How Much Money Do You Need to Live Off Interest?

How Much Money Do You Need to Live Off Interest?

Investment Calculator

Photo credit: © iStock/samxmeg
Photo credit: © iStock/samxmeg

Whether you’re considering getting started with investing or you’re already a seasoned investor, an investment calculator can help you figure out how to meet your goals. It can show you how your initial investment, frequency of contributions and risk tolerance can all affect how your money grows.

We’ll walk you through the basics of investing, tell you about different risks and considerations and then turn you loose. Ready to put your money to work?

A financial advisor can help you manage your investment portfolio. To find a financial advisor who serves your area, try our free online matching tool.

7. Put your money in low-initial-investmentmutual funds

Mutual funds are investment securities that allow you to invest in a portfolio of stocks and bonds with a single transaction, making them perfect for new investors.

The trouble is many mutual fund companies require initial minimum investments of between $500 and $5,000. If you’re a first-time investor with little money to invest, those minimums can be out of reach. But some mutual fund companies will waive the account minimums if you agree to automatic monthly investments of between $50 and $100.

Automatic investing is a common feature with mutual fund and ETF IRA accounts. Mutual fund companies that have been known to do this include Dreyfus, Transamerica, and T. Rowe Price.

An automatic investing arrangement is particularly convenient if you can do it through payroll savings. You can typically set up an automatic deposit situation through your payroll, in much the same way that you do with an employer-sponsored retirement plan. Just ask your human resources department how to set it up.

Read more: How To Buy A Mutual Fund

Video

Invest in Rental Properties

Buying rental properties is a popular real estate investment strategy used to generate passive income.

For rental properties, the rate of return will depend on your specific area, vacancy rate, whether you are taking out a mortgage to buy the property, and many other factors. In general, most real estate experts agree that the expected yearly return in rent will be around 10% of the property’s value in the USA.

We then have to take into consideration maintenance costs, so let’s assume that apart from the maintenance costs, you make a yearly net profit of 8%.

In this case, you’ll need to invest roughly $450,000 in a few properties to make $3,000 a month. Here’s how we calculated this number:

  • If we want $3,000 a month, then we want $36,000 per year ($3,000 x 12 months).
  • If we invest $450,000 in rental properties that generate 8% annual returns, then we can get that $36,000 per year (8% of $450,000 is $36,000).

On top of the rent that you’ll be collecting each month, your properties could continue to appreciate in value, so if you decide to sell them in the future, you would also make a profit on the sale.

Alternatively, you could buy properties with mortgages, paying less upfront. That means you also generate less profit, as you have to pay for your mortgages. The upside here is that someone else is paying your mortgage for you – your tenant. A good strategy to consider in this case would be house hacking – investing in a larger property, keeping one part of it for yourself to live in, and renting out the remaining space.

Risk and Returns

Photo credit: © iStock/HAKINMHAN
Photo credit: © iStock/HAKINMHAN

The closer you are to retirement, the more vulnerable you are to dips in your investment portfolio. So what’s an in investor to do? Conventional wisdom says older investors who are getting closer to retirement should reduce their exposure to risk by shifting some of their investments from stocks to bonds.

In investing, there’s generally a trade-off between risk and return. The investments with higher potential for return also have higher potential for risk. The safe-and-sound investments sometimes barely beat inflation, if they do at all. Finding the asset allocation balance that’s right for you will depend on your age and your risk tolerance.

2. Invest in a money-making course

Investing in yourself is one of the best possible investments you can make. While you might not be able to pinpoint an actualized return on investment, there’s no money that’s better spent. Invest in yourself. Invest in your education. Learn. Adapt. Grow. Discover what you’re passionate about.

There are loads of money-making courses on the internet. The hard part is choosing the right one. From ebooks to social media marketing, search engine optimization and beyond, the possibilities are endless. While many money-making gurus might pop up on social media, not all courses are created alike. Spend time doing your due diligence and research to choose the one that’s right for you.

Related: Mark Cuban’s 3 ‘Smart Money Moves Everyone Should Make’

Creating a Diverse Portfolio

Most financial experts recommend investors and savers create a diverse portfolio that balances various investments with different risk levels. This means combining different assets that provide varying levels of returns.

Diversification is one of the most foundational aspects of investing, and it becomes that much more important when you plan to live off interest alone. While it is the key to long-term investment success for many individuals, it often requires the help of a professional.

