So, You Have a $1M Portfolio. Now What?

Making the most of your $1 million in investments requires a strategic approach.

For those fortunate enough to have accumulated such wealth, the question “Can I Retire with a $1M Portfolio?”becomes a viable prospect.

Notably, the S&P 500 consistently averages annual returns of around 10%, and a $1 million investment, such as in an index fund, could potentially yield $100,000 annually.

However, this straightforward equation merits consideration of factors like taxes and portfolio management in years of economic downturn.

While the prospect of substantial returns is enticing, it’s important to recognize that there are more conservative approaches that can better serve your long-term financial objectives.

In this article, we delve into these strategies to help you make informed choices and tailor your investments to your unique goals.

Why Invest In Interest-Bearing Assets?

When you’re dealing with a significant sum like $1 million, your investment decisions need to align with your financial aspirations. What are you saving for, and how do you envision reaching your goals? These questions point to the paramount issue of certainty in investing.

Many investors are drawn to interest-bearing assets, not just because they tend to be more secure than other options but because they offer a level of predictability. Consider stocks or options, where your best estimate is based on historical performance.

The S&P 500, for instance, generally returns around 10% annually, and individual stocks have their own track records. While this information is valuable, it’s crucial to remember that past performance doesn’t guarantee future results.

Interest-bearing investments offer something different: a promise. When you invest in these assets, you enter into an agreement with another party who commits to specific, detailed payments according to a set schedule.

For example, a company may pledge to pay you 5% annually on bonds you hold, distributed in quarterly installments. Similarly, a bank could promise to offer you a 2% interest rate on a certificate of deposit.

While there remains some degree of risk, as borrowers can potentially default on their obligations, your returns are fundamentally known and predictable.

This aspect is one of the primary reasons to consider interest-bearing investments. Not only do they offer control over your risk, but they also enable you to construct a finely detailed financial plan well in advance.

Interest vs Returns

When considering interest-bearing investments, it’s important to weigh the trade-off between security and potential earnings.

The choice to invest in interest-bearing assets inevitably means opting for more security, but it also comes with the cost of potentially lower returns compared to more volatile investments like stocks.

For instance, in terms of comparative yields, interest-bearing assets tend to deliver modest annual rates, averaging around 2-3%. In contrast, stock dividends typically range from 2 to 5% per year.

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This disparity implies that, by investing in bonds, you could potentially earn half as much in terms of annual returns.

Similarly, if we examine capital gains and recent performance, as of the time of writing, bonds are experiencing a relatively favorable climate with an average interest rate of 4.66%. Consequently, a $1 million bond investment would yield approximately $46,600 in returns.

In contrast, considering the year 2021, the S&P 500 posted an impressive 26.61% return. Had you invested in the S&P 500 during that period, your one-year returns would have amounted to a substantial $266,100.

The critical question, then, is whether it’s worth paying this price for the reassurance of financial security. If you have $1 million to invest, it’s plausible that you’re well on your way to meeting your financial objectives.

This is often a compelling argument for embracing the stability of interest-bearing investments, even if it means accepting lower returns.

Our recommendation is to consider your financial plan carefully. Assess your proximity to your financial goals, particularly if your $1 million portfolio is largely dedicated to retirement savings.

The nearer you are to reaching your financial target, the more you might lean toward interest-bearing accounts.

By allocating your funds in this manner, you can consistently set aside the returns, such as the $46,600 from our earlier example, with the assurance that you don’t need to expose yourself to unnecessary risks.

Conversely, if you are some distance from your goals, you might need to be more open to assuming a higher degree of risk to achieve the results you desire.

Earning Potential on a $1M Portfolio

When it comes to the amount of interest you can accrue from a $1 million investment, your choice of interest-bearing accounts plays a pivotal role. The annual earnings can significantly vary, potentially reaching upwards of $50,000 or more.

Naturally, the safety of your investment will inversely affect your returns. However, shrewd investors can strategize to subsist solely on the interest generated from their wealth.

Now, let’s delve into some of the prime interest-bearing investment options you can consider for your portfolio. Each of these options entails a distinct level of risk and opportunity, so it’s essential to align your choices with your specific financial objectives.

1. Bonds

  • Average Interest At Time Of Writing: 4.66%
  • Value of $1 Million In Five Years: $1,255,751

Bonds represent financial instruments that companies and other institutions employ to secure funds. Every bond comprises two key attributes: its maturity period and its coupon rate.

Maturity denotes the duration until the institution reimburses your invested capital, while the coupon rate signifies the interest the bond will generate during this interim. To illustrate, let’s consider a hypothetical bond:

  • Face Value: $1,000
  • Maturity: 10 Years
  • Coupon Rate: 5%
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Investing in such a bond would yield annual returns of $50 (5% of the bond’s face value), typically distributed in four to six-month installments while the bond is active. Upon the bond’s completion of the ten-year term, the company will reimburse your initial $1,000.

