Understanding projected LISA value at 50 compared with age 60

[Summer210]

Help me to understand projected LISA values please.

I use AJ Bell Dodl. If I put my figures into their calculator (maximum contributions of £4000 for 17 years until I'm 50, with an estimated 5% interest average) it gives me a figure of around £117,500. That is just the projected value at the age of 50 isn't it? Or does it project for retirement age of 60?

If it were to continue earning 5% from age 50 to age 60 the final value (with compounding 5% annually) would be closer to £191,000+. That seems like a 'too good to be true' figure...thoughts?

If you put £117,500 into a calculator and multiply it by 1.05 10 times (or 1.05 ^ 10) you get £191,395. It’s just the power of compund interest.

Yes, that’s just the future value of money calculation.

For the first 17 years you’re adding £4K (but receiving a top up to £5k). You’ll get respective compound interest for each of these payments (with your first years’ £5k alone compounds up to £11k by age 50, or £18k by age 60). For the period when you are aged 50-60 you cannot add more payments, but do continue to earn interest.

On the other hand, the purchasing power of that £190k in 27 years will, be assuming inflation of 3%, equivalent to about £90k.

Of course the 5% cash rate mightn’t be too reliable and at a younger age you may consider stocks and shares LISA depending on your risk tolerance (expected 8-10%, or at least inflation beating return to keep your purchasing power up).

I do have a S&S LISA and have invested the lot at the start of each year. I was being conservative calculating at 5% as I expect that will account for the good years as well as bad.

Also, the purchasing power of such a large sum in 20+ years time is depressing. 😫

When looking far ahead it is often useful to do the calculation based on what you might make over inflation. So something like 2% would be a conservative estimate. You can then work out what the pot would be worth in ‘real’ money.