Unique Money Management Challenges for Professional Athletes

How many stories have been publicized about professional athletes that have gone broke? Imagine how many stories have gone untold of not-so-famous professional athletes that made substantial amounts of money in their career but also went broke? Professional athletes often find themselves in the unique situation of earning significant income at a relatively young age. The sudden influx of money can be overwhelming and, without proper financial education, it's all too easy to mishandle these finances. This article aims to shed light on the key aspects of money management specifically tailored for athletes, providing valuable insights into topics such as budgeting, investment, tax planning, and preparing for post-retirement life. I hope to equip athletes with the knowledge and resources they need to make informed financial decisions and sustain their wealth beyond their playing career.

The Reverse Earnings Curve

The earnings curve of athletes is typically characterized by an early start, a steep rise, and a premature decline. Athletes usually kick off their careers in their late teens or early twenties - , much earlier than individuals in traditional professions - and their peak earning period is intense and concentrated, often featuring salaries in the multi-million-dollar range. However, this lucrative phase is usually short-lived. The average career length of a professional athlete is in the single digits, which means a healthy and lucky individual will most often conclude their playing career in their mid-thirties due to age-related physical constraints and competition from younger athletes. This earnings trajectory stands in stark contrast to that of the average working individual, whose earnings tend to gradually increase over a much more extended career lifespan, commonly peaking later in life. This unique earnings curve for pro athletes underlines the critical need for sound financial management and robust future planning in their lives.

The height of peak income for pro athletes is usually followed by a rapid decline. This downward trajectory can be attributed to various factors such as injuries, aging, or changes in team dynamics. Unlike other professions where individuals can continue to grow professionally into their 60s, athletes rarely have this luxury. Their earning capacity is limited by the physical demands of their sport. Consequently, many athletes move on to a second career, outside of their sport, during what would be the peak earning years in a more traditional career. This not only represents a major lifestyle shift but often requires a significant adjustment in financial planning and lifestyle habits.

The early peak earnings characteristic of an athlete's career can also greatly enhance the risk of them outliving their assets – this is called Longevity Risk. Notably, athletes often reach peak earning capacity at a relatively young age, and the lofty income they generate during this period can lead to a false sense of financial security. The potential for extravagant spending, poor investments, or inadequate savings during these peak years can seriously jeopardize their financial wellbeing in the long term. This risk is further exacerbated by the previously mentioned short career lifespan, which provides a much smaller window of opportunity for wealth generation compared to traditional professions.

Cash Flow Management

Cash flow management is of paramount importance for athletes due to the unique earnings curve described earlier. Traditional financial advice often fails to cater to the needs of these high-income, short career span individuals. Therefore, a tailored approach to managing spending, savings, and investments is vital.

One crucial aspect is maintaining a sustainable lifestyle. Despite the allure of extravagant spending during peak earning years, athletes must bear in mind that their high-income period is temporary. Overspending during this phase can lead to financial difficulties down the line, even bankruptcy. A common mistake - not just for athletes - is the failure to consider the longer-term future, often resulting in an unsustainable burn rate of cash during peak earning years. But this risk is especially prevalent when earnings are exceptionally high for a short period of time.

Furthermore, poor investment choices can exacerbate financial instability. Athletes are often targeted by risky or fraudulent investment schemes, promising high returns with little to no risk and without regard for a well-diversified investment strategy. Falling for these traps can severely drain an athlete's wealth accumulated over their peak earning years. And because their salaries and other income is public knowledge, athletes are especially vulnerable and targeted for unscrupulous investments that are either questionable or not a good fit for their financial plan.

Effective cash flow management, including budgeting and spending plans, can help prevent these pitfalls. By setting up a detailed and realistic budget, athletes can better understand their income versus expenditures, plan for the future, and ensure they live within their means. This financial discipline is essential to manage the swift transition from a no-earning period to a high-earning period to a significantly lower income phase later in life.

