Professional Athlete’s Survival Guide – 2018
Because of the large dollars involved with sports, professional athletes are in a position to do great things for themselves, their families, and whatever cause they choose to champion. They can establish a legacy for generations to come. But they can also squander that opportunity.
Your first two years are a success. You earned $12 million on paper, but actually only received $6 million because of taxes and agent fees. Like most people, you spent half of that but saved $3 million.
After two years of marriage the spouse wants a divorce. Because you did not have a prenuptial agreement, your spouse gets half of the $3 million, so you now have only $1.5 million. But the court also orders you to pay spousal maintenance and child support. Because you are still scheduled to make $6 million year, the court orders you to pay $200,000 a month for support and maintenance. Plus, you take over all the debt, because you are the well-paid athlete and your spouse stayed at home with the kids.
A few months or even a year later, you get cut, injured, or otherwise retire.
You are now officially broke!
The Phoenix Chapter of the NFLPA Former Players Association wants to help educate all athletes so they enjoy what they have worked so hard to achieve long after they have retired.
How and Why Professional Athletes Go Broke
While there is an endless number of reasons that can lead to an athlete squandering their hard-earned success, a handful of problems occur most frequently. These issues are not unique to professional athletes, but the consequences are much more profound because they are dealing with large sums of money earned over a very short career.
1. Living an Extravagant Lifestyle.
For many people, reaching the goal of becoming a professional athlete and being paid handsomely is intoxicating. Just like becoming intoxicated on alcohol, this type of intoxication leads to poor judgment. In many instances, that poor judgment is reflected by extravagant spending on material items that in time will have no value. When you receive your first check as a professional athlete, remember one thing: There will be a day when those checks stop coming. In short, wouldn’t you rather “live like a prince for a lifetime than a king for a year?”
Expensive cars, jewelry, boats, and other luxury items are often purchased as a sign that an athlete has “made it.” Those items certainly look nice and, in moderation, are fine. But they are not investments and have no long-term value. The true sign of “making it” is having something of substance left after your short career is over. Consider this: It was front-page news when Mike Tyson bought a Bengal tiger, but no one reported that Serena Williams simply deposited her first $1 million check in the bank. Which of those two “made it” and will have the longer legacy?
2. What You See is Not What You Get.
Remember this: If you sign a contract that pays you $1 million a year, you do not get $1 million a year. In fact, you receive considerably less than that.
Understand how taxes work: “The taxman always gets paid.” Most people know that but do not appreciate how much is taken in taxes. The more you earn, the higher the tax rate. Some people are taxed at only a 10% rate. But a person earning $500,000 or more a year pays the federal government, at the time this is written, 37% of that amount, and in most states there is also a separate state income tax. Overall, roughly 40% of your salary is taken in taxes, so the $1 million a year really means you only receive about $600,000 a year.
Taxes are not the only thing that may be taken out of your paycheck. There are fees paid to agents and final financial advisors that cut into your paychecks.
3. Getting Behind in Taxes.
It is bad enough that you have to pay taxes; it is even worse if you get behind in tax payments. Plus, there are high penalties and interest charges for late and unpaid taxes. The tax laws are extremely complicated. Even professionals like doctors, lawyers, engineers, etc., do not even attempt to do their own taxes. The point: You need to have an accountant involved in handling your finances.
New York Times
and Sports Illustrated
articles estimate that the divorce rate for professional athletes is somewhere between 60% and 80%. When people divorce, all of their assets – their cash, real estate, and investments – are typically divided in half. The $1 million in the bank can become $500,000 overnight. That is why every professional athlete needs to consider a prenuptial agreement, which is a legal way of allowing the athlete to keep the assets they accumulated both prior to marriage as well as during the marriage. In addition, breakups get nasty, and in this day and age of social media, it is too easy for an angry spouse or long-term significant other to threaten to embarrass or defame an athlete as a means to extract money. A well-worded non-disclosure agreement can help prevent that.
5. Spousal Maintenance and Child Support.
Getting divorced does not end your obligations. If you are a professional athlete, the likelihood is that you will have to pay spousal maintenance and you most certainly will pay child support. A child support obligation exists regardless of whether you have children from multiple marriages or relationships, and it continues until the child reaches age 18. That likely means that your support obligations will continue long after your professional career has ended. The extent of those obligations varies, depending on the circumstances and where you live, but they can take another 10-20% of what you earn. And if you get behind in payments or refuse to make them, you will go to jail. Courts rarely give special treatment to athletes.
That $1 million a year salary, after taxes, divorce, maintenance, and child support is now down to $300,000 or less.
6. Helping Family and Friends.
Everyone on the outside thinks a professional athlete “has it made,” which is why there is no shortage of people looking for “some help.” It is entirely natural to feel obligated to help out or reward friends and family for their support. But, once that door is opened, it can turn into an endless drain on your finances. You need to establish firm boundaries and stick to them. Once you start giving away money, those who ask for it will ask for it again, and then other people will start asking for money. That is money you earned, pay taxes on, and will never see again from those to whom you give it. Remember this: People who ask for money neither know anything about nor care about your finances, because they just assume you are “rolling in money.” You can reward friends and family without being careless with your money.
7. Bad Investments.
Just because you are a successful athlete and make a lot of money does not mean you are a good investor. That is a mistake many successful people make. Lawyers, for example, are usually pretty smart, but rarely are they good businessmen. It is the same with investing. Just like taxes, investing money is a very complicated matter, and you need a professional to give you advice.
