Remember when you'd talk to your grandparents and they'd say stuff like, "When I was your age, candy bars were just 5 cents!" ...And now they're a dollar? Whoa.
That's what inflation does over the course of 50-60 years. So what about your retirement? How much money should you have in your nest egg if the dollar keeps buying less and less each year? Have you been thinking about saving up 4 million dollars for your retirement? What is the interest on 4 million dollars? Can you live off 4 million dollars...??
Have you had these same questions? Yeah…us too! Let’s find the answers together.
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How Much Do Banks Pay in Interest on $4 Million?
What kind of money will the bank pay out on a big chunk of cash? Another way of asking this question might be, “How much will I earn on $4 million in savings?”. No reason to belabor the point here.
Banks will likely pay out just 0.5%-1.0% on your million bucks. This will produce between $20,000-$40,000 a year. Not chump change, but probably not enough to live on for the rest of your life.
A couple years ago, you could have found savings rates of 1.5%-2.0%. If that ever comes back, then you could earn between $60,000-$80,000 a year with your $4 million in savings. But, until that happens, you may want to find some investment alternatives.
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What is the Interest on 4 Million Dollars Annually?
How much interest does 4 million dollars earn per year? It's a great question, but it’s not the easiest answer to give since there are so many investment options. Based on my research and my experience, you can expect to get the below rates for the following investments.
Savings: 0.5%
Certificate of Deposit: 0.65%
Short term government bond: 1%
Short term corporate bond: 2-3%
Annuity: 3%
Real Estate: 7%
S&P 500 Index Fund: 10%
The real estate percentage is my estimate based on the crazy price of homes today (rental rates have not kept up with housing prices). And, the S&P 500 is based on thehistorical average when you include the dividend reinvestment.
So now to answer the question of “what is the interest on 4 million dollars annually?” (This will give you glimpse of what living off the interest of 4 million dollars looks like.)
With a 0.5% savings account: $20,000 a year
1% government bond: $40,000 a year
3% annuity: $120,000 a year
7% real estate: $280,000 a year
And, 10% in S&P 500: $400,000 per year
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What To Do With 4 Million Dollars...
You might immediately choose the largest earning option (because it may yield $400k a year!), but be careful with this. If this is your entire nest egg, you may not want to be so aggressive. We’ve all seen that stocks can drop substantially.
While the S&P 500 is diversified with 500 different companies, there still is risk of losing many hundreds of thousands of dollars here if you're not careful. Choose wisely and do what’s best for you in your situation. Don’t always choose the options with the highest earnings potential.
Related: What is the Interest on 5 Million Dollars? (...And Is It Overkill??)
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What is the Interest on 4 Million Dollars a Month?
If you had 4 million dollars, then what would the interest be on it per month? Using the same investment figures as above, here’s how much you’d earn each month on $4 million:
0.5% savings account: $1,667 a month
1% government bond: $3,333 month
3% annuity: $10,000 a month
7% real estate: $23,333 a month
And, 10% in S&P 500: $33,333 per month
Well wouldn’t THAT be nice? To have $4 million and earn $33,333 every month on your investments?
Heck yeah!
It’s certainly not easy to save that much, and you really have to be a patient and confident investor to earn 10% on your money. But, it’s certainly possible, and it would make for a FANTASTIC retirement!!
Related: How to Pay Off Your Mortgage in 5 Years (Robust Calculator Offer!!)
What is the Interest on 4 Million Dollars…If Left Alone…??
Let’s say you decide that $4 million is the amount you’re targeting for your retirement. And then you start wondering what to do with 4 million dollars...
For simplicity sake, let’s say that you’re able to leave your nest egg alone and can just let it grow for a couple more decades. You know…maybe you can live on some other savings plus your social security or pension payments. So you’re able to leave the entire $4 million invested for the long-term.
If your money compounds annually, here’s the interest on $4 million (ie. the potential answer to the question, “what is the interest on 4 million dollars”….if it were left alone and reinvested?):
2% interest for 20 years = total after 20 years of $5,965,312
4% interest for 20 years = total after 20 years of $8,890,328
6% interest for 20 years = total after 20 years of $13,240,817
8% interest for 20 years = total after 20 years of $19,707,211
10% interest for 20 years = total after 20 years of $29,312,294
Whoa! Those are some pretty big numbers!!
What Are Sustainable Withdrawal Rates: The Key to Perpetual Income
The example above looks pretty awesome – I mean to have over $29 million in your account?
Whoa.
But, it’s honestly pretty unrealistic.
In your case, you probably don’t want to know just the interest on $4 million. You’re probably going to make some withdrawals on that money over the years, right?
Instead of just investing for life, you’ll likely save diligently over many years, reach that $4 million mark, and then potentially retire and start drawing on those funds over (hopefully) a long period of time!
What you want to look for is the sustainable withdrawal rate: the percentage of your savings that you can take out for living expenses each year without ever exhausting your funds. Fidelity gives 4%-5% as a general rule of thumb, but it depends on a few factors.
