Financial Planning for Professional Athletes
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It is a common misconception that wealthy individuals cannot possibly have any financial problems. But on the contrary, UHNIs, HNWIs, or wealthy individuals have to deal with several legal and financial complications due to their large net value and possibly multiple income sources. Celebrities, actors, politicians, musicians, and even athletes may be earning millions of dollars annually. Naturally, self-managing such a large corpus is out of the question, especially given the level of financial expertise required. Hence, for all these individuals, the need for professional wealth and financial planning becomes paramount.
Athletes, in particular, pose a unique challenge to wealth planners. It is a well-known fact that athletes have very few years in their prime. And, a bulk of their earnings come in the prime of their careers. For this reason, athletes cannot have ordinary or generic wealth planning strategies. Their income sources, frequency of income, risks, and net worth heavily vary from other wealthy individuals. If you wish to create a unique financial plan to meet your future financial needs and goals, do reach out to a professional financial advisor who can advise you on how to maximize your earnings during your prime years.
Read further to know suitable financial planning for professional athletes:
Why do athletes need financial planning?
Every individual, regardless of income and risk tolerance, needs financial planning. Athletes are no different. In fact, they are a unique set of individuals whose income and quantum of risk differs from ordinary and even wealthy individuals. An athlete is not a wealthy businessman whose future income can be predicted and planned through a cash flow model. Nor are athletes common individuals with a set salary that can be planned for. Athletes deal with different phases and spurts in income and savings and often experience dry spells. They possess maximum risk from age and injuries, which may end their career in a jiffy. This makes it imperative for them to be equipped and ready with a financial plan. An athlete’s income, return, and net worth depends on performance, competitors, brand engagement, endorsements, and other factors. But, even these highly disciplined and competitive sports persons are prone to making some common investment mistakes. In fact, due to a lack of financial planning, many athletes have lost a major chunk of their capital and owe millions in debt.
What common mistakes do athletes make when dealing with finances?
Asset management and financial planning for athletes can get very complex, depending on the sports they play, fees, seasons, injuries, controversies, and others. For instance, the income of a soccer player will differ greatly from that of an NBA player or someone who plays baseball . While commonly the ideal work span in any profession is estimated around 20-30 years, athletes only have a decade or two, which overlaps with their prime years.
Below are a few common mistakes athletes may commit when dealing with their finances:
1. Inability to manage and save substantial wealth
For novices and athletes, handling a lot of money attained in a short time span can be tricky. Many young athletes may end up splurging or incurring huge debts, while others may recklessly invest in risky investments and assets. Statistics show that nearly 60% of NBA players were found to be broke 5 years post-retirement, and over 80% went bankrupt just 2 years once they stopped playing.It may surprise you how many millionaire athletes of yesteryears have lost their fortunes and are worth nothing today.
2. Lack of an alternative career
Some athletes earning an 8-figure income may assume the same to continue for a lifetime. But once their prime years elapse , that may not be the case. Most athletes also do not plan their future or consider what their life would look like once they retire from the sport. When they play, naturally, their prime focus remains the sport. And, financial planning may take a back seat in such instances.
Also, it may be difficult for these individuals to face post-retirement reality, which often is accompanied by depression and identity issues.
3. Unprepared for unforeseen circumstances
Athletes may sometimes not give enough importance to preparing for contingencies and unforeseen circumstances. Also, for a few, managing health insurance and premiums may not be the first priority. It is also well known that the risk of injury always hangs on an athlete’s career. Studies have shown that professional athletes have more than 2000 injuries per 10,000 individuals. Athletes are often faced with uncertainty and ambiguity that can prove to be disastrous if adequate attention is not paid to the issue.
4. Lack of knowledge on taxes and their implications
Lastly, major athletes do not understand how taxes work. Most athletes are HNWIs, for whom taxes can eat into a majority of their income. Taxes may cause a major dent in the savings as well as the net worth of these individuals.
So, how should financial services for professional athletes be planned? Let us find out.
