Every go-getter dreams of reaching that millionaire milestone. It represents the lifestyle of someone who has achieved financial freedom. But how much interest on 1 million pounds can you actually make? The answer depends on your ability to invest money wisely to generate a good return on investment, and whether you want to live off the passive income or use it to make more money. Generally speaking, you can expect 3-8% pre-tax interest with low risk, which amounts to £30,000-£80,000 each year. The higher the risk, the higher the reward.
Interest is taxed differently based on how you use the money. Here’s a typical (long-term average) expectation from stock investing with the 4% rule being the most likely outcome:
|Interest Rate (%)
|Monthly Post-tax Income
|Yearly Post-tax Income
5% interest on 1 million pounds
If you put your £1 million into shares of an exchange-traded fund (ETF), you may receive dividends of up to 5%, which would return £40,400 in a year. The first £2000 of your investment returns is tax-free and then you have to pay a 20% flat rate for capital gains once they’re realised (declared to government). Stock dividends are a decent option if you’re looking for a more stable source of passive income.
Similarly, you may put your money into an S&P500 index that bets on the assured long-term growth of the stock market. While this can grow 10% annually on average, your returns when considering compound annual growth rate (CAGR) and adjusted for inflation are closer to 5%. Plus, you wouldn’t be wise to withdraw that money during economic downturns when your investment amount is lower.
Despite what some finance websites claim, you can’t put your million in a 1-year fixed savings account or stocks and shares ISA at 5% return on interest because ISAs have annual deposit limits of £20,000. It would take 25 years to even reach one million.
10% interest on 1 million pounds
If you take time to become a savvy investor, you could make around 10% yearly from stock investments. This would give you a return of £80,400. This is plenty to live off but it’s likely that you’ll be sitting on that money some years. For example, if the stock market dropped 30% unexpectedly your 1,000,000 would temporarily be worth 700,000. Or you may pull your money out of stocks in anticipation of a crash and during this holding period you won’t get any returns from share prices going up.
If you don’t want the headache of timing the market and learning which stocks to pick, there’s a better option for you – real estate. The annual percentage increase for average house prices was 10.3% in the year to November 2022. You have a few options here. You can invest in property and wait for the price to go up and sell at a later date, then buy another house and keep the profit margin you made for spending. Alternatively, you can get an equity release, which lets you take equity out of your house in exchange for a lump sum of cash. This is tax-tree and as a result you forfeit a share of ownership.
Lastly, you could buy homes to rent out. This allows you to keep ownership and take advantage of stable increase in property value overtime while collecting a monthly sum from tenants. As a general rule of thumb, you can get up to 0.5% of your property value in rent so 1 million pounds would give you £50,000 annual income. On top of that, you may be sitting on an extra £100,000 in equity (value of the property) each year. Just remember, there’s no guarantee your properties will always be occupied and you will need to pay for any repairs and an agent to market and manage properties if you don’t want to.
Can I retire with 1 million pounds?
If you have 1 million pounds and live off the interest it doesn’t matter what age you are. If you have invested the money wisely, you can enjoy a comfortable lifestyle well above average but not enough to live a lavish life with supercars, big houses and endless holidays. Also, if your money is also paying for a family, depending the size, you could retire but you’d have to live modestly.
If you chose to live off the money by dividing the spend over your lifetime, you would still be poor starting at age 25, comfortable from 55, and have a life of luxury at 75. Here’s a table detailing the annual spend of a person living off £1,000,000, assuming they were to die at age 81 (the average life expectancy).
As you can see, being a millionaire doesn’t get you very far if you want to put your feet up and elevate your lifestyle. Most millionaires don’t even have that kind of money lying around, it’s simply their net worth. Here’s how to calculate your expected net worth by age and what types of wealth that includes. Of course, if you time it wrong or overspend at any point you may have a miserable end of life experience surviving on a miniscule state pension.
How to become a millionaire with a good lifestyle
The road to success is paved with failure and grit. Unless you win the lottery (and the odds aren’t looking good) there’s no way around it…You must embrace the journey of making money and all that it encompasses. The best thing you can do is shift your mindset to finding a purpose that inspires you to work and build yourself into a formidable character who finds fulfilment in achieving things, providing value for others, and balancing time between work, hobbies and relationships. There are 5 main paths to becoming a millionaire:
- Start a business
- Work in STEM
- Become a CEO
- Inherit from relatives
- Invest in high growth startups
The smart option many people opt for is entrepreneurship despite the high rate of failure. The goal of ambitious people looking to retire early is to scale a business as fast as possible using investment funding rounds, take it public with an IPO, sell your remaining portion of shares and exit the company.
But realistically, you don’t even need to be a millionaire to enjoy a good lifestyle as long as you have a few things nailed. First, you have managed to achieve a work-life balance that your routine is sustainable. Next you just need a good mix of active and passive income that funds nice experiences and provides you with a safety net to take career breaks. Cost the minimum required to pay your bills and work to fund that with your passive income and then cost up your ideal lifestyle so you have active income figure in mind you need to hit for that. Here are some side hustle ideas to supplement your job.
Everything you need to do can be boiled down to three focuses:
Make money: Active income. Gain experience. Improve skills. Provide value. Be entrepreneurial and seek opportunity.
Save money: Preserve the money you make. Budget to live below your means. Setup short-term and long-term security with emergency fund and retirement fund.
Invest money: Make your money work for you (passive income). Buy assets, not liabilities. Diversify income streams.
With so much to learn, knowledge is an important part of financial success. The Money Mind was created to help give you the latest scoop on what others are doing to live life on their own terms.