Bonds generally offer a relatively higher rate of return among interest-bearing investments. However, it’s worth noting that they also carry an elevated level of risk, albeit still rare, as compared to institutions like banks or insurance companies, companies may occasionally default on their debts.

2. Certificates of Deposit (CDs)

  • National 5-Year Rate Cap At Time Of Writing: 4.96%
  • Value of $1 Million In Five Years: $1,273,852

Certificates of Deposit, commonly referred to as CDs, are financial products offered by banks to their customers.

When you opt for a CD, you commit a specified amount of money for a fixed period, during which you cannot access or withdraw these funds. In return, the bank offers a higher interest rate compared to standard savings or checking accounts.

The potential returns from a CD are contingent on the duration of your deposit.

At the shorter end of the spectrum, a 30-day certificate of deposit offers an average interest rate of approximately 0.03%, akin to a typical checking account’s yield. In contrast, a longer commitment, such as a five-year CD, garners an average interest rate of about 0.39%.

These are standard CD offerings. However, some financial institutions may present certificates of deposit with significantly higher interest rates, often exceeding 2% or more, contingent upon various circumstances and the specific investor.

A certificate of deposit is characterized by its emphasis on security at the expense of liquidity.

While the returns may be relatively modest, you benefit from the knowledge that your funds are not only safely deposited with a reputable bank but are also insured by the FDIC (Federal Deposit Insurance Corporation) in case of any financial instability or unforeseen disasters.

3. High-Yield Accounts

  • Average Interest Rate: 1%
  • Value of $1 Million in Five Years: $1,051,010

High-yield accounts represent an enticing option for those seeking an optimal balance between liquidity and financial gain.

While checking accounts, known for their liquidity, typically offer an average interest rate of merely 0.03% at the time of this publication, savings accounts, which do impose some restrictions on withdrawals, provide slightly better returns with an average interest rate of about 0.07%.

However, certain alternative financial institutions and banks have emerged as formidable contenders by presenting more attractive terms in this domain.

A high-yield savings account essentially functions as a conventional savings account with one crucial distinction: it offers interest rates that surpass the industry average. These accounts still provide the expected liquidity, coupled with standard rules governing withdrawals.

It’s important to note that high-yield savings accounts are often administered by non-traditional financial institutions, which signifies that they do not benefit from FDIC insurance in the event of unforeseen complications.

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While high-yield accounts may not be deemed as high-yield investments per se, they serve as a viable choice for everyday fund storage.

Although the interest rates offered may not classify them as traditional investment assets, it’s noteworthy that they currently outperform most certificates of deposit by a significant margin.

4. Annuities

  • Average Interest Rate: 3%
  • Value of $1 Million in Five Years: $1,075,380

Annuities represent financial agreements offered by insurance companies and financial institutions, offering an alternative avenue for investment. When you opt for an annuity, you provide an upfront sum to the institution.

Subsequently, at a predetermined date, the institution initiates a repayment plan, which includes the return of both the initial principal and the accrued interest.

Annuities function on the principle of compounded interest, ensuring that while the company disburses payments, the interest continues to accumulate on your principal.

This implies that each year, the company remits compounded interest based on the funds in your account. Monthly payments are then made until the entire value of the contract has been restored.

Typically, annuities are structured as longer-term commitments, stretching over 10, 20, or even 30 years. While this extended duration may result in lower monthly returns, it has the potential to significantly augment the overall value of your investment.

For those interested in maximizing the value of an annuity, acquiring one well in advance of the repayment phase is advisable. Since interest commences accruing from the initial investment date, delaying the start of the repayment phase allows for the accumulation of more substantial returns.

☞ Final Thoughts

When you find yourself in possession of $1 million and are keen on nurturing its growth through interest, a multitude of investment options await your consideration. Interest-bearing assets offer a prudent means to invest this substantial sum while maintaining a degree of financial security.

Bonds typically emerge as the prime choice for those aiming to optimize their returns.

However, for individuals who prioritize risk mitigation, assets such as certificates of deposit (CDs) or annuities hold distinct advantages. These alternative investments provide stability and lower risk profiles, making them valuable tools in your financial strategy.

Ultimately, your investment decisions should be guided by your unique financial objectives, risk tolerance, and timeline. To make well-informed choices, enlisting the services of a qualified financial advisor is a judicious move.

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Pavlos Written by:

Hey — It’s Pavlos. Just another human sharing my thoughts on all things money. Nothing more, nothing less.