Your $1 Million Dollar Retirement - What Will Earn You The Most On Interest?

Congratulations! You’ve saved a million dollars for your retirement. That’s no chump change and should provide you some peace of mind and residual income. But, how can you maximize that?  Where can you put your money, to let your money best work for you? By comparing the most popular investments, you can understand which investment type(s) are the best fit for your desired retirement lifestyle.
 

Certificates of Deposit - High Yield Savings Account

These two methods probably involve the least amount of risk, which explains the (relatively) low reward.  CDs are instruments issued by banks that require a minimum deposit and pay you interest at regular intervals. The terms on these vary greatly, as you could have a CD with a term of 3 months or over ten years.  The term is the biggest differentiator between CDs and High Yield Savings, as your CDs will sit until the term has been completed, whereas High Yield Savings are much more accessible.

The minimal risk is because of the guaranteed fixed interest rate and CD accounts are insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000 per depositor, for each account category, in the event of a bank failure.  Generally speaking, a CD will pay more interest than a High Yeild Savings account.  The math is the same, so we’ll focus on a CD. Currently, the average rate of Marcus by Goldman Sachs CD is 2.6%.

Year One: $1,000,000 x 2.6% = $26,000

Year Two: $1,026,000 x 2.6% = $26,676

Year Three: $1,052,676 x 2.6% = $27,369.58

Year Four: $1,080,045.58 x 2.6% = $28,081.19

Year Five: $1,108,126.76 x 2.6% = $28,811.30

Five Year Total: $1,136,938.06

To adjust for personal rates, deposit amount, inflation, etc. you can use various online calculators to help you plan.

Bonds

These are another relatively safe bet for your money, and a safer way to take advantage of compounding interest.  A bond is essentially a loan one gives to a creditor of some kind - company or government entity. In exchange, you will receive a specific yield from them.  In order realize your compounding interest, you’ll have to reinvest the interest paid.  Be sure to set your finances up to automatically be reinvested.

U.S. Treasury securities are backed by the full faith and credit of the U.S. government, but don’t have the same potential as Long-Term Corporate bonds.  Long-Term Corporate bonds, while potentially more profitable, are much riskier than its Treasury counterpart.

Bonds of any kind carry a bit more risk than CDs and High Yield Savings, as bond prices can fluctuate.  As prevailing interest rates increase, existing fixed-term bonds can decrease in price, and vice versa. YCharts has the Treasury’s long term average at 4.27%

Year One: $1,000,000 x 4.27% = $42,700.01

Year Two: $1,042,700 x 4.27% = $44,523.31

Year Three: $1,087,223.29 x 4.27% = $46,424.43

Three Year Total = $1,133,647.72

REITs

When it comes to Real Estate, your returns vary greatly depending on the route you want to take.  You could take your million and purchase your own property or properties and rent them out accordingly. Or, you could choose something more hassle-free and invest in a REIT (Real Estate Investment Trust).

REITs come in all shapes and sizes, vary by sector and industry, etc.  So, it will important for you to do research and invest where you feel most comfortable.  Do you want to invest in storage units? High end apartments? Low income housing? Farmland?  These are all options and carry their own pros and cons.  

In general, REITs tend to do well; between 2010 and 2020, the index's average annual return was 9.5%.  More recently, the three-year average for REITs between November 2017 and November 2020, checked in at 11.25%, well above the S&P 500.

REITs are not without risk though, most notably potential tax liabilities since their dividends are taxed as ordinary income.  That being said, the high yield dividends, the diversification it provides, and the liquidity associated, typically make REITs very attractive. The shine of REITs won’t dull as long as the return can continue to remain near 10%.

Year One: $1,000,000 x 9.5% = $95,000

Year Two: $1,095,000 x 9.5% = $104,025

Year Three: $1,199,025 x 9.5% = $113,907.38

Three Year Total = $1,312,932.38

Dividend Stocks

Stocks in general are typically an appealing investment opportunity.  There is certainly a risk, especially currently.  There is volatility in the market, but returns over long stretches have been generally pretty positive.  If you’re willing to wait long term, you’ll probably see a return. Dividend stocks, however, are even more appealing.

Dividend stocks can pay in multiple ways, if the underlying asset can keep increasing in value while paying out dividends. This investment can earn compound interest if the payouts are reinvested.

Consider the Dividend Aristocrats, an exclusive club with historically impressive performance and incredibly high standards. At minimum, companies must be a member of the S&P 500, increased the annual total dividend per share for at least 25 straight years, and have an average daily trading amount of at least $5 million.

The S&P 500 Dividend Aristocrats index has returned an annual average of 18.3% over the past 10 years, compared with 17.1% (including dividends) for the S&P 500 as a whole. Usually, higher returns indicate higher risk, but the Aristocrats have achieved their returns with less volatility than the full S&P.

Consider the SPDR S&P Dividend ETF, NYSEARCA:SDY, which relies heavily on the aristocrats but utilizes more than just that collection. The ETF includes 118 stocks, each of which have consistently raised its dividend. The fund itself has seen annual dividend increases for seven straight years, with the dividend rising at a five-year compound annual growth rate of 11%.

Year One: $1,000,000 x 11% = $110,000

Year Two: $1,110,000 x 11% = $122,100

Year Three: $1,354,200 x 11% = $148,962

Three Year Total: $1,503,162

Investing Tips

The examples above paint a picture of guaranteed returns, but that’s not always the case.  America’s economy has seen a largely unprescednted run of success, prior to this year.  Inflation is high, and the market is down. Invest carefully, and attempt to minimize risk by diversifying your portfolio.  
A million dollars is a nice chunk of money to invest in retirement, don’t put it all in one place.  Instead, utilize all methods mentioned in this article.  If you’re uncomfortable with doing this on your own, find an investor or investment firm near you, and get started today.