What to consider when investing 1 million dollars
You can invest 1 million dollars just about anywhere. However, the best way to invest 1 million dollars will depend on your life and goals.
Even if you’re not new to investing, take some time to consider risk tolerance, liquidity needs, time horizon, diversification, tax and estate planning, and your personal involvement. Some questions you may want to ask include:
Time horizon: How soon do you need to see returns from the money? Are you investing for growth, or do you need income from the investment right away?
Risk tolerance: Are you more interested in preserving capital or growing the investment to a greater sum?
Liquidity needs: Do you need access to the money quickly? How do you balance amounts in highly-accessible accounts vs. traditional retirement accounts that have a penalty if you make early withdrawals?
Diversification: Can you create a well-balanced portfolio that aligns with your goals? What plans do you have for asset allocation and diversifying your investments? Can you talk to someone with expertise on the topic?
Tax and estate planning: How are you going to be able to preserve the 1 million sum? Do you have a plan for making it last through retirement or leaving some of it to your heirs? What plan do you have for making your investments tax-efficient?
Personal involvement: How hands-on do you want to be with investing 1 million dollars? Do you have a trusted advisor who can handle investment decisions for you?
How to invest 1 million dollars
If you’re investing 1 million dollars, a financial advisor can help you think about what type of investment to buy, where to buy it, and what type of account may be most advantageous for holding that investment.
Types of investments
Stocks: You can invest in individual companies by buying a small piece of them in the form of a share. You benefit when the stock goes up and lose when it goes down.
ETF: An ETF is a group of investments organized around a central category or investing approach. ETFs offer diversification and are easy and inexpensive to trade.
Mutual fund: A mutual fund is a group of investments compiled by an SEC-registered investment company. Investors can pool their money together and invest in the fund to gain access to a diversified portfolio of investments.
Bonds: Bonds are government or corporation-issued loans issued to raise money for a specific purpose. They are relatively low risk and offer stable interest payments to investors.
Real estate: Traditional real estate investing involves the purchase of property in order to receive rent and benefit from the appreciation of the property. It’s appropriate for hands-on investors who are willing to manage the property and take on some risk.
Private equity: Private equity is an alternative investment class where money is pooled from investors for privately owned companies. They’re typically long-term investments with higher investment amounts, higher risk, higher returns, and no SEC oversight.
Hedge funds: Hedge funds are private, unregistered investment funds open only to certain investors. They may have a more flexible approach with complex trading and risk management techniques.
Venture Capital: As a venture capitalist, you invest directly in a startup company for a stake in ownership. It’s a much higher risk with potentially higher rewards.
Retirement and investment account providers
There’s no shortage of retirement and investment account providers.
You may have heard of traditional, full-service brokerages such as Fidelity, Vanguard, or Charles Schwab.
But fintechs such as Betterment, Wealthfront, and SoFi also offer a full range of investment options.
Newer investors may be more familiar with apps such as Acorns, Stash, and Robinhood, which provide simple ways to invest.
Types of accounts
When you’re investing with a brokerage, the three main types of accounts where you can invest are divided into three categories. The main difference between these accounts is how you pay taxes on your investments.
Traditional retirement accounts, such as a 401(k) or IRA. You pay taxes in retirement, and there’s a penalty if you withdraw money early.
Roth accounts, such as a Roth IRA, Roth 401(k). You’ll pay taxes on money before investing it. It grows and is withdrawn tax-free, though there are limits.
Brokerage accounts. An investment account where gains are treated as taxable income in the current year.
How much interest would 1 million dollars earn?
Looking at how much interest 1 million dollars would earn is an important question. If you’re able to rely on interest payments for income, you may be able to preserve more of the principal.
