interest Can $2.5 Million Earn Per Year?

When you have seven figures to invest, your goals and outcomes can change. For some people, they want to continue growing their wealth. They look for the best opportunities and target growth as a long-term goal. Other people, however, no longer need that growth. They spent years building their nest egg and, now that they’ve gotten there, those investors will shift their priorities towards protection and stability. Depending on your strategy, here’s how much interest you can earn with $2.5 million per year.

A financial advisor could help you figure out if income investing is a good fit for your financial needs and goals.

What You Should Know About Private Investments

Interest investing is based on debt. You aren’t investing for capital gains, like when you buy stocks, nor are you investing for profits, like if you invest in a small business or real estate. With interest, you lend someone money and they repay you that principal plus an extra amount for the use of your money.

With significant private wealth you will have numerous opportunities for private lending. This can range from individuals asking for a personal loan to small business lending opportunities and secured lending such as a real estate transaction. You will have to judge the value of these investments on a case-by-case basis. We cannot advise you on the wisdom of transactions that occur off the mainstream markets, since there is no standardization to those assets nor is there any market oversight.

To the extent that we can guide you, SmartAsset would recommend focusing on secured lending. For example, with $2.5 million you can lend someone the money to buy real estate. This is a section of the market that currently has strong interest rates, and you can use the property itself as collateral in case of nonpayment. Proceed with caution, and make sure that you consult with a lawyer, but this is an area that may prove lucrative.

However, you want to invest, interest-bearing assets will often make up a significant portion of your portfolio. These are assets that are generally safe and which generate income each year, repaying you in exchange for lending someone your money. With $2.5 million to invest these products can generate some real money over time. For mainstream investors, the most common interest-bearing assets include:

Each of these is a debt-based product by definition, since only debt products return interest payments. Yet each has its own risk/reward profile. Here’s what you could earn per year if you invest for interest and income.

Annuities

Average Annual Return: Variable
Payment on a 20-Year Contract: $197,448 /Year

In previous articles on income investing, we have sometimes avoided discussing annuities. The reason is because they are structured significantly differently from most other debt-based products, making them hard to compare against something like a bond or fund.

With many annuities, you buy a contract significantly in advance of intended payment. For example, you might purchase an annuity 10 years before it generates any returns. Once the contract matures, otherwise known as “annuitization,” you receive regular payments based on the nature of your specific annuity. The payments are structured such that, by the end of the contract, you have received back your initial payment with interest. That interest rate can range widely, based on factors such as the length of payment, how far in advance of payment you bought the contract, how large your contract was, etc.

This differs from a standard, more liquid, investment product such as bond, where you purchase the asset and immediately begin generating your return.

However, when it comes to particularly large investments, annuities are still worth discussing. For security-oriented investors, annuities can let you turn your money into a highly safe form of income relatively quickly. For example, say you buy a 20-year, $2.5 million annuity five years in advance. This means that in five years the contract will begin making monthly payments, and those payments will continue for the following 20 years. Depending on the annuity you chose you could receive $16,454 per month, or $197,448 per year. This is a very comfortable, very secure income that would leave you with almost $4 million to invest at the other end.

For the right investor, this might be exactly what is being sought.

Bonds

Average Annual Return: Between 5% and 6%
Final Value After One Year: $2.65 Million

The bond market can be difficult to pin down. Over time, the average return of investment-grade assets comes in somewhere between 5% and 6% per year. For example, at time of writing, bonds were generally returning around 5.33% across the market as a whole. But that’s not really the whole story.

Like stocks, specific bond rates can fluctuate widely within the market’s average annual return. Individual assets can produce a wide range of returns, with some generating returns closer to 10% while others can actually lose money in the long run. That’s a particular risk for highly secure bonds, which can sometimes have interest rates below even the Federal Reserve’s target rate of inflation.

Yet, overall, bonds are secure products. Treasury bonds are backed by the U.S. government itself, while corporate bonds are backed by the company’s assets and credit. It is rare for an investment-grade bond to default, so if you can find a bond with a good interest rate it is often a strong investment. In fact, over time, bonds post the best returns of any mainstream interest-based product.

Certificates of Deposit

Average Annual Return: Between 0.60% and 3.5%
Final Value After One Year: $2,587,500

Now we start getting into the banking products.

For a high-net-worth investor, banking products can be a difficult sell. The upside to this kind of asset is usually security. If you buy a certificate of deposit, you have the bank’s guarantee that you will receive this money back in full plus interest. This is a stable, solid option, especially in a turbulent market. But with millions of dollars at stake, it’s worth noting that your money is less safe than a retail investor’s would be because the FDIC only insures your assets up to $250,000. At the same time, you receive significantly less interest on this debt instrument than you would with a bond.

The upshot is that your risk profile is not that dissimilar to a bond: You have a debt instrument secured by the good faith and assets of the underlying company that issued it. But in return for that comparatively low risk you get around half the returns. You also lose the liquidity of a bond, since you can sell a bond at any time while a certificate of deposit (CD) is locked up for the duration of its maturity. This makes CDs a somewhat trickier sell for high-net-worth investors.

Still, a certificate of deposit is considered a safe, low-interest product for investors that want some place safe to put their money for a while.

High-Yield Savings

Average Annual Return: 2.5%
Final Value After One Year: $2,563,221

A high-yield savings account is a form of depository savings account. They work the same way as a standard savings account in most respects. You hold money on deposit with your bank and can move cash in and out of this account, often to a checking account for casual spending. In exchange for offering you an interest rate, the bank restricts how often you can transfer money out of the savings account. With a high-yield savings account, the bank typically also requires you to maintain a minimum balance.

High-yield savings accounts are generally a good idea for people who want to hold a large amount of cash. Most of the time these aren’t good options as a specific investment asset, since you can find better returns with low risk elsewhere. Instead, they’re a good way to generate some additional interest on money that you were going to keep liquid anyway.

However, it’s worth noting that, at time of writing, the average high-yield savings account posted returns comparable to or better than many certificates of deposit. This leaves high-yield accounts in an unusual position. Given that they are also much more liquid than a CD, which locks up your money for years at a time, investors looking for a secure, high-interest asset may prefer a savings account to a certificate of deposit.

Bottom Line

Interest-bearing assets give you access to what’s known as “income investing,” meaning that you receive regular payments over time while you hold the product. With $2.5 million to invest, many products will generate enough interest that you can afford to live off just your investments alone.

Tips for Investing

A financial advisor help you create a financial plan for your income investing needs and goals. 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.
If you don’t need dividends for current income but own dividend-paying stocks, you could reinvest them. Many companies offer a dividend reinvestment plan or DRIP in which you can automatically reinvest dividends in additional shares of the same stock.