What a needs analysis is actually calculating

A retirement needs analysis answers one question: what capital must exist on the retirement date so that a defined stream of spending can be met for as long as it is needed. Everything else is an input to that.

• Two established methods. The capitalisation of earnings, or human life value, approach capitalises the income the client would have earned. The needs approach starts instead from what the household will spend and subtracts the resources already in place. The needs approach dominates in retirement work because it asks about spending rather than earning.
• Three approaches to what remains at the end. Capital utilisation spends the portfolio down to nothing by the end of the plan. Capital preservation leaves the original capital intact in nominal terms. Purchasing power preservation leaves it intact in real terms. Each requires more capital than the one before it.

Which to use is a client decision, not a technical one. A client with no bequest motive and a conservative life expectancy assumption can use capital utilisation; one who wants to leave something cannot.

The output is a single number with a date attached, and it is only as good as the assumptions underneath it. That is why the next block is about the assumptions rather than the arithmetic.

Money Education, Retirement Planning, ch. 2Competency Handbook ch. 44