Here are a few examples on how to live off interest. These strategies highlight risk and the need for diversification.

Interest on $100,000

If you only have $100,000, it is not likely you will be able to live off interest by itself. Even with a well-diversified portfolio and minimal living expenses, this amount is not high enough to provide for most people.

  • Investing this amount in a low-risk investment like a savings account with a rate between 2% to 2.50% of interest each year would return $2,000 to $2,500.
  • Investing in stocks, which may earn up to 8% per year, would generate $8,000 in interest.
  • Bond investments may generate 2% to 4% per year, resulting in no more than $4,000.

Interest on $300,000

Having $300,000 set aside to retire may be more feasible to live off interest, but diversification and risk still plays a crucial role in how much you will generate.

  • From savings, an account paying 2% in interest would provide $6,000 each year in interest.
  • Conservative stock investments in that amount could generate 4%, providing $12,000 per year, while those paying 10% would offer $30,000 in income.
  • And $300,000 in bonds paying 2.87% would pay $8,610 in interest.

Interest on $500,000

An investment of $500,000 may get you much closer to your income needs in retirement. Based on similar examples as above:

  • A savings account paying 2% provides $10,000 each year in interest.
  • Stocks with 4% gains generate $20,000, while those generating 10% returns provide for $50,000 in interest.
  • Bonds with 2.87% interest rate would offer $14,350 per year in interest income.

Interest on $1,000,000

Many investors target $1,000,000 as the magic number for retirement. Here’s how the numbers break down.

  • Earning 2% on a savings account, you could receive $20,000 in interest each year.
  • Conservative stocks paying 4% generate $40,000, while higher-risk stocks averaging 10% generate $100,000 in interest.
  • Bonds paying 2.87% generate $28,700 in interest each year.

>> Read More: How much interest would you earn on $1 million?

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How To Grow A Small Account?

Now you know how much money you need in your account to make a monthly income with stocks.

The next question is: How do you grow a small account into a larger one?

If you start with $10,000, you need to use aggressive MONEY MANAGEMENT to grow this $10,000 into $100,000. 

This means that you have to increase your risk, because the more your risk, the more money you can make.The important thing: You have to first be able to CONSISTENTLY make money with trading before you start increasing the risk.

It’s like learning how to drive:

In the beginning, you should learn how to drive on an empty parking lot. That’s what I did with my son. And after that, we went into neighborhoods with a speed limit of 25 mph. Then we moved on to neighborhoods with a speed limit of 35 mph. And after a few months – and lots of practice – we finally went to an Interstate.

What do you think would have happened if we went to the Interstate on Day 1?

My son would have probably crashed the car!

Same in trading: Start slow, and work your way up.

And once you see consistent profits, you can start increasing your goals.

Here’s the new math:

  • Instead of risking 2% of your account size on any given trade, let’s assume that you would risk 3% of your account. Based on a $10,000 account, that’s $300.
  • And let’s say that instead of taking profits as soon as you see 1.5x the risk, you take profits when you achieve 2x the risk. So in this case, you would risk $300 and try to make $600.
  • The rest stays the same – for now: We assume that you make 10 trades per month, and half of your trades are losing trades. Here’s the math: – 5 losing trades of $300 per trade = – $1,500 – 5 winning trades of $600 per trade = $3,000
  • So at the end of the month, you now have $1,500 left, even though half of your trades were losing trades.

$1,500 per month * 12 months = $18,000 per year. Getting better 🙂

Now let’s say that you are getting more experienced, and you start trading more:

Instead of taking 10 trades per month, you now take 20 trades per month.

Here’s the new math:

  • You make 20 trades per month
  • 10 trades are losing trades, and you lose $300 per trade = – $3,000
  • 10 trades are winning trades, and you make $600 per trade = $6,000
  • This means that you now make $3,000 per month

$3,000 per month * 12 months = $36,000 per year!

But here’s the kicker:

Of course, you would increase your risk as your account grows.

So if your first trade is a winning trade, and your account grows from $10,000 to $10,600, you now risk 3% of $10,600 = $318.

And you try to make $636.

As you can see, with this “progressive money management” you can achieve your goals much quicker.

Where to Start Investing

One of the most important steps to getting started with investing is deciding where you’ll actually invest. Today, there is no shortage of brokerage firms where you can start investing quickly. NextAdvisor recommends online brokers like Vanguard, Fidelity, and Schwab because they make it easy to open an account online and have a wide variety of investments to choose from.

