Many people believe that when a professional athlete gets a multi-million dollar contract they must be set for life. Are they really? That depends on several factors including spending, inflation, and what income they will make after they retire.
Professional athlete’s contracts- it’s about net after tax
Many professional athletes receive the biggest check of their life right after they get out of college. The 2016 NFL overall pick Jared Goff will earn approximately $27,946,656 over his rookie contract with the Los Angeles Rams, including a $18,515,839 signing bonus.
The NBA has some different circumstances. There is a term in college basketball, called one and done. That means that the player is so good that after one year, possibly one semester, they are now ready to enter the National Basketball Association. In fact, many players don’t finish college or take any personal finance classes relating to this unusually high income.
Let’s say you are a top pick. You may roughly $5 million/yr. for 2 years for a total of $10,000,000. You pay federal taxes of 40% and if you live in California are subject to a marginal tax rate of 13.3%. You can see that you get about half. You probably have some expenses for trainers and dietitians to support your profession. If you get married and divorced, there goes at least half. Hopefully half is based on the net value of the contract, $5,000,000 and not the gross.
This has been the calculation for the top picks. The numbers go down from there. However, the expectations seem not to.
Professional athlete’s contracts- and inflation too
Let’s say you never wanted to work a day in your life. Let’s assume a 60-year life span and no inflation. That means you get to spend $83,000 per year before you run out.
|Age Now||23 yrs. old|
|Death||83 yrs. old|
Big problem though. There is inflation.
While we don’t know what inflation will be in the future, history says over a long-haul period, 3 to 4% is a reasonable assumption. Now let’s look at what happens.
|Years||Now||In 10 years||In 20 years||In 40 years|
Advanced financial planning for professional athletes
What will their second career pay? All professional athletes are not the same. Some become coaches in college and some in high school. I know one former player that will likely make more in his second career than his playing years. However, he is one of the few exceptions. Most will make significantly less on an annual basis than they did before.
It is key that they find a CERTIFIED FINANCIAL PLANNER™ professional to help them develop a plan. Many of them have goals of taking care of mom, buying expensive homes, cars, etc. While an annual salary based on the contract they receive may support those goals during their playing years, what will life be like when their career is over. What if they wanted to sustain, say a $100,000 lifestyle? A financial plan could chart a course of how much they can spend of the contract per year when added to their projected earnings after ball. There is financial planning software and skilled CERTIFIED FINANCIAL PLANNER™ professionals that can help architect a plan and help them implement the plan. Moreover, when one is so you and healthy it is hard to believe that they may be hit with death or disability. That is where some contingency planning can provide comfort for family should a tragic happen to them.
If you are a professional athlete, loved one or friend of one, I would be glad to show you tools that can help you plan to avoid being one of the said stories on 60 minutes or ESPN’s 30 for 30. Contact us or sign up for our blogs, twitter or Facebook posts.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.