How can professional athletes address financial planning?
A young athlete who suddenly finds fame and money can tank his/her finances in no time. But this can be avoided by creating a meaningful financial plan that can set clear targets for savings and how much money to invest to secure their future financial goals and dreams.
Let us find out how athletes can address their financial needs.
1. Monitor your resources, savings, and income
Any young adult with substantial wealth and fame may typically want to spend on a lavish lifestyle and on luxurious items. Few may concern themselves with financial planning and its nuances. More likely financial planning takes a back seat in the fast-moving career of an athlete. However, ignoring finances for any reason may not be wise. Athletes should constantly track and be aware of their income, savings, and investments.
Tracking income, which can be through fees, brand endorsements, and more, is paramount to having a safe and sound financial plan. For instance, planning ahead for national and international events like the Olympics can help athletes predict what cost and earnings they would need to take care of. Not just this, athletes should also make sure that they save aggressively in the beginning and have an emergency fund for unforeseen events and injuries.
2. Address tax issues
Understanding the impact of taxes on one’s earnings and investments is a tricky concept to grasp for most individuals, let alone for professional athletes who have to regularly deal with complex financial issues and implications. Moreover, the state in which the athlete resides heavily impacts their tax treatment. For instance, living in one state for the purpose of training and better facilities may attract fewer taxes than in another state. Athletes can minimize taxes on their gym memberships, nutrients, supplements, agency fee, and other costs through appropriate tax deductions and claims.
3. Plan for your retirement
Planning for retirement is the last thing most athletes have on their minds. This is because it may force athletes to look at life without the money and fame that they may have become accustomed to. Also, a pre-set mind notion that they would never have to ”worry for money” may rule the mind of many young players. This may prove to be disastrous.
Athletes need to be careful and plan for a scenario wherein they may have to retire suddenly causing them to lose their multi-million dollar contracts. In fact, even one serious injury may push them closer to retirement. Hence, no matter what age or sport an athlete may compete in, retirement planning should never be put on the back burner.
4. Have a backup plan
Athletes should mentally and financially strive to prepare for a second alternative career that they can practice in case of severe injuries. Athletes should give thought to what they wish to do after retirement and what other employable skills they have to be well prepared to face retirement.
Professional athletes can also look to generate passive income to sustain themselves. For instance, Hakeem Olajuwon earned more than $100 million by investing in real estate which was separate from his career earnings as an NBA player. In fact, many players and athletes have their own ventures in numerous fields, right from investments in different kinds of startups to restaurants, etc. This is ideal and may benefit athletes once they retire or start a new career.
5. Hire a suitable financial advisor
Lastly, the most crucial decision for an athlete is to choose the right financial advisor suitable for athletes and their specific financial needs. The advisor should be able to navigate uneven cash flow, shorter career spans, scams, lawsuits, and other nuances that are typical to an athlete’s life.
No matter how much wealth an athlete may earn, it may remain of no use if an advisor cannot plan and manage the same. An efficient and experienced advisor can help athletes manage their taxes, invest in the right instrument/assets, sign fruitful endorsements, and accurately plan their retirement. But an advisor may also completely wreck your finances if they are incompetent or do not understand your needs. Hence, it is paramount that athletes dedicate enough time and energy to finding the right advisor, who can not only guide their financial decisions, but also save them from committing common yet expensive blunders.
All individuals need to plan for their taxes, retirement, and income. Athletes are no different. These young individuals have access to unimaginable amounts of money that can easily derail their finances, if they are not careful. And thus, athletes need to be precisely aware of their income, liabilities, taxes and simultaneously plan for retirement and injuries. Finally, they should look to choose a professional advisor who has experience in dealing with sporting personalities and their unique career trajectory.
Use the free advisor match tool to match with an experienced and certified financial advisor who will be able to guide and advise you effectively keeping in mind your career as a professional athlete. Give us basic details about yourself, and the match tool will connect you with 1-3 professional financial fiduciaries that may be suited to help you.