A Financial Game Plan for Athletes, in Three Phases
May 09, 2017
The 2017 National Football League draft concluded last week, with the No. 1 overall draft pick earning approximately $30.4 million (including a $20.3 million signing bonus) over the term of his rookie contract. But if he doesn’t take care, he could end up bankrupt, like so many other top players.
How could that happen? The substantial headline number on the contract ignores Uncle Sam’s cut and agent fees. Those two, often-overlooked expenses lead many athletes to misjudge their suddenly acquired wealth and overspend.
Also, future earnings are unpredictable—as are the lengths of athletes’ sports careers. Disappointing subsequent contracts or injuries lead many players to retire in their 30s (if they make it that far). An estimated 78% of NFL players are bankrupt or under financial stress within two years of retiring.
So, athletes (like everyone else) need to plot their financial lives, not just the plays for their next game. Good planning can help players take better advantage of their contracts throughout their athletic and post-athletic careers—and it should start as soon as possible after the athlete scores a contract.
When we work with players and their advisors, we begin by separating an athlete’s financial life into three distinct phases:
Phase I is the athletic career, when an athlete earns a high salary or bonus and can invest substantial savings in financial assets. In this phase, we help the athlete understand how the capital markets work and evaluate how much he can save after taxes and spending to invest in personal and retirement portfolios.
Phase II comes after the athlete retires from his sport. The athlete needs to find a second career to support current spending, while continuing to build a retirement nest egg. At Bernstein, we use our Wealth Forecasting System to help quantify how much the athlete can sustainably spend based on new salary figures and the age at which he may be able to fully retire. It takes a lot of money to fund what may be a long retirement. We estimate that a million dollars saved by retirement at age 65 and invested in a moderate allocation is likely to support $30,000 in annual spending, in the median case.*
Phase III is full retirement. In this period, we help determine if income from investments will allow the athlete to maintain his lifestyle for the rest of his life. Although the average league pension provides a $147,000-a-year payout, adjusting for taxes and inflation, the payout would be worth only $33,000 in 40 years, when a player who is 22 years old today could start drawing it (Display).
A successful long-term financial game plan includes determining the appropriate asset allocation and sustainable spending rates in all three periods, and evaluating investment opportunities. And it isn’t just won and done: The planning process continues as the athlete’s career and personal life unfold, and as capital markets evolve.
*Assumes that 80% of a $1 million portfolio at age 65 is invested in taxable accounts and 20% in tax-deferred retirement assets, and that the portfolio was invested with a growth allocation (80% stocks, 20% bonds) before retirement, and a moderate allocation (60% stocks, 40% bonds) thereafter. Stocks are modeled as 21% US diversified, 21% US value, 21% US growth, 7% US small- and mid-cap, 22.5% developed international, and 7.5% emerging market. Bonds are modeled as intermediate-term diversified municipals in taxable accounts and intermediate-term taxable bonds in retirement accounts. The $30,000 of annual spending is in real dollars and is adjusted annually with inflation, and is calculated at a 90% confidence level.
The Bernstein Wealth Forecasting System seeks to help investors make prudent decisions by estimating the long-term results of potential strategies. It uses the Bernstein Capital Markets Engine to simulate 10,000 plausible paths of return for various combinations of portfolios, and for taxable accounts, it takes the investor’s tax rate into consideration.