Your annual spending
The length of your retirement
Inflation rates
Rates of return on your investments
Inflation is out of your control, but the others are somewhat impacted by your choices. What you can control, to a certain degree, is how much you spend per year.
I have been a fan of Mr. Money Mustache for quite a while. He points out that if you can ratchet down your expenses now, no matter what your age, you’ll reap double the benefits in retirement.
Looking for a monthly budget template? Follow the link for a comprehensive spreadsheet that will auto mantically create your budget for you. All you need to do is enter your income and it does the rest.
Here’s what decreasing your spending does for you:
Leaves you more to save and invest over your working career.
And, it means you’ll need less money to live on once you’re retired.
You are also largely in charge of the length of your retirement
No, you can’t predict exactly how long you’ll live for…But you can make reasonable assumptions based on your family health history, your lifestyle, etc. Decide when to retire based on when you think you’ll reach your optimum total retirement funds.
Predicting your rate of returns
As far as rate of return, you get to decide how you’ll invest your money. If you have a basic 401(k), you usually have options of types of funds based on your risk tolerance.
While you can’t control the markets, you can choose the types of investments to make, which impacts your overall returns. After reaching that total, your interest on 4 million dollars can fund however many years you need it to.
Related: What is the Absolute Easiest Way to Make a Million Dollars?
Interest on 4 Million Dollars for a Sustainable Retirement
$4 million is a hefty amount of money if you’re retiring in the next few years. If you invest well, you can live quite luxuriously on that amount. Let’s look at your “safe” withdrawal rate if you think about the interest on 4 million dollars in your 401(k), for example.
Generous Retirement Example
$4 million starting balance at 4% rate of return
30-year retirement (a pretty lengthy retirement)
$220K withdrawal per year
Using Bankrate’s calculator, in that example, you’d still have $252K left in your accounts by year 30. Ummm…if I had to get by on $252k a year…I bet I could do it. That would be a pretty nice retirement!!
More Frugal Retirement Example
$4 million starting balance at 4% rate of return
30-year retirement
$200,000 withdrawal per year
You’ve cut your spending a bit and kept the rest the same, leaving you with $1.4 million after 30 years! This would enable you to still live a very nice lifestyle in retirement, and you can even leave a pretty decent inheritance behind.
Super-Early Retirement Example
This is my personal favourite. Check this out. Want to retire at 40 years old?
$4 million starting balance at 4% rate of return
50-year retirement (retire at 40 and live to be 90!)
$175K annual withdrawals
Retire at 40 years old and end up with $1.0 million even after 50 years of retirement! Your spending likely wouldn’t stay exactly at the $175K number every year in an early retirement, but you if you’re right around there, you’ll almost certainly have money left at the end of retirement.
Keep Playing With The Numbers
If you play with the numbers, looking at the interest on $4 million, $3 million, or perhaps $2M, you can check out different scenarios.
Maybe you plan on working until age 70 and you anticipate living to be 90. You’d only need to finance 20 years of retirement in that case.
Or if $175K annual spending sounds too low for you (in our 50 year retirement example), maybe you could earn 5% returns and withdraw $200k instead. If you withdraw $200k a year and earn 5% interest on $4 million bucks, you could still have $2.8 million dollars left after 50 years of retirement!
Related: What is the Interest on 3 Million Dollars? (Should This Be Your Goal??)
Interest on 4 Million Dollars – Is It the Right Number For You?
So what do you think? Can you life off 4 million dollars?
$4 million sounds like a TON, but when the cost of living doubles every 20 years, it's really not that crazy of an amount. It's still a lot of money (don't get me wrong), but you can’t just spend $4 million foolishly in retirement and expect it to last forever.
Based on the examples we outlined above, if you retire at 65 and live for 30 years, you can withdraw roughly $200,000 a year. Any more than that and you’re at risk of running out of money.
Also, keep in mind that inflation will make $200,000 seem more like $100,000 in 20 years, and only $50,000 in 40 years. That $200k option sounds great...but the $50k a year doesn't sound as great, does it?
But let's put it this way, if you live on $125k or less right now, then you’ll probably do just fine with $4 million in retirement.
Don’t Fear Your Retirement – Embrace It!
Some people can save up $4 million before they retire. Most can’t. If you can only reach the 2 million dollar mark and want to retire, then maybe you should just go for it!
But, instead of sitting on the beach and buying everyone’s pina colada, maybe you want to pursue a fun side hustle a few hours a week. It would give you purpose and provide you an income to boot!
So, while many of the financial gurus will try to scare you into working until you’re 75 to reach a ridiculous nest egg figure, choose to march by the beat of your own drum instead.
You might not have $4 million. Heck, you might not even have $3 million in retirement! But, if you can spend less and perhaps create some side hustle income, then it might be time to give retirement a shot!
Just remember, you can’t prepare for every possibility in life. But you can build in margins for error in your calculations. The 4% rule is a guideline—you can adjust that to be confident your finances can handle life’s curveballs.
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