For investors who prefer a more hands-off approach, a robo-advisor is also something to consider. When you sign up for a robo-advisor like Betterment, Wealthfront, or Ellevest, an algorithm chooses investments on your behalf based on your financial goals and time horizon. This option might be well-suited to investors who don’t know what to invest in and are allowing analysis paralysis from allowing them to take the next step.

Just as it’s important to talk about what company to open an account with, we should also talk about what type of account to open. While a taxable brokerage account is a great option, experts agree that investors take advantage (and max out) all their retirement accounts first, to take advantage of the tax breaks associated with them. For example, a Roth IRA.

“I do recommend that, especially for young people, that they consider their first investment to be in a Roth IRA account,” Berkowicz said. “They provide for tax-free distributions, both during the lifetime of the contributor and for their heirs.”

A Roth IRA can be a great option for everyone from the teenager working a few hours per week to earn money to the professional who is ready to take investing more seriously. And for those who make more income than the Roth IRA allows, a traditional IRA also allows investors to save for retirement in a tax-advantaged way.

How Much Money Is Needed to Start Investing

You might be surprised to learn that you can start investing with just about any amount of money. Many brokerages require no minimum amount of money to get started. For example, the major online brokerage firms Fidelity and Schwab both have no account minimums. 

“Even if you invest only $10 per week or month, make a goal to make it $15 per week or month by the end of the year to build and reach those benchmarks,” said Sara Stolberg Berkowicz, a CFP and Assistant Professor at the College for Financial Planning. “We can build up how much we’re saving as we go.”

6. Trade options

When it comes to options, Tom Sosnoff at Tastyworks says, “Trade small and trade often.” What type should you trade? There are loads of vehicles, such as FOREX and stocks. The best way to make money by investing when it comes to options is to jump in at around 15 days before corporate earnings are released. What type should you buy? Money calls.

The optimal time to sell those money calls is the day before the company releases its earnings. There’s just so much excitement and anticipation around earnings that it typically drives up the price, giving you a consistent winner. But don’t hold through the earnings. That’s a gamble you don’t want to take if you’re not a seasoned investor, says John Carter from Simpler Trading.

Related: 2 Strategies for Making Money Day Trading With a Bit Less Risk

2. Enroll in youremployers retirement plan

If you’re on a tight budget, even the simple step of enrolling in your 401(k) or other employer retirement plan may seem beyond your reach. But you can begin investing in an employer-sponsored retirement plan with amounts so small you won’t even notice them.

This is one step that everybody should take!

For example, plan to invest just 1% of your salary into the employer plan.

You probably won’t even miss a contribution that small, but what makes it even easier is that the tax deduction that you’ll get for doing so will make the contribution even smaller.

Once you commit to a 1% contribution, you can increase it gradually each year. For example, in year two, you can increase your contribution to 2% of your pay. In year three, you can increase your contribution to 3% of your pay, and so on.

If you time the increases with your annual pay raise, you’ll notice the increased contribution even less. So if you get a 2% increase in pay, it will effectively be splitting the increase between your retirement plan and your checking account. And if your employer provides a matching contribution, that will make the arrangement even better.

Read more: The Best 401(k) Investment Accounts

If you’re at a complete loss, companies like blooom offer hands-off investment management of your 401(k).

The Foolish bottom line

Investing money may seem intimidating, especially if you’ve never done it before. However, if you figure out 1. how you want to invest, 2. how much money you should invest, and 3. your risk tolerance, you'll be well positioned to make smart decisions with your money that will serve you well for decades to come.

And here’s the good news

Stocks go up and stocks go down — like really up and really down. The “stock market” is is just the collective value of all the stocks investors own, so it goes up and down, too. In fact, the market’s biggest one-year gain since 1928 was 52.6%, and its biggest one-year loss was -43.8%. But. (And this is a big but.) The market has, on average, returned 10%. 10-year government bonds have returned an average of 4.8%. In comparison, the average savings account currently pays 0.09% per year. That’s why investing can help investors get to their goals faster than saving alone.

Ready to get started?

Bottom Line

You can live off interest alone, but you need to be careful about understanding your expenses and your current and future assets.

Also, remember that investment returns are not guaranteed, and the more risk you take on to achieve a higher return, the greater your probability of losing some of your investment. Be sure to consider these factors closely before deciding to retire and live off interest income alone.

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