8. Long-Term Debt.
Some people live their entire lives paying cash for everything and never use a credit card. They do that because they always know how much money they can spend. When you finance purchases with a long-term mortgage, bank loan, or credit card, two things happen: (1) You have guaranteed you will have that payment obligation long after your career is over; and (2) you are paying interest on that debt, and interest adds up.
9. Trusting the Wrong People.
Everyone has heard stories about the professional athlete who has placed his or her complete confidence in one financial advisor or agent and wakes up one morning to learned they have been wiped out, either because the advisor or agent was unscrupulous, made bad decisions, or simply was not competent.
10. Substance Abuse.
With success comes pressure, which sometimes leads to substance abuse, whether it is alcohol, street drugs, or prescription medication. And along with substance abuse comes bad judgment.
How to Protect Your Wealth and Yourself
Now that you know some of the things to avoid, here are some of the things you can do to positively affect your financial future. You can get a lot of complicated advice, and some of it may be very good, but here are a few simple rules that successful people in everyday life follow.
1. Pay Yourself First.
Everyone has bills to pay. The first check you write each month should “to yourself,” meaning you should put away a set amount of money with each paycheck. Better yet, it should be taken out of your pay automatically. This is how everyday working Americans are able to secure their future, by putting away a little bit each month, because they cannot spend what they do not see.
2. Understand the Power of Compounding Interest.
Properly invested, a modest sum of money can grow to a significant amount over time, thanks in part to the power of “compounding interest.’ As a general rule, if your investment earns 10% a year, your money doubles every seven years. Consider the following example: a 22-year-old athlete takes the first $25,000 he earns and places it in a conservative mutual fund. No other money is added to or withdrawn from the account. By the time he turns 70, that $25,000 will have become $3.2 million.
3. Establish a Retirement Account.
Having an Individual Retirement Account (IRA) or 401(k) is how most Americans save for the future. Those retirement funds are important because money contributed to a conventional IRA or 401(k) is not taxed until it is later withdrawn. That means the 40% in taxes is not taken out and instead can be invested and allowed to grow over time, like the above example.
4. Diversify Your Investments.
Investing all or even most of your money in one or two investments is not a good idea, nor is it a good idea to put a large amount of your money into risky investments. The reality is that not all investments are the same. In general terms, a conservative investment is one that you can count on being there years down the road, but in exchange for that reliability, you might receive a relatively modest return. Risky investments create the possibility of reaping a much greater return, but you can also lose the money you invest. Except for federally insured accounts, there are no guarantees in any investment, and the cardinal rule of investing is to diversify. Spread your money around into different types of investments.
5. Diversify Your Professional Advice.
You diversify your investments so you do not lose all your money if one investment turns out to be bad. Placing all your trust and confidence in one advisor is also risky. Professional advisors come in all shapes and sizes: Some are good, some are bad; some explain things well, others do not; and some are honest, while others are motivated simply by the money they can make without regard to whether it helps the athlete. That is why you need to surround yourself with different professionals who are able to identify problems that you may not see. Every line of work has different challenges and different needs. For a professional athlete who has to deal with a large sum of money over a short career, you want a strong working relationship with several professionals (e.g., an investment advisor, accountant, attorney, insurance broker, and physician). The long-time attorney or accountant who has no relationship with the financial advisor may detect a problem with your investments that your financial person either does not see or care to tell you about.
6. Have Proper Insurance.
People buy insurance to protect against the unexpected. Like taxes and investing, insurance is complicated and you need a professional. For young people, insurance is a complete afterthought, because they have never really needed it. But you will need it. For most people, that means having health, auto, life, homeowners, liability, and disability insurance. Without health insurance, you can be wiped out financially with one illness. Disability insurance pays if you become physically or mentally disabled from working. You need automobile and liability insurance in the event you are involved in an accident and someone is injured. No one has a bigger target on them than a professional athlete. Liability insurance pays the attorney to defend you and pays to settle the claim.
7. Plan for Life After Your Career.
Every professional athlete’s career comes to an end. When the career ends, so do the paychecks. Planning for the “end of your professional career” has two significant components. The first is to have a lifestyle that is not extravagant. Paying for houses, cars, and expensive trips is easy when you are still enjoying your career, but how do you pay for that when your career ends? Sometimes it ends abruptly, and in a matter of months you go from earning a lot of money to earning nothing. Even if you have saved money, you will burn through that money very quickly if you do not adjust your lifestyle. The second component is to have an alternative plan on how to earn money after your career ends. That is harder than it sounds. It does not happen overnight, meaning you have to plan. Further, the success you enjoyed as a professional athlete is not a good predictor of whether you will succeed in a different line of work.
8. Take Responsibility and Be Involved.
There is only one person who absolutely has your best interests in mind all the time, and that is you. And the only way you can avoid and fix a big problem is if you know about it. This means you need to be involved in your financial future. Do not rely exclusively on someone else to accomplish what you need to get done. You should check on your finances at least every 30 days and meet every three or four months (if not more often) with your financial advisor. If you do not always understand what the financial person is telling you, then take to the meeting someone you trust.
9. Ask Questions.
One of the best ways to learn is to ask questions. If you do not understand the answer, ask it again. Like Denzel Washington’s character in Philadelphia
famously said, “Explain this to me like I am a two-year-old.”
10. Ask for Help.
Finally, if you either do not know what to do or are concerned you are getting bad advice or even swindled, there is no shame in asking for help. Do not sit by silently and allow your future to be taken from you. Qualified people will gladly help you.
Schneider & Onofry can provide the reputable and personalized attention you need to anticipate and avoid these consequences.