Mar 15, 2017

How Athletes Go Broke and How They Can Avoid It

By United Capital

Photo credit: Getty Images

Professional athletes face unique hurdles managing their wealth. Unlike other high earners, the professional athlete's income peaks at an early age and tapers off dramatically. A professional athlete’s career can, and often does, end years before anticipated.

According to a survey conducted by Sports Illustrated, 78% of National Football League players encounter some form of financial stress, or go bankrupt in just two years after retirement. In addition, the same survey revealed that 60% of National Basketball Association players share a similar financial fate in just five years after retirement.

Professional athletes face a variety of challenges managing their wealth, which can range from lack of financial literacy to being targets of frivolous lawsuits, and risky investment opportunities. Athletes require financial life guidance beyond the average investor. While the typical investor saves for an average retirement of about 18 years. The vast majority of professional athletes will need to save for a retirement twice that long with just a fraction of the time horizon for growth before beginning to take distributions.

If you think of the average person's earnings as a hill, which starts modestly and gradually climbs as they earn more and edge closer to retirement. The typical professional athlete experiences the opposite, they start at what will likely be their peak earnings, or far above the what the average 20-something makes, and taper down over time. The professional athlete's earnings hill can become steeper if they neglect to plan for a second career following or if they suffer a career ending injury. A strategic advantage to the athlete's inverted earnings cycle is that if the athlete saves and invests a portion of their earnings they have a significant time line to allow compound interest to potentially work for them.

It’s not uncommon for a rookie contract to be the most money an athlete has seen in their entire life. However, athletes are wise to resist the urge to succumb to lifestyle inflation as they earn their first paycheck.

The Road Often Traveled

Terrell Owens is an excellent, albeit dramatic, example of how an athlete can squander wealth. A decorated and robust playing career signified by his electric, and at times, polarizing personality. How could the almost certainly soon-to-be Hall of Famer go broke? Owens, a player in high demand for the fifteen seasons he spent in the NFL, amassed career stats that leave him second only to the great Jerry Rice in total career receiving yards and career earnings to boot. Owens made at least $80 million. However, despite that, the former pro bowl wide receiver filed for bankruptcy in 2012.

Owens demonstrates several - if not all - of the common pitfalls that athletes should avoid if they want to sustain a healthy, wealthy financial life. His lavish lifestyle, punctuated with unchecked spending is characteristic of a complete lack of a coherent long-term financial plan.

Here are some of the most common fact patterns behind athletes losing their wealth:

  1. Lack of financial literacy and planning: The majority of athletes - like most recent college graduates - lack basic financial literacy at the time they collect their first paycheck. Collegiate curriculums expose student athletes to little if any education about budgeting, taxation, or long term financial planning. To exacerbate this, many athletes come from humble beginnings and lack an example of properly managed wealth and financial responsibility to draw guidance. It is prudent for an athlete to surround themselves with a team of trusted advisors who can fill in the gaps in their competencies. However, not all advisors have their best interest in mind. Athletes should screen potential financial advisors and ask thoughtful questions regarding professional designations, appropriate disclosures. The NFLPA scrutinizes financial advisors, ensuring a clean sheet, a minimum threshold of experience and professional liability insurance.
  2. Not knowing when to say "no”: Professional athletes recognize that success is not achieved in a vacuum; thus, they often feel indebted to those who were "there" for them in the beginning. Buying mom and dad a home or paying for your sibling’s college education are worthy expenses, however the athlete should ensure their financial life is in order before doing so. This largesse can lead players to spend themselves thin and potentially outspend their earnings.
  3. Concentrated investments: Friends and family commonly approach Athletes as the potential funding sources for their own business ventures. Investors are encouraged by their advisors to diversify their investment portfolio amongst various asset classes, sectors, companies, and even countries. The idea is to prevent irredeemable losses in the event that one of the investments fail. However, when approached, athletes are often convinced that their investment opportunity will reap unrealistic returns leading them to sink a risky chunk of their wealth in the investment. In the event that the venture fails, they could be left with insurmountable losses.

The Road Less Traveled

So, with all this said, how should a professional athlete avoid the same outcome? We suggest following a few basic steps to keep your financial life on the right track for the long run. We like to offer our professional athlete clients a few rules of thumb. While these tips do not completely address every aspect of the unique nature of financial planning for the professional athlete, they will begin the thought process required to create their One Best Financial Life ®.

  1. Set a budget and try as hard as you can to stick to it. Hold yourself, or have someone hold you accountable when you don't. A budget is the most crucial cog in any financial plan. In order to plan for the future you need to know how much is coming in, and how much is going out. Having a budget does not mean you can’t spend or indulge on yourself; you've earned it, splurge a little. The key is to keep track of your spending and keep your spending in check, and well below your means.
  2. To ensure their financial security in retirement, it is paramount that an athlete begins to pave a path for their professional life after the pros. That can mean any mixture of developing marketable skills, retooling to succeed in a management position in professional sport, or taking night classes to finish their college degree. Athletes should take manageable steps to ensure a smooth transition into a post-playing career.
  3. Seriously consider talking to your significant other about a pre-nuptial agreement prior to getting hitched: Even if a professional athlete does everything right, a divorce can completely shake up a pro athlete’s financial plan. Divorce can splinter wealth leaving an athlete with half of the assets they started with. Additionally, alimony and child support have the power to drain a pro’s pocket book quickly.
  4. Take advantage of league benefits. Many, if not most, North American leagues and player’s unions have implemented incentives and benefits to take care of their athletes. For example, the NFL offers insurance coverage, health savings accounts, disability benefits, retirement savings plans, etc... The list goes on. The NBA offers insurance, retirement savings accounts, pension benefits, and stands to implement business and coaching apprenticeship opportunities in the D-League in the new Collective Bargaining Agreement.

In the end, athletes should recognize that their earnings are finite. Statistically it's highly unlikely that they will sustain peak earnings for more than seven years. With that in mind, athletes should plan for the future utilizing the resources they have available to them today. We can give advice until we are blue in the face, but it is ultimately up to the athlete to take the advice and utilize it.

United Capital Financial Advisers, LLC (“United Capital”), is an affiliate of Goldman Sachs & Co. LLC and subsidiaries of the Goldman Sachs Group, Inc., a worldwide, full-service investment banking, broker-dealer, asset management and financial services organization. Investing involves risk and clients should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions.

The information contained in this blog is intended for information only, is not a recommendation, and should not be considered investment advice. Please contact your financial adviser with questions about your specific needs and circumstances. This blog is a sponsored blog created or supported by United Capital and its employees, organization or group of organizations. This blog does not accept any form of advertising, sponsorship, or paid insertions. Certain authors of our blog posts may be influenced by their background, occupation, religion, political affiliation or experience. It is important to note that the views and opinions expressed on this blog are that of the owner, and not necessarily United Capital Financial Advisers. As a Registered Investment Adviser, United Capital does not allow any testimonials on their blog, and any comments deemed as such United Capital will remove.

United Capital does not offer tax, legal, or accounting advice; therefore all articles should not be taken as such. Readers should obtain their own independent legal, tax or accounting advice based on their particular circumstances. All referenced entities in this site are separate and unrelated to United Capital. Any references to any specific commercial product, process, or service, or the use of any trade, firm or corporation name is for the information and convenience of the public, and does not constitute endorsement, recommendation, or favoring by United Capital.