A 9-out-of-10 risk score two years from drawdown

Risk tolerance is Daniel's attitude to volatility: how he feels about a fall and whether he would stay invested. Risk capacity is his ability to absorb a loss without abandoning his plans. They are different measurements and here they point in opposite directions.

His tolerance looks high on paper. His capacity does not. He starts withdrawing $25,000 a year in about eighteen months, owes his son $40,000 within twelve months, and holds only $8,000 of accessible cash. A 25-30% fall on $310,000 is a loss of roughly $78,000 to $93,000, and he would be selling units at depressed prices to fund the withdrawals: sequence-of-returns risk, where early losses in a drawdown phase do permanent damage even if markets recover later.

The questionnaire is a self-report tool, completed once, and Daniel's stated reason ('shares always win over ten years') reveals a belief about long-run averages that does not address a two-year horizon. Clients also tend to answer hypothetical questions more bravely than they behave in a real 20% fall.

So the score is an input, not the answer. Wiremu must document the conversation that tests it: what Daniel would actually do if the balance fell by $80,000 in year one while he was drawing $25,000, and what would happen to the loan to his son in that scenario.

The recommendation should be built around when the money is needed, not a single risk label.

Horizon matching:

• About $40,000 is needed in twelve months and $25,000 a year from age 65. Funds required within roughly the next two to three years should sit in cash or short-dated, low-volatility options so withdrawals never force a sale of growth assets at the wrong time.
• The remainder has a longer horizon and can carry growth exposure, at a level Daniel can live with through a downturn.

The explanation: Wiremu should show Daniel the arithmetic rather than assert an answer. A 100% share allocation is not 'safer because it grows more' when withdrawals are running. He should explain that the split is what lets Daniel stay invested through a fall instead of selling at the bottom, and that the cost of the cash buffer is some forgone return in strong markets, accepted in exchange for certainty on the near-term spending.

Practical points: confirm KiwiSaver withdrawal mechanics and timing, whether the fund offers the required cash or conservative option, the effect of the fund's fees, and whether part of the $40,000 should be moved now rather than held in a growth fund.

Wiremu should also address the emergency fund: $8,000 is thin for someone about to stop earning, and a small cash reserve outside KiwiSaver reduces the chance of raiding the investment in a bad year.

Documentation:

• The client's goals, income needs, the $40,000 commitment and the withdrawal timetable.
• The risk questionnaire result and the follow-up discussion that tested it, including Daniel's own words about a fall.
• The capacity analysis: what a 25-30% drawdown means in dollars while withdrawing.
• The alternatives considered (all-growth, balanced, and the horizon-matched split) and why the recommended option was chosen.
• The risks disclosed and Daniel's confirmation he understood them.
• Any deviation from the recommendation and the client's instruction, recorded at the time.

If Daniel insists: Wiremu cannot simply execute and call it advice. Giving advice he believes is unsuitable, or recording a client instruction as if it were his recommendation, breaches the suitability standard. His options are to escalate within the FAP, to decline to implement the all-growth instruction, or to make clear in writing that the instruction is contrary to his advice, set out the specific consequences (forced selling in a downturn, the $40,000 commitment, the reduced income), and have Daniel confirm the instruction in his own words.

The file must be clear about who decided what. A note reading 'client insisted' with no evidence of the risk explanation is not protection for either party.