Elite athletes: are they set for life?

Financial planning for professional athletes requires a specialized approach that addresses their unique career trajectory and the financial challenges they face.

While you might think that someone earning millions of dollars a year couldn’t possibly have financial worries, the opposite is often true. A high net worth can exacerbate financial challenges compared to the average individual. When that wealth is earned rapidly and in a short period of time, as is the case with many professional athletes, financial risks become even greater. At Nantas, we specialize in assisting professional athletes (and high net worth professionals) with these concerns. What often happens with professional athletes is that they receive the majority of their income in a very short and dizzying span of time, sometimes towards the end of their fleeting sports career, earning more than many people do throughout their lifetime. These high incomes can lead to a false sense of financial security, and mismanaging their money during their peak earning years could leave them with serious financial problems later on. Financial planning for professional athletes requires a specialized approach that addresses their unique career trajectory and the financial challenges they face.

Having short-lived careers means athletes need to plan ahead for years when their earnings may not be as generous. One of the things we work on with our clients is building up their cash reserves to avoid disrupting their lifestyle after retiring from their sport. The amount of cash reserve needed will depend on the activity they pursue after leaving professional sports.

Are they planning to pursue another job after retiring from sports? Are they expecting to live off their earnings as a player or athlete? If the intention is to continue working after leaving professional sports, a large cash reserve won’t be necessary.

Minimizing taxes will help keep the bulk of earnings in the pocket, but tax planning for professional athletes presents many unique challenges. For example, tax consequences vary depending on the country where they perform or reside, a situation often seen, for instance, in the profession of tennis players. Additionally, professional athletes can also take advantage of tax deductions for business expenses, such as agent fees, nutritional supplements, gym memberships, and equipment.

Regardless of the sport one engages in, if they earn a significant income, they will face the same risks as other high net worth individuals. In this regard, one of the most important challenges is the relationship with close individuals. Athletes often feel obligated to provide assistance to loved ones, but it’s necessary to do so in a way that safely avoids jeopardizing the athlete’s financial stability. Working with a financial advisor who can mediate financial disputes or money requests can be helpful. Another source of risk is public profile, as athletes are often targets of financial scams. Professional athletes are frequent targets of vendors making big promises. This makes it difficult to determine who has a genuine interest and who is trying to take advantage; this is where a trusted financial advisor with experience working with professional athletes can be of great benefit.

Common Mistakes Often Made:

1 – Thinking Money Will Last Forever

While an athlete may be earning a salary 10, 20, or 50 times higher than that of a friend of the same age, their career may be short-lived. While most careers last 30 years, an athlete’s career may only last a few years or a decade or two at best. Once that salary is spread out over a lifetime, it becomes apparent that it’s not as much money as it seemed.

On average, a 65-year-old person has a 60 percent chance of living to age 85 and a 35 percent chance of living beyond age 90. While living longer is a good thing, it means needing much more money to cover expenses and the increased cost of living due to inflation.

How to Avoid This Mistake

Building a solid financial plan is key to ensuring that the success being experienced now doesn’t end when the career does. There are many aspects to a well-planned comprehensive financial plan. Contacting a financial advisor early on will ensure that the athlete’s current salary covers them and their family in the long term.

2 – Not Thinking About What to Do Once the Sports Career Ends

Given the 100% dedication to sports, one may not think about what to do the day after the professional career ends. Beyond the financial problems this can bring, not thinking about what to do the day after can lead to frustration, depression, and a lack of identity.

How to Avoid This Mistake

Start thinking today about what path to take once the sports career ends, steadily but surely. Will retirement be early? Will a new career begin? Some athletes experience even more success after retiring from sports.

Here are some examples that can be used as inspiration:

  • Hakeem Olajuwon has earned over $100 million since retiring from the NBA in 2003 to start a career in real estate.
  • Michael Jordan still earns an estimated $40 million per year (or more) in corporate deals, thanks to his partnerships with brands like Nike, Gatorade, McDonald’s, and Coca-Cola.

It’s important to start planning for the future after sports well in advance to ensure a smoother and more successful transition.

3 – Not Having an Emergency Plan If the Career Is Cut Short

What to do if a sudden injury arises without a guaranteed contract? Statistics show that one in five athletes is injured each year. Some of these injuries are not serious, but others can completely end a career. When it comes to managing athletes’ assets, not having an emergency plan if the career ends is one of the biggest financial planning mistakes.

How to Avoid This Mistake

Depending on the situation, it might make sense to get term life insurance or total and permanent disability insurance, which will protect future income.

It’s also wise to start saving as much money as possible while active. This doesn’t mean you can’t enjoy the income, but it’s important to consider how to continue supporting spending if the money suddenly stops.

4 – Overspending

Sixty percent of NBA players are bankrupt within five years of retirement. There are no statistical records for former athletes in Latin America, but it’s clear that many highly successful athletes in the past are in a precarious financial situation today.

Why does this happen? Often, it’s believed that the income source will never run out. We’ve seen it many times: an athlete receives their first big paycheck and then spends it on a luxury mansion or a high-end car.

When the athlete is young and encounters sudden wealth, there is a temptation to spend excessively on trendy clothes, extremely luxurious properties, and high-end cars. But no matter how high the salary, spending more than you earn will end in trouble. It’s simple math.

How to Avoid This Mistake

Even athletes who earn large sums of money should have an organized budget. It’s the most prudent way to ensure you don’t spend more than you earn. Learning to live on a fraction of the salary and investing the rest wisely is the most sensible approach. The athlete is young, the money will have decades to grow and become true wealth through reinvestment. Savings rates of over 50% of income are necessary to ensure a similar standard of living to what was had before retirement.

5 – Forgetting About Taxes

As high-income individuals, athletes often lose a large portion of their earnings to taxes.

How to Avoid This Mistake

Discussing with a financial advisor the various tax planning strategies available for the athlete and their investments will help minimize the tax burden. The right strategies can help:

  • Minimize the tax impact of extraordinary income
  • Carry out an efficient investment process in your financial plan

6 – Working with the Wrong Financial Advisor

A critical mistake athletes make is assuming that all financial advisors are the same and that anyone using the title “financial advisor” is qualified to help them manage their money. Athletes’ concerns are different, so it’s important to find a financial advisor who understands the unique challenges athletes face. Challenges such as:

  • Sudden wealth at a young age
  • Irregular income fluctuation
  • Uncertain job situation
  • Short career duration
  • Lack of financial experience
  • Potential lawsuits, scams, and fraudulent activities

How to Avoid This Mistake

A recent study in the US estimates that professional athletes were defrauded of nearly $500 million between 2004 and 2017. Before blindly following the first financial advisor you find, conducting due diligence and thoroughly researching the advisor is highly recommended. In a previous article, we detailed the 10 questions we suggest asking your advisor. It’s basic to know:

  • Their credentials, overseeing and regulating bodies.
  • Their fee structure and existence of conflicts of interest.
  • How they have helped other athletes.
  • If they act as a fiduciary or not.

At Nantas, we specialize in asset management for athletes and helping professionals achieve the kind of financial security that will last a lifetime. Remember, proper financial planning is about ensuring that money works hard for you.

It’s never too soon, and it will be comforting to reap the rewards of early planning.

 

Ec. Juan Martín Rodríguez, CFA