Why It’s No Shocker When Athletes Go Broke
March 08, 2013As a sports fan, I see a lot of sports–related items in the news, on Facebook, on my Twitter feed…all over the place. Not too long ago, ESPN aired a special called “Broke” about athletes that earned tens of millions of dollars during their careers who are now completely broke. A lot of people have expressed a bit of shock and disbelief that someone who earns $10,000,000 or more in a short career can have nothing left just a few short years after their playing days are over.
I don’t find it surprising. Earlier in my career, I was able to work with athletes, celebrities, and multiple people who won large lottery jackpots. The team I worked on would develop strategies for them, help them minimize taxation and portfolio risk, and more times than I’d care to remember we would have a follow up meeting where they would need to take large distributions from the portfolio.
Within a few years, contrary to the advice that we offered, many of them had depleted their asset base. Sudden wealth is very difficult to manage. That surprises a lot of people, but there are a lot of reasons why athletes who gain wealth almost instantly lose that wealth almost as quickly.
First, careers are short. In the major sports, NFL players have an average career of only 3.5 years, NBA players average 4.8 years and MLB players average 5.6 years. Once they retire, they will probably NEVER earn anywhere near what they earn during their playing days.
The typical pro athlete is also in his early 20’s, and that isn’t when many men are highly responsible financially. So, they are at their financial earnings peak but not at their peak of financial wisdom. That’s not a great fit. By the time many athletes are accustomed to earning a lot of money and realize that they need to save NOW to position themselves for the future, their career is over. Very young men with lots of money has never been a recipe for success.
The earnings you see reported in the newspaper aren’t how much they really earn. We see this in the disparity between our gross earnings and our net take home pay. After taxes, agent fees, management fees and the cost of maintaining their bodies, many athletes take home only 40-50 cents on the dollar.
What many people don’t know is that an athlete’s tax return can look like the congressional budget. They pay taxes in every state and municipality in which they earn income. So, a baseball player that plays 81 home games and 81 road games will pay taxes in his “home field” state for ½ of his income, but may pay taxes in 7-10 other states where he played away games. And, by virtue of their incomes, they are paying in the top tax bracket so when you hear of an athlete that makes $X, realize that he is only seeing half of that. It’s still substantial, but it helps to explain why they find themselves without any money just a few years later.
They often hire the wrong people to take care of their financial lives. Athletes spend their entire lives working on their skills, becoming the best in the world at what they do, and all too often that means that they don’t spend much time learning about the business world and the world of investing. So, what do they do? They hire “experts” who tell them that they have spent as much time getting as good at investing and managing money as the athlete is at his craft. The athlete trusts that person and sadly, there are countless stories of “advisors” and “experts” who take advantage of a trusting person with a high income and not all that much knowledge of the world of personal financial management. Financial education is the key to preventing this, and most major sports are trying to implement educational programs that are woefully underutilized.
Poor investment choices are yet another reason why athletes have less to show for their peak earning years than many people would suspect they should have. Their “advisors” often have athletes make investments in highly speculative, risky ventures that pay the advisor handsomely but rarely work out for the athlete. There is “high risk” and there is “speculative” when it comes to investing. High risk could be defined by investing in the stock market, where returns have averaged 8-10% over the long term. Most people consider investing in stocks as risky.
What many athletes (either on their own or through their advisors) do, though, goes beyond high risk and into speculative territory. Investing a huge sum of money into one project would be considered speculative. Again, the stories are numerous of athletes who invest millions of dollars into a real estate development project that never works out; a record label that siphons money endlessly and never produces results, a start up company that eventually fails….the list goes on.
Untested, unproven businesses are some of the riskiest of the risky investments that can be made. The people who were early investors in Google and Facebook are rather happy that they were speculative with a portion of their money, but those cases are the exception. And, those people invested only “a portion” of their money in speculative ventures. Athletes far too often invest the bulk of their wealth into speculative ventures that fail and wipe out an entire career’s worth of savings.
Another key reason that leads to a lack of financial security after retirement from professional sports is completely in the control of the athlete himself. It’s a complete lack of budget discipline. Overspending. Houses, cars, jewelry, parties, an entourage of friends…..you name it! Let’s face it, being a pro athlete is cool! It’s awesome! Fame and fortune for playing a kid’s game? Sign me up! (Wait, I am not all that gifted and would get crushed….but the thought is nice) It is easy for athletes to get swept up in all the hype and glitz and glamour and start to spend money like it’s a never ending resource. But, looking back at the average career span, it is a rapidly ending resource! All too often, they get caught up in the lifestyle and don’t have the long term focus needed to produce financial independence for life.
The most financially successful athletes start their careers with budget discipline and end their careers with budget discipline. During that career, they diligently save money and when their career is over, they have the ability to start the rest of their lives on solid financial ground. What they don’t do is overspend on short term luxuries and entertainment that have a very short shelf life. Overspending is rampant in America, at the personal level as well as the governmental level, and athletes are clearly not immune to that. In fact they may rival Congress in their ability to spend!
The combination of short career spans, lack of financial knowledge, trusting the wrong advisors and making the wrong investment choices is a lethal combination for the long term financial security of many professional athletes. What can be done? A higher level of financial literacy in the country would be a nice start and highly focused financial education for the pro athlete is a great next step. There is lots of work to be done at many levels. So, when you see stories about a former professional athlete who is filing for bankruptcy or working two jobs just to pay the bills, understand that there are a whole lot of factors that created the situation. It’s an epidemic, but it is a perfectly understandable one.