It’s interesting that, when you’ve been an advisor for some time, you start to notice patterns in the clients that you attract.

Most of my clients are referrals from other clients. They tend to be family, friends, and work colleagues of my current clients. And, perhaps not surprisingly, they tend to be in similar socio-economic circumstances.

Young families refer me to other young families. People heading into or already at retirement refer me to their friends that are also retiring or retired. My 20-somethings referred me to their mates who also tend to be in the same age range.

But because people are wonderfully varied and complex, it doesn’t surprise me when a decidedly middle-class client refers me to a multi-millionaire. It happens. Another fascinating thing about society is that you don’t know who people know.

However, clustering is still more common.

Today, I want to talk about one particular cluster of clients—divorced or single women—and the mindset most have towards their financial future.

Divorced Lady Army and Financial Doom

Recently, one of my clients referred a lovely person to me, and she said, ‘another addition to your divorced lady army’.

Could this be you?

When I meet a client within this group, I often notice in their language and expression that they have an overwhelming sense of ‘pending doom’.

And I say these women feel doom, not fear.

Fear is a feeling that something terrible is going to happen. But doom is a sense that something terrible has already happened, and you can’t see a way out.

That’s the vibe I pick up.

Typically, I quickly review the client’s financial position in these catch-ups. It’s often just an informal conversation; nothing really serious.

But I do ask roughly what their assets are (i.e., Superannuation, personal investments and their own home) versus their liabilities (i.e., debt, mortgage, credit cards etc.), and what their income is (i.e. how much they earn).

Mostly I make these calculations in my head. You get very good at this after several decades.

After the quick analysis, my most common comment is, ‘yes, you are in pretty good shape’.

And I make this statement with complete honesty. I would never mislead people.

But the client’s response to this statement is interesting. To say that they’re shocked is an understatement. But I know that what I said is true. They ARE in good shape—just not now with the way things are currently arranged.

Because I am not suggesting that there is no room for improvement (even millionaires aren’t doing it perfectly), I usually recommend a complete overhaul of how they have structured their assets and investments.

But the critical thing, and the reason I say they are in good shape, is that they have the ingredients for success.

I like to use the analogy of making a soufflé. Pretty much anybody could make a soufflé.

The ingredients for a soufflé are butter, flour, egg yolks and egg whites, salt, pepper, and cream of tartar.

You probably have ALL the ingredients, so why don’t you have a soufflé? The ingredients are just not organised correctly. Most of them are probably still in the fridge.

Some people might even get as far as making the soufflé, but it doesn’t turn out as well as they hoped. Well, the key to a good recipe is how you use the ingredients—not just the components themselves.

So, the great thing is, if you come to me with the ingredients, I can make a wonderful financial soufflé.

It takes me less than a minute to make that assessment.

How can I be confident that you have the ingredients for success?

Partly because I know the power of compounding and the ART of investing.

Let me use an example of a client of mine Carol (name changed for privacy). We meet, and like many others, she comes to me with an overall sense of ‘pending doom’.

Carol is 47 and recently divorced. She’s paid 80% of her mortgage from the divorce settlement—no other debts.

She has about $100k in Super and about $70k in other assets (stocks, funds, cash etc.). She earns $60k per annum but saves $10k per year. She manages her money to within an inch of her life.

Carol is worried about her retirement. Like many, she feels that she’s left everything too late and doesn’t earn near enough to invest for retirement. Carol feels sure she will enter retirement with virtually nothing.

But Carol is sensible, intelligent and careful with her money. And with regards to her thoughts on retirement? She couldn’t be further from the truth.

Why?

I see the ingredients of the soufflé. And it’s a beauty.

So, how can Carol create her financial soufflé?

Firstly, she has essentially no debt.

She has a little bit of mortgage, but her weekly payments are next to nothing due to low prevailing interest rates. If Carol continues repayments as per her current plan, she will pay her mortgage off in 10 years. Amazing!

But even better still, She has $170k between her Super and her investment portfolio. True, they are all poorly invested, but that can be fixed.

Then I do a little back of the envelope type of calculation. You can do this calculation too.

A decent investment portfolio should roughly double in value every seven years.

Carol has 20 years until retirement, and that means, again roughly, her investments should double three (3) times.

So, $170k > $340k (once) > $680k (twice) > $1.36m (three)

Yes, the m is for million. In 20 years, Carol can be a millionaire.

But it’s better than that. Much better.

As I mentioned, a quick analysis of her budget shows she can save an extra $10k per year into her Super. The additional $10k every year is like rocket fuel for her investment plan.

By how much, you might ask?

Her $170k would now be worth over $2m in 20 years.

All with a nominal return of 10% per year. And that’s not likely to change because it’s been the broad stock market returns for the past 80 years.

Why doesn’t everyone retire with millions?

So, if it is that simple, why don’t all retirees make millions in investments?

The answer is simple.

It’s because of poor investments choices, bad investment profiles, and unnecessarily high fees.

Exorbitant fees (which I’ve also spoken about previously) are often overlooked and play a huge role in slowing your investment returns.

But poor investment choices are a huge problem. I won’t cover the choices in any detail here as I have extensively in other places. But the biggest mistake of them all is not mapping correctly to your risk profile.

Very broadly, the higher your risk tolerance, the more your investments should be placed in growth investments, like stocks.

The lower your risk tolerance, the more your investments should be placed defensively, like in bonds.

Defensive assets should have low but steady returns. Growth should have high returns but fluctuate a lot.

Therefore, I expect lower growth and more defensive investments if you are heading into retirement. On the other hand, if you are a young 20-something, you should have almost all growth.

ASIC mapped them out as the following:

Defensive (10% growth / 90% defensive)

Conservative (25% growth / 75% defensive)

Balanced (50% growth / 50% defensive)

Growth (70% growth / 30% defensive)

High Growth (85% growth / 15% defensive)

High growth plus (95% growth / 5% defensive)

The thing is, if you go with default super investment options, you will often be placed into a balanced portfolio. And that’s a disaster for young people. Over decades, a balanced portfolio could cost you hundreds of thousands of dollars. If you want to know where you should be, a quick test will spit out the results for you. Or give me a call.

So, there you have it.