How Much Money Do You Need to Live Off Interest?

When planning to live off interest, it is important to understand the true numbers behind living a comfortable lifestyle during your retirement years. Most Americans need to have a little more than $1 million to live comfortably.

retiring off of interest

Key Takeaways

  • The average American earning $66,621 per year would need to have $1,282,467 invested with a 4.0% annual return to live off interest only.
  • You can calculate how much you need to save to live off interest by dividing annual expenses by the annual interest rate.
  • Other factors, such as your investment strategy, inflation, life expectancy, and taxes, affect your required savings threshold to live off interest.

When planning to live off interest, the million-dollar question (sometimes quite literally) is: How much do you actually need to save to do so? 

Like many aspects of personal finance, the answer isn’t one-size-fits-all. The magic number varies for each individual depending on numerous factors, including your desired lifestyle, the current economic environment, and your investment strategy.

With that in mind, let’s dive into the numbers and strategies that can turn the dream of living off interest into a reality. 

We’ll start by examining the fundamental calculation that forms the basis of this financial strategy, then explore how different investment vehicles can help you reach your goals.

By the end of this guide, you’ll have a clearer understanding of how much money you need to save to live off interest.

How much money do I Need to live off interest?

The average American needs approximately $1,282,467 invested with a 4.0% annual return to live off fixed interest or from stock dividends. 

This can be calculated by using a straightforward formula: Required savings = Annual expenses / Interest rate

live off interest formula

Our $1,282,467 estimate was calculated using the US national average salary and average monthly expenses as a percentage of income. 

According to the Social Security Administration, the national average salary in the US is $66,621.80.

Meanwhile, the average American household spends roughly 77% of monthly pre-tax income on living expenses. 

These figures assume the average American needs $51,298.68 annually to cover expenses.

If you have a 4% annual return, you’ll need a portfolio of $1.28 million to live off interest. 

However, you should remember that this is your annual interest-only salary.

Other income sources or a higher return equal a lower required savings threshold.

When relying on interest over the long term, you should consider other factors, such as inflation, taxes, market volatility, and unexpected expenses.

How much money do I really need?

The amount of money required to live off interest changes from person to person due to several key factors.

We explore each factor in detail below.

Lifestyle & expenses

Your desired lifestyle in retirement is the primary driver of how much you’ll need. According to the latest data, the average annual expenditure for households is $77,280

However, this figure drops significantly for individuals or older households closer to retirement age.

Personal expenses may vary based on:

  • Housing costs (mortgage, rent, property taxes)
  • Healthcare needs
  • Travel and leisure activities
  • Location and cost of living

Creating a detailed budget of your expected monthly expenses is necessary to accurately estimate annual expenses and your required savings balance.

Interest rates & investment returns

Interest rates and investment returns can significantly impact how much you need to save to live off interest.

As of 2024:

  • High-yield savings accounts offer interest rates of around 4-5% APY.
  • The 10-year Treasury yield, often used as a benchmark for fixed-income investments, has averaged 4.26% over the past 20 years.
  • The S&P 500 has delivered an average annual return of about 10% over the long term (1957-2023). 

Higher interest rates mean you need less principal to generate the same amount of income.

Inflation

Inflation erodes the purchasing power of your savings over time. The average annual inflation rate in the U.S. over the past 30 years (1993-2023) has been approximately 2.46%

This means that $100,000 today would have the purchasing power of only $77,726 in 10 years at a 2.5% inflation rate.

Life expectancy

Americans are living longer than ever before. A 65-year-old woman has a 34% chance of living until 90, while a 65-year-old man has a 22% chance.

Your savings must potentially last 25-30 years or more in retirement. If you are younger and aiming to retire early by living off interest, consider this in your calculations.

Taxes

Taxes are another factor that can greatly impact your retirement income.

Different types of accounts (traditional IRA, Roth IRA, taxable accounts) have unique tax implications. 

For example, withdrawals from a Roth IRA are tax-free, while traditional IRA withdrawals are taxed as ordinary income.

These tax rates should be factored into your expenses while calculating required savings.

Risk tolerance

Your comfort level with investment risk affects your portfolio allocation, which in turn impacts your potential returns. 

A more conservative portfolio may require a larger principal to generate the same income as a more aggressive one.