Though market conditions and interest rates change frequently, here’s an example of possible interest earnings you might see from different investments.
| Investment | APY | Interest earned for the year on $1,000,000 |
|---|---|---|
| Savings accounts | 0.40% | $4,000 |
| Checking account | 0.07% | $700 |
| High-yield savings account | 3.90% | $39,000 |
| 6-month CD | 1.60% | $16,000 |
| 24-month CD | 1.34% | $13,400 |
| Bonds | 4.10% | $41,000 |
| Dividend Stocks | 2.45% | $24,500 |
| REITs | 3.88% | $38,800 |
| I-Bond | 3.98% | $39,800 |
How to invest 1 million dollars for income
Investing for income is a different strategy from investing for growth. If you need investments that produce income, you have some options. This is an explanation of some of the more popular options.
Real Estate
Investing 1 million dollars in real estate may allow you to acquire a number of rentals and receive steady income through rental payments.
REIT
A REIT (real estate investment trust) is a way to invest in real estate without owning or managing real estate directly. You own a part of a company that owns and manages properties like apartments, office buildings, commercial real estate, and other types of real estate. Dividends are paid out to investors, which can help provide income.
Annuity
An annuity is an insurance product often marketed as an investment with guaranteed income. It appeals to retirees who like stability. There are times when an annuity makes sense, but enter into these agreements with an overabundance of caution; there are likely better investments and strategies your financial advisor can steer you toward.
CD
A certificate of deposit (CD) earns interest when you deposit money with a financial institution for a specified period of time.
Bonds
A bond is a relatively low-risk investment that pays interest to investors. You can invest in individual bonds, Bond ETFs, or bond mutual funds.
Dividend stocks
Dividend stocks return a portion of the company’s earnings to the investor in the form of a dividend. Enough dividend stocks may be able to provide income for your life.
HYSA or MMA
You can earn interest on money deposited in a high-yield savings account or money market account. For example, if you find a HYSA at a 3.5% rate, then $1,000,000 deposited would earn $35,000 in interest for the year, or $2,916 per month.
Balancing income and growth with 1 million dollars
At 1 million dollars, there are trade-offs between investing for income vs. growth, but they’re not as polarized as you think.
Sean Mullaney, financial planner and co-author of Tax Planning To and Through Early Retirement, says with the right strategy, many people may have enough assets to produce income. Spreading investments across traditional, Roth, and taxable brokerage accounts can help produce income at the right times while saving enough for retirement and making investments tax-efficient.
Investors may also want to be mindful of safe withdrawal rates. A safe withdrawal rate is the amount you take from your investments each year that will allow you to get through your retirement with money still available. The rate is found by dividing the amount withdrawn by the total amount of investment.
Conservative withdrawal rates between 3.5% and 4% are likely to help preserve your retirement income, assuming you have a proper allocation of investments. For 1 million dollars, that’s between $35,000 and $40,000 per year.
With withdrawals at this rate, it is possible that your money could continue to grow. Again, this is dependent on many factors, such as where and how your money is invested and how many years of retirement you expect to enjoy. Thus, it’s crucial that you see an advisor to evaluate your situation.
Other 1 million dollar investment considerations
If you’re looking at what else you need to consider with a sum over 1 million dollars, you may have questions about some of the following:
Tax efficiency: Tax efficiency, or tax planning, is a way of legally paying fewer taxes. Holding certain investments in different types of accounts can help produce some tax efficiency.
Estate planning: Estate planning is a plan for where you want your assets to go and how you want them managed upon your passing.
Inflation: Inflation impacts how much your money is worth and how far it will go in retirement. Thinking of inflation ahead of time, even with 1 million dollars invested, can help you navigate the challenges that go with it.
Philanthropy: A financial advisor can help facilitate charitable donations, navigate complex relationships, advise on impact, bring you up to speed on current tax benefits, and warn of potential issues that may arise.
Family Offices: High-net-worth families may consider forming a family office, which is a legal entity designed to manage and preserve wealth. Recommended for those with a net worth above $350 million.
Work with Unbiased
Your investments need to be efficient in every way possible. Whether that’s investment strategy, asset allocation, tax efficiency, or estate planning, you need to be able to get the most out of your money.
That’s where an advisor can help. With years of experience, they’ll know how to point you in the right direction and what options may be best for your situation. Unbiased can connect you to a fiduciary financial advisor who puts your interests first.
Find an advisor and get your questions answered today.