Tax Management

Tax management is another crucial aspect that athletes must consider, especially given the fact that they often play games in multiple states. Each appearance in a different state can make them liable to pay state income taxes, meaning they often have to file tax returns in each state they play in. This is commonly referred to as the 'jock tax.' The calculation of these taxes can vary from state to state, making the process complex and daunting. Some states base their taxes on duty days, the total number of days spent in the state, while others calculate based on games played. Regardless of the method, athletes may find themselves with hefty tax bills if they don’t manage their finances appropriately. Given the complexities of these tax laws, athletes are advised to seek specialized tax advice to ensure they comply with their obligations, minimize their tax liability, and avoid any potential penalties. This is just another reason why athletes need comprehensive financial planning that addresses their unique circumstances, including the geographical diversity of their earnings.

Risk Management

Risk management through insurance is another critical component of financial planning for athletes, helping shield them from unexpected and financially damaging incidents. For instance, disability insurance is crucial as it provides financial protection against income loss due to career-ending injuries. This type of insurance can replace a portion of the athlete's income should they become unable to perform due to a disability.

Loss of value insurance is another safeguard that athletes should consider. This insurance protects them if injury or illness significantly impairs their future contract value or earning potential. By mitigating the financial risk associated with a sudden drop in value, this insurance allows athletes to focus on their recovery and return to the sporting stage without the added stress of potential financial loss.

Liability insurance is equally essential, providing protection in case athletes face lawsuits for actions or accidents that occur outside of their professional sporting activities. Given their public profile and substantial earnings, athletes can become targets for legal claims. Liability insurance helps cover legal fees and any required settlement costs, thus safeguarding the athlete's wealth.

In essence, the strategic use of insurance is a crucial element in an athlete's comprehensive financial plan. By considering disability, loss of value, and liability insurance, athletes can ensure they are well-prepared for a range of potential risks and can protect their earnings and future financial stability.

Portfolio Management Strategies

Portfolio management strategies for athletes often differ markedly from those of a typical individual of the same age. Given the unique nature of an athlete's career, their income trajectory tends to be front-loaded, with peak earnings often achieved in the early to mid-twenties, and a likely decline thereafter. This is in stark contrast to a typical career where earning potential generally increases steadily over time and peaks in the late forties or early fifties – if not later.

As a result, athletes need a more aggressive savings strategy, aiming to maximize their accumulation of wealth during their peak earning years. Their portfolios may include a higher proportion of growth-oriented investments early on to capitalize on long-term market trends and potentially generate substantial returns – provided they are saving a large proportion of their earnings. At an early age, this strategy may be no different than that of a typical working professional. However, the shift to a more conservative strategy might be warranted at an earlier age for athletes, as their playing career ends and they rely on their savings and investments to fund some or a portion of their everyday expenses. In contrast, a typical individual might still be in the wealth accumulation phase at the same age, and thus continue to maintain a more aggressive investment portfolio - only gradually shifting to a more conservative approach over time.

Ultimately, the risk profile of an athlete's portfolio should be tailored to their individual circumstances, including their career lifespan, earning trajectory, financial goals, and risk tolerance – as well as their post-playing career prospects. A trusted wealth manager with expertise in the unique financial needs of athletes can play a vital role in formulating an appropriate investment strategy.

Financial Education and Maturity or Lack Thereof

Despite the potential for significant earnings, many athletes lack the necessary financial education to manage their wealth effectively and make informed financial decisions. This knowledge gap can be attributed to several factors including their younger ages, lack of formal schooling, and improper guidance. Many athletes begin their professional careers at such a young age often without having gained a comprehensive understanding of money management, budgeting, and investing.

Impulsive buying behavior poses a significant risk for athletes, especially considering their reverse earnings curve. The disproportionate amount of earnings at such a young age creates a unique financial challenge and can fuel impulsive buying habits. When income is high, athletes may fall into the trap of extravagant spending without considering the long-term consequences. High-value purchases, such as luxury cars or properties, can quickly deplete an athlete's earnings. Moreover, these impulsive purchases can lead to a higher fixed cost of living, making it difficult for athletes to adjust their spending post-retirement. Therefore, it's crucial for athletes to understand the impact of impulsive buying and take steps to curtail such behavior, fostering a sustainable financial lifestyle that spans their earning years and beyond.