Given these factors, the amount needed to live off interest varies widely. For example, using the 4% rule (a common retirement withdrawal strategy), you would need:

  • $1 million to generate $40,000 annually
  • $2 million to generate $80,000 annually
  • $3 million to generate $120,000 annually

However, it’s important to note that many financial experts now suggest a more conservative 3-3.5% withdrawal rate.

This would require even larger savings.

How much you can earn in interest?

Understanding the potential earnings from different investment types will help you better estimate your savings goals.

It’s also how you can plan your future and determine what you need to live off interest income. 

The three most common investment options are high-yield savings accounts, stock market earnings, and bonds.

High-yield savings account

High-yield savings accounts are a conservative way to earn interest on your savings.

As of October 2024, top high-yield savings accounts offer rates around 4.0% to 5.0%APY.

However, interest rates are lower for accounts with higher balances in the 2.0% to 2.5%APY range.

Initial InvestmentInterest RateAnnual Interest Earnings
$100,0004.0%$4,000
$200,0004.0%$8,000
$300,0002.5%$7,500
$500,0002.5%$12,500
$1,000,0002.0%$20,000
$2,000,0002.0%$40,000
$5,000,0002.0%$100,000

Stock market

The stock market has historically provided higher long-term returns. The S&P 500 delivered an average inflation-adjusted return of 6.4% from 1957 to 2023.

However, year-to-year returns can vary significantly. Below, you’ll find estimated annual earnings based on different investment strategies.

Interest on $100,000

Account TypeAnnual Return RateAnnual Interest Earnings
Stocks (Average)6.4%$6,400
Stocks (Conservative)4.0%$4,000
Stocks (Risky)10.0%$10,000
Stock Dividends (S&P Average)1.5%$1,470

Interest on $200,000

Account TypeAnnual Return RateAnnual Interest Earnings
Stocks (Average)6.4%$12,800
Stocks (Conservative)4.0%$8,000
Stocks (Risky)10.0%$20,000
Stock Dividends (S&P Average)1.5%$2,940

Interest on $500,000

Account TypeAnnual Return RateAnnual Interest Earnings
Stocks (Average)6.4%$32,000
Stocks (Conservative)4.0%$20,000
Stocks (Risky)10.0%$50,000
Stock Dividends (S&P Average)1.5%$7,350

Interest on $1,000,000

Account TypeAnnual Return RateAnnual Interest Earnings
Stocks (Average)6.4%$64,000
Stocks (Conservative)4.0%$40,000
Stocks (Risky)10.0%$100,000
Stock Dividends (S&P Average)1.5%$14,700

Interest on $2,000,000

Account TypeAnnual Return RateAnnual Interest Earnings
Stocks (Average)6.4%$128,000
Stocks (Conservative)4.0%$80,000
Stocks (Risky)10.0%$200,000
Stock Dividends (S&P Average)1.5%$29,400

Bonds

Bonds typically offer lower returns than stocks but with less volatility. As of October 2024, the 10-year Treasury yield (often used as a benchmark for bonds) is around 4.28%.

However, the rate will change depending on the type of bond you buy. For example, EE Bonds have a much lower rate than I Bonds. 

You can also look into bond ETFs to secure higher rates and larger investment limits.

Account TypeAnnual Return Rate
EE Bonds2.70%
I Bonds4.28%
Bond ETFs3.0% to 6.0%

Can I really live off of interest on $1 million?

The amount you can earn in interest on $1 million depends entirely on the type of investment vehicle you use and current interest rates. 

Here are some examples:

  • High-yield savings account (2.0% APY): $20,000 per year
  • 10-year Treasury bonds (2.87% yield): $28,700 per year
  • Conservative stock portfolio (4% return): $40,000 per year
  • Aggressive stock portfolio (10% return): $100,000 per year

Living off the interest of $1 million is possible for many people, assuming they have:

  • A diversified investment portfolio earning around 4-5% or more annually.
  • Annual expenses close to or below the average of $51,298.68 for Americans.
  • Additional income sources like Social Security.
  • Flexibility with withdrawals and lifestyle requirements.

Is living off interest a good idea?

While many Americans dream of living off interest, only a small percentage can turn this attractive financial strategy into reality. 

Figuring out savings goals is the easy part. From calculating your expected annual returns to determining monthly expenses, we recommend overestimating to accommodate any unexpected changes. 

Before committing to this new lifestyle, it’s important to carefully assess your financial situation, risk tolerance, and long-term goals.

Consulting with a financial advisor can help you more accurately determine if living off interest is right for you.

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