The savings and fixed-income landscape grows more diverse every day and individuals have many options at their fingertips. When making an investment, you will want to consider how much money you could get in return. Here’s a breakdown of how much interest $500,000 can earn per year. A financial advisor can help you tailor your investment portfolio to specific needs and goals.
Interest on Fixed-Income Investments
Interest is the name of the game when it comes to fixed-income investments. Without it, there would be no incentive to not just keep all of your money under your mattress. When people talk about living off of interest, they are generally referring to these types of investments. Here’s an overview of the kind of interest you can expect from four common fixed-income instruments:
1. Bonds
Investors are drawn to bonds, and really any type of fixed-income investment, due to the greatly reduced risk of negative outcomes relative to more lucrative investments such as stocks. With bonds, the return on your investment is often known at the point of purchase. Although it is often a lower return than the best-case scenario of riskier investments, certainty provides a lot of value when it comes to balancing out a portfolio.
When you purchase a standard bond, you agree to receive a set percentage of the price of your bond in interest. This percentage is called the coupon rate, and its size is largely dependent on the interest rates in the market at the time you purchase the bond.
So, if you bought $500,000 in bonds that have a 3.45% coupon rate, you would receive 3.45% of your balance in interest throughout the term of your bond. Most bonds compound semi-annually, so if you put a bond with a term longer than six months, you will also have the opportunity to earn interest on your interest.
2. Treasury Bonds
Famous for being the safest investment of all, many investors are attracted to the prospect of United States treasury bonds (sometimes referred to as T–bonds), because the United States government guarantees their return. This means that the risk of a loss on your investment is effectively removed.
The process of purchasing newly issued T-bonds is a bit complex. The exact price you pay for a bond isn’t entirely predictable beforehand, as the bonds are issued by the government via an auction. So while you may go into the auction expecting to purchase a $500,000 bond, you may actually walk away having purchased it for slightly more or slightly less. Treasury bonds issue interest payments to holders once every six months throughout the term of the bond.
For example, if you entered an auction looking to purchase a 30-year bond with a face value (or par value) of $500,000 and you came away with a coupon rate of 3.5%, you would receive an annual interest amount of $17,500 in two, semi-annual installments. The interest you receive will be calculated using the face value of your bond, but if you manage to purchase that bond for *less* than the face value, you will effectively be earning at a higher interest rate.
If you were to purchase a bond with a shorter term, the mechanisms by which your interest is calculated and issued would remain unchanged, but the interest rate you’ll be able to obtain would likely be slightly lower. Current rates for two-year Treasury as of this article’s publication are between 3.0% and 3.25%, which would result in an annual interest amount of between $15,000 and $16,250.
3. Corporate Bonds
Many corporations choose to issue bonds as a fundraising strategy, and since even the sturdiest companies can’t quite match the guarantee of treasury bonds, they’ll often issue those bonds with higher interest rates. This makes them an attractive proposition for investors who don’t mind marginally more risk.
Similar to treasuries, most corporate bonds have a fixed interest rate attached to the par value of the bond, and that interest rate determines the annual amount of interest to be paid out most frequently in semi-annual installments.
According to data from the Federal Reserve Bank of St. Louis, high-grade corporate bonds are currently (at the time of this article’s publication) selling with average yields of 4.07%. So, if you purchased these corporate bonds with a par value of $500,000, you would be looking at annual interest payments of $20,350.
4. Certificates of Deposit (CDs)
A similar instrument to a bond is a certificate of deposit, or CD, in which you agree to lend a set amount of money to an institution, often a bank, change for an agreed-upon amount of interest. CDs can have a wide variety of term lengths (there are often more choices than that of bonds) ranging from seven days all the way up to 10 years or more.
One advantage that these have over bonds is a greater number of choices. Most large consumer banks offer a variety of different CD options, so it’s very likely that you won’t be able to find the right one for you. Additionally, the interest in the mini CDs compounds monthly.
This means that with equal term lengths and interest rates, you will be able to earn more in interest with the CD and with an equivalent bond. Because of these advantages, however, you’ll find that the interest rates offered for many CDs are slightly lower than the coupon rates you’ll find for similar bonds.
For example, if you were to put $500,000 into a Capital One 60-month CD with an interest rate of 3.25% and monthly compounding, you would earn $88,094.97 in interest, an annual value of $17,619.
5. Savings Accounts
If saying goodbye to your principal for a period of up to 30 years seems a bit worrisome to you, you can also earn interest on your money by placing it in a high-yield savings account. Keep in mind, of course, that the benefit of having immediate access to your funds comes at the trade-off of much lower interest rates.
If you were to place $500,000 in a high-yield savings account with a 2.15% APY and wait one year, you will have earned $10,750 in interest. This rate is likely insufficient to keep up with annual inflation, which means your money will become less valuable at a higher rate than when it’s accruing interest. You’ll also want to check the fine print of your savings account for things like maximum balance thresholds and tiered interest rates if you’re considering this approach.
6. Money Market Accounts
If for whatever reason, you feel the need to have even greater access to your funds than a savings account can provide (many savings accounts limit how many times you can make a withdrawal per year without paying a fee), then a money market account could serve as an alternative.
Keep in mind, however, that while you may be able to withdraw from the account more freely, you pay the price of even lower interest rates. Most competitive money market accounts offer APYs between 1.6% and 1.8%. A 1.8% APY would mean you earn $9,074.62 in the first year after depositing $500,000. As it’s unlikely that you’ll need that much money with that level of liquidity, this is likely not the wisest approach.
Can You Retire With $500,000?
As always, the answer to this question depends on a number of factors specific to the individual asking, including but not limited to how much money the asker needs to live in retirement. Many financial experts point to a rule of thumb known as the 4% Rule, which states that retirees are usually safe to withdraw four percent of their retirement savings on an annual basis without risking running out of money.
Four percent of $500,000 is $20,000, and the average annual benefit for someone receiving Social Security at the time of this article’s publication is also around $20,000. An annual retirement income of $40,000 may be sufficient for some people, while for others it’s not enough to cover the costs of day-to-day life as well as medical expenses
How Should You Invest $500,000?
As mentioned above, your primary goals with any retirement investment are to outpace inflation and to earn enough of a return to withdraw comfortably without dangerously depleting the principal.
The conventional wisdom among financial experts is to diversify any investment portfolio between things like stocks and mutual funds that can earn a higher return and fixed-income instruments like the ones we’ve discussed that can hedge against the risk of losses. Ultimately there’s no golden ratio of investment products that will work for every investor.
The Bottom Line
Determining interest on a $500,000 investment is a lot like asking someone what they see in a Rorschach blob: the answer will depend on the specifics of the person being asked. Factors like how much risk you’re assuming, the term length you choose, the broader economic environment at your time of purchase and the frequency at which your interest compounds will all play a role in calculating how much you earn on your principal investment.
Tips for Investing
- Before diving into options trading, consider talking with a seasoned financial advisor. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted 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.
- One of the most useful tools investors have is an investment calculator, which helps portfolios maintain the desired balance among asset classes.
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