Athletes, like any other individuals, can be susceptible to a range of cognitive biases that impact their financial decision-making. One such bias is the Overconfidence Bias, where athletes may overestimate their knowledge and skills, leading to risky financial decisions. Another common cognitive tendency is the Confirmation Bias, where they interpret or favor information that confirms their preconceived notions, often ignoring contradicting evidence. This can lead to misguided financial decisions, as athletes remain confined to their biases and fail to objectively assess their financial situations. The Illusion of Control Bias is also prevalent, where athletes believe they can directly influence the outcome of uncontrollable events, like the returns of a risky investment. All of these biases can be exacerbated because the confidence and success required for athletes to have in their respective sports is erroneously applied to investment acumen. Finally, the Herd Mentality often prevails among athletes, leading them to follow the financial behaviors of their peers or popular trends, rather than making independent, informed decisions. These cognitive biases, if left unchecked, can significantly hamper the financial stability and future prosperity of athletes.

Unfortunately, this lack of financial education and dependence on others can leave athletes vulnerable to financial exploitation and mismanagement. Cases abound of athletes who have lost their wealth due to fraudulent investment schemes, poor financial decisions, or lack of planning for the future.

This underlines the importance of financial education for athletes and the value of having a trusted wealth manager to guide them. A wealth manager can not only handle the day-to-day management of an athlete's wealth but also provide education on key financial concepts and planning for the future. They can help athletes understand the importance of budgeting, saving and investing, and the potential risks and rewards of various investment options.

Moreover, a trusted wealth manager can assist athletes in navigating complex issues like tax management, insurance coverage, and retirement planning. They can also act as a safeguard against financial exploitation, providing advice and guidance to ensure the athlete's wealth is protected. In other words, if a friend approaches an athlete with a questionable business opportunity, it could be uncomfortable for the athlete to decline. Referring them to the Wealth Manager deflects any ill feelings and provides the athlete with a professional assessment of the opportunity. Let the Wealth Manager be the gatekeeper, and the bad guy saying ‘No’ if the opportunity doesn’t make sense.

Career Paths

Athletes have a variety of post-career options to consider, and ideally, they should start evaluating these options early on in their professional sports career, even as early as their peak earning years in the event some of these opportunities require capital investments. Here are a few possibilities:

1.????? Coaching and Mentoring: Many athletes transition into coaching roles after retiring from their sports careers, leveraging their deep knowledge and experience to guide the next generation of sports talent.

2.????? Sports Broadcasting and Journalism: Athletes can also make a mark in sports broadcasting or journalism, an arena where their insights and on-field experience can provide unique perspectives.

3.????? Entrepreneurship: With their brand value and network, athletes can venture into entrepreneurship, establishing businesses related to their sport or other industries entirely unrelated to sports.

4.????? Public Speaking: Athletes often have inspiring stories of grit, determination, and resilience, making them excellent motivational speakers.

5.????? Charity and Philanthropy: Some athletes choose to dedicate their post-career lives to charity and philanthropy, initiating or joining causes that resonate with them.

6.????? Sports Administration: Retired athletes can also consider roles in sports administration, management, or policy-making bodies.

By exploring these potential career paths early, athletes can prepare for a smooth transition when their sports career comes to an end, ensuring their financial stability and personal fulfillment in the long term.

Conclusion

In conclusion, the unique career trajectory and income pattern of athletes necessitates a distinct approach to financial management. While they may have the potential to earn significant wealth, their financial stability can be threatened by cognitive biases, lack of financial education, and potential exploitation. Therefore, a specialized approach to wealth management, with an emphasis on education and guidance, can be a critical factor in securing their financial future. By working with a trusted wealth manager, athletes can navigate the complexities of financial planning, make informed decisions, and ultimately ensure they are well-prepared for life after their athletic career concludes.

The views expressed within this article are those of the author only and not those of BNY Mellon or any of its subsidiaries or affiliates.?The information discussed herein may not be applicable to or appropriate for every investor and should be used only after consultation with professionals who have reviewed your specific situation.

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