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Date: October 19, 2020

6 Common Financial Planning Mistakes We See Athletes Make

Professional athletes can make more money in a few years than most workers make in their lifetimes. Yet, many of these same professional athletes make a few common financial planning mistakes that leave them burning through those high-earning salaries and having nothing to show for it in the end.

Take Adrian Peterson for example. He made nearly $100 million during his NFL career. But he burned through it all and wound up owing almost $10 million to various creditors.

Athlete asset management can be complex. As a financial advisor who specializes in working with athletes, there are 6 financial planning mistakes that we see pop up again and again. One aspect of financial planning is to make sure you avoid these mistakes – it’s not only about how much you earn but how much you keep. In sharing these mistakes, we hope other athletes will make a plan to avoid them.

Mistake #1: Thinking Your Money Will Last Forever

You may be earning a six-, seven- or even eight-figure salary as a professional athlete, but your career may be short-lived. While most careers last 30 years, an athlete’s can only last a few years or a decade or two at best. Once you amortize that salary over the course of your life, you may find that it’s not as much money as you think.

The average 65-year-old has a 60 percent chance of living to age 85 and a 35 percent chance of living past age 90. While living longer is a good thing, it means you’ll need a lot more money to cover your expenses and the rising cost of inflation.

How To Avoid This Mistake

Building a strong financial plan is key to making sure the success you’re experiencing now won’t end when your career does. There are many aspects to a well-thought-out comprehensive financial plan. Start a conversation with a financial advisor early on to make sure your salary today will cover you and your family for the long haul.

 

Even simple financial planning mistakes can have long-lasting effects. Contact the professionals at Watts Gwilliam to see how we can help.

 

Mistake #2: Not Thinking About What You’ll Do Once Your Sports Career Ends

As someone who’s dedicated their life to sports, you may not have given a second thought to what you’ll do once your career ends. But here’s the reality: It will end at some point. In addition to the financial issues this can create, for many athletes, this transition into retirement is met with depression and a loss of identity – especially for those who haven’t given much thought into what they’ll do next.

How To Avoid This Mistake

Start thinking now about what you’ll do once your sports career ends. Will you head into an early retirement? Start a new career? Some athletes experience even more success once they retire from the game.

Here are a few examples you can use as inspiration:

  • Hakeem Olajuwon has earned more than $100 million since retiring from the NBA in 2003 by starting a career in real estate.
  • Jack Nicklaus has a reported $5.7 million in career earnings, but that doesn’t come close to what he’s made in endorsements and golf-course design since retiring from golf in 2005.
  • Michael Jordan still earns an estimated $40 million a year (or more) in corporate endorsements, thanks to his partnerships with brands like Nike, Gatorade, McDonald’s and Coca-Cola.

Mistake #3: Not Having an Emergency Plan if Your Career is Cut Short

What will you do if you’re suddenly injured and don’t have a guaranteed contract? Statistics show that one in five athletes get injured each year. Some of these injuries aren’t serious, but others can put a full-stop to your career. When it comes to athlete asset management, not having an emergency plan if your career ends is one of the biggest financial planning mistakes I see athletes make.

How To Avoid This Mistake

Depending on your situation, it may make sense to get a term life insurance or permanent total disability insurance, which will protect your future income.

It’s also wise to start saving as much money as you can while you can. That’s not to say you can’t treat yourself, but it’s important to consider how you’d support your family if the money suddenly stopped.

Mistake #4: Overspending

Almost 80 percent of NFL players go bankrupt or face serious financial strain within their first two years off the field. Likewise, 60 percent of NBA players find themselves broke after five years of retiring.

Why? Many times, it’s because they think the financial spigot will never be turned off. We’ve seen it time and time again: An athlete gets their first big paycheck, then turns around and blows it on a McMansion or a Lamborghini. It’s a slippery slope.

When you’re young and have sudden wealth, it’s especially easy to spend it on the latest fashions, the best real estate and the shiniest toys. But no matter how gigantic your salary is, spending more than you earn will catch up with you. It’s simple math.

How To Avoid This Mistake

Even top-earning athletes should have a budget in place. It’s the most prudent way to ensure you’re not spending more than you earn. Learn to live on a fraction of your salary and invest the rest wisely. If you’re young, your money will have decades to compound and grow into true wealth.

Mistake #5: Forgetting About Taxes

As high-income earners, athletes often lose a huge chunk of their earnings to taxes. Even if you live in a no-tax state, you may still be subject to the “jock tax.”

Take LeBron James, for example. He lives in Florida, which doesn’t have state income tax at all, but he still pays income tax in 18 states where he plays basketball. He also falls within the highest federal income tax bracket, which is 37 percent for 2020.

It’s important to implement tax strategies into your financial plan that will help you keep as much of your earnings as possible.

How To Avoid This Mistake

Discuss the different tax-planning strategies available to you and your investments with a financial advisor to help you minimize your tax burden. The right strategies can help you:

  • Alleviate the jock tax you may pay on money you earn in other states
  • Minimize taxes on signing bonuses and other one-time windfalls
  • Maximize your tax deductions and credits when it’s time to file your tax return

Mistake #6: Working With the Wrong Financial Advisor

One critical mistake athletes make is assuming that all financial advisors are the same, and that anyone who uses the title “financial advisor” is qualified to help them manage their money. The truth is, one size doesn’t fit all. Athlete’s 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
  • Uneven cashflow
  • Uncertain job security
  • Short career span
  • Lack of financial expertise
  • Potential for lawsuits, scams and fraudulent activity

How To Avoid This Mistake

A recent study estimates that professional athletes were defrauded of almost $500 million from 2004 to 2017. Before blindly following the first financial advisor you find, do your due diligence and thoroughly investigate a financial advisor before you agree to hire one to oversee your financial future. Find out:

  • Their credentials
  • Their fee schedule
  • How they’ve helped other athletes
  • If they’re a fiduciary

What We Do and How We Help

At Watts Gwilliam and Company, we specialize in athlete asset management and helping elite professionals achieve the type of financial security that will last a lifetime. Remember, one aspect of financial planning is to make sure you are in a position where your money works hard for you. Athlete asset management has added complexities.

Watts Gwilliam & Company is a fee-only, fiduciary financial advisory firm headquartered in Gilbert, Arizona and serving investors nationwide. Our firm was established to provide a conflict-free environment that’s dedicated to our clients’ success. We provide innovative investment and financial planning strategies so you can build wealth, generate income and secure your future.

It’s never too soon to start planning for the future. Get the conversation started.

Watts Gwilliam retirement eBook

David Watts
Author:

David Watts

Dave is one of the firm’s founders. He helps business owners, professional athletes, and other high-net worth clients develop and implement financial plans and strategies. He also specializes in helping those with single-stock positions to diversify and manage their financial lives. Other areas of specialty are wealth transfer plans for concentrated stockholders and business owners; tax minimization strategies for those with employee stock options; cash flow management; and risk management planning.