If your company gave you the option of taking all of your salary January 1, would you run out of money before December 31?
A Google search will show that there are many articles written on the topic of financial woes of professional athletes. These athletes have spent much time focused on honing the athletic skills that have made them the benefactor of sudden wealth. Hopefully someone that has spent time focused on honing their financial planning brain can help grow this sudden wealth.
Financial planning for the fiscal cliff coming at retirement
Let’s say you are an athlete with a sign-on bonus worth $5 million and a contract of $500,000 per year for five years. Many people would consider you a millionaire. What happens after your career is over? Let’s assume you want to make $100,000 per year for a life that attends at age 85. After retiring, assume you will qualify for a job with a starting salary of $50,000.While I won’t adjust for taxes, I’ll assume a 3% inflation adjustment. Assume you are on the lucky side of a 50/50 chance of not divorcing. Assume you don’t get hurt and forfeit your non-guaranteed money.
After retiring, you will need about $10,500,000 in lifetime supplemental income. Hopefully you didn’t live on more than $100,000 per year during your sports career. If not, you’ll have about $7,000,000 to generate the $10,500,000 you’ll need. Of course, this takes a very rational approach to money. The emotional and self esteem aspects of wealth will whisper that you should eat top shelf, pick up the tab, buy expensive cars and homes for you and possible loved ones.
Making the sports retirement nest egg last
If you happen to know an athlete that is still in college encourage them to take finance classes. If you are a pro athlete or know someone who’s currently employed by a pro team, you may want to recommend that they think of their money this way or find a professional advisor who will. If they had viewed the end of their career as a earnings cliff and work with a financial planner they could have discussed strategies that would have potentially smoothed out their income for life. Of course, that would mean living on less today but this strategy would go a long way to creating a sustainable income, potentially never having to work again. It could also create capital to support their church, family and charities.
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