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When investing in your future, it is important to understand how much income you can expect from your nest egg. Many people use the 4% Rule to calculate how much you can safely withdraw from your portfolio, but is that number right for you? Let’s take a look at how much interest $3 million pays without touching your principal.

A financial advisor could help you create a financial plan for your retirement needs and goals.

How Much Interest Does $3 Million Pay?

The amount of income that you’ll receive from a $3 million portfolio depends on the types of investments you choose. Living off the interest of $3 million is possible when you diversify your portfolio and pick the right investments. Here are six common investments and expected income for each year:

Savings and money market accounts. Savings accounts are one of the most liquid places to hold your money besides a checking account. Money market accounts are similar to savings accounts, but they may be offered by a bank or an investment company. While both accounts offer unparalleled liquidity, the interest rates offered tend to be much lower than other investment choices.

Depending on your balances and where you open your account, your interest rate may range from 0.05% to 0.7%. On a $3 million portfolio, you’d receive an annual income of $1,500 to $21,000.

Bank certificate of deposit (CD). Bank certificates of deposit offer higher rates of return in exchange for keeping the money locked up for a specific timeframe. The most common CDs range in duration from 30 days up to five years. If you need to access the money early, most banks charge a penalty of three months’ interest on CDs with maturities of less than one year. For maturities of 12 months or longer, you’re typically charged six months’ of interest. Because of these penalties, many investors stagger the maturity dates every three-to-six months so that it is easier to get access to money without paying a fee.

Interest on a bank CD depends on the bank and duration. The balance of the CD usually doesn’t affect the rate. A typical CD today offers an interest rate of 0.5% to 2%, providing an annual income of $15,000 to $60,000 per year.

Annuity. This insurance product offers a higher rate of interest and tax-deferred growth. You don’t pay taxes on the growth of your account balance until you start making withdrawals. And depending on how the money is withdrawn, you may pay taxes on some or all of the distributions.

Annuities are considered a retirement product, therefore, any withdrawals before age 59 1/2 may incur a penalty. Additionally, the insurance company may charge a fee if you withdraw money before the annuity contract matures. However, most annuities allow account holders to withdraw a set amount from their account each year without a penalty.

You can withdraw money on an as-needed basis, through regular recurring withdrawals or by annuitizing your account. When you annuitize your account balance, you convert your balance into a stream of payments for the rest of your life. This distribution amount varies and is typically based on your age, state of residency and gender.

For example, a 65-year-old man living in Tennessee, a $3 million annuitization would provide an annual income of $150,000 to $200,000. When adding a 60-year-old female spouse as a joint annuitant, you’d receive approximately $130,000 to 160,000 for the rest of both of their lives.

Bonds. Bonds act as a loan between the investor and the company or government agency that issued the bond. Interest rates vary based on the time before the bond matures and the rating of the issuer. Typically, Federal bonds like T-Bills are considered the safest bonds and, therefore, offer the lowest interest rates. The longer the term and riskier the bond issuer, the higher the interest must be to attract investors.

As interest rates change throughout the bond term, your bond’s value may fluctuate. However, as long as you hold it to maturity, you’ll receive the face value at the end.

Bond interest rates vary widely, but an investor can expect to receive between 2% and 5% interest each year. This results in income of $60,000 to $150,000 per year on a $3 million portfolio.

Stock dividend mutual funds & ETFs. While many people invest in stocks for their growth, many stocks also offer recurring dividend income. Dividends are a return of profits to shareholders. These dividends provide an opportunity to receive income today and growth for tomorrow. Many mutual funds and ETFs create “income” and “growth & income” portfolios for investors who favor income over pure growth.

A typical stock dividend portfolio will earn between 2% and 5% in dividends each year. Additionally, the portfolio may grow over time to provide higher dividends and capital gains in the future. On a $3 million portfolio, you can expect to receive $60,000 to $150,000 per year.

Real estate investment trust (REIT). While some investors own individual real estate properties, other investors invest in real estate investment trusts (REITs). REITs offer the potential for income and appreciation without the hassles of managing properties. Additionally, they act like a mutual fund by providing professional management, diversification and access to investments that you may not be able to afford by yourself.

On average, REITs distribute returns of 3% to 10% each year. This equates to an annual income of $90,000 to $300,000 per year on a $3 million portfolio.

Expected Income From a $3 Million Portfolio

Based on current interest rates and historical performance, here’s what living off the interest of $3 million in investments would look like. The actual income from these investment choices varies on the individual selection, duration, amount invested and other factors.

Expected Income From a $3 Million Portfolio
Account Type Interest Rate Annual Income
Savings & Money Market Accounts 0.05% to 0.70% $1,500 to $21,000
CDs 0.50% to 2.00% $15,000 to $60,000
Annuity 2.00% to 3.30% $150,000 to $200,000
Bonds 2.00% to 5.00% $60,000 to $150,000
Stock Dividends 2.00% to 5.00% $60,000 to $150,000
REIT 3.00% to 10.00% $90,000 to $300,000

Note that some choices, like a CD or an annuity, may require that your money is locked up for a minimum timeframe or that your account is annuitized.

Factors That Affect Your Retirement Income

In addition to what types of investments are in your portfolio, there are other factors that will affect how much income you’ll receive. These are a few of the most common:

  • Taxes. Using tax-free investments like Roth IRA and Roth 401(k) accounts eliminate tax burdens on your investments. Your financial advisor can help minimize taxes using long-term capital gains, tax credits and other strategies.
  • Diversification. Investments regularly fluctuate in value. By having a diversified portfolio, you can reduce volatility and minimize selling investments when they are down in value.
  • Interest rate risk. The interest rates offered by deposit accounts and investments typically have a defined timeframe. You can minimize the impact by laddering CD and bond maturity dates.
  • Dividends. Choosing stocks that have a long track record of consistent dividends can provide income that you can count on. Avoid companies that cut dividends whenever the economy turns.

Bottom Line

Living off the interest of a $3 million portfolio is possible when you create recurring income from your investments. Depending on how you invest your portfolio, the interest income can range widely. Based on the 4% Rule, you could withdraw $120,000 per year safely, but your portfolio needs to earn at least that amount to avoid touching your principal. That’s why it is important to work with a financial advisor to reduce your risk while also meeting your income needs.

Tips for Creating Retirement Income

  • Work with a financial expert. Financial advisors are trained in creating retirement income plans that reduce risk, increase income and address longevity risk for their clients. 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.
  • Calculate your interest. The interest rate that you earn on your savings and investments determines how big your nest egg will grow. These interest rates also influence how much income your portfolio will provide in retirement. SmartAsset’s savings calculator forecasts how big your balances will grow based on your initial balance, interest rate, additional contributions and timeframe.
  • Pick an asset profile. SmartAsset’s free asset allocation calculator will assist you in picking a profile to help align your portfolio allocation with your risk tolerance.

Photo credit: ©iStock.com/AnnaStills, ©iStock.com/Luke Chan, ©iStock.com/skynesher

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