Professional Athletes Have Unique Needs When It Comes to Financial Planning

Jul 29, 2022

By Jacob Turner

As a professional athlete, your financial situation is far from normal. Professional sports provide planning opportunities that when implemented correctly set a path for success.  Your signing bonus, contract structure, players association royalties, off-field income, roster placement, benefits package, and uneven cash flow all provide financial and tax opportunities when positioned properly.

Players find themselves in peak earning years from 18 to 35.  There is no build-up period.  The general population builds net worth and begins to understand finances as they climb the corporate ladder.  You are on a rocket ship with limited fuel.  Any financial mistakes are extrapolated ten-fold due to your age and earning ability.  In conjunction, your career will last anywhere from 1-20 years.  When you combine a shortened earnings window with the top 1% income thresholds it creates an enormous opportunity.

Professional sports are a business that has no emotions.  The best players play, and the game quickly weeds out those who do not perform at the highest level day in and day out.  This level of expertise demands all your time, energy, and focus.  As such, finances tend to take a back seat to your career.

While it is easy to feel that you are saving enough when minimum salaries for every major sports league are in the mid to high six figures.  The time is now to plan.  Setting clear expectations early on allows you to truly optimize your situation.  To maximize your investment strategy and your savings rate while minimizing your tax burden requires more than a feeling.  Optimizing for these items allows for you to capture the 8th wonder of the world, compounding. The financial system is geared toward the average.  It is not geared towards a twenty-year-old making seven figures.  Generic financial planning tools, thoughts, and ideas are table stakes, and your approach needs more.  Whether you sign the big free-agent contract, grind it out year to year, or never quite reach your athletic goals, achieving financial success is fully in your control. We aim to provide clarity for athletes and their specific needs.

5 Ideas to Understand

  1. What can you afford?

Answering this question helps set you up for success in your financial life.  On the surface, it seems quite simple.  There are countless articles, studies, and opinions that help people make savvy buying decisions ranging from the mundane to dream houses.  Unfortunately for athletes, it is a different ballgame.  Basing spending habits off an athlete’s salary is a recipe for disaster.

According to data gathering firm Statista, the average salaries for the four major sports leagues range from $2,690,000 million for the NHL up to $8,320,000 for the NBA.  Most professional teams only pay players during the season which only magnifies the per check number for athletes.  The average player is earning six figures per paycheck. This sum allows you to buy nearly anything.  Want to buy a new car, great.  Want to put a down payment on a house, approved.  Want to buy a Rolex, no problem.  These large checks create a false sense of security for players.  To compound the issue, these checks are usually year to year with no guarantee of future income.

So how do we decide what an athlete can afford?  The key here is distinguishing between needs and wants.  You need a car.  You do not need a Ferrari.  You need a place to sleep.  You do not need a 6,000 square foot house.  You need shoes.  You do not need Gucci loafers.  This is not to say that you should not reward your success with things that bring you joy.  This is to illustrate the difference between a one-time purchase and a lifestyle.  A one-time purchase is just that, one time.  A lifestyle is a sustainable way of living that can continue.  Building a budget based on your needs provides an excellent starting point for athletes.

  • What is investing and how do you do it best?

Investing at its most basic level is the use of capital with the belief that it will generate a return. For this paper, we will focus on financial capital. Financial capital is the dollars that are left after you pay your taxes, write your agent a check, take care of the people around you, and reward yourself. This is the money that is “leftover”. A good rule of thumb is to take whatever your contract is and slice it in half. You will send 50% out the door and keep 50%. Understanding this idea sooner rather than later avoids many common mistakes. Now, you have your 50% and you are ready to decide how it gets invested. There are two camps at opposite ends of the spectrum in terms of the public markets or what most refer to as the stock market. There is “active” investing. This is the idea that you can outperform the market by correctly choosing stocks or timing your investments. You are sure to come across an advisor proclaiming his track record in selecting certain stocks or funds that have generated outsized returns. On the opposite side is “passive” investing. This is a belief that the stock market is highly efficient. So, rather than trying to find the needle in the haystack, they buy the entire haystack. We are not going to get too far into the details of either strategy. Instead, we want you to consider the “cost” of being wrong. A passive investor who is wrong generates market returns instead of something greater. While an “active” investor who is wrong jeopardizes their ability to reach their goals. In addition, believing that your advisor can beat the odds and is the “smartest guy in the room” requires two things. First, you must ignore the overwhelming amount of evidence to the contrary. Second, you must consider the above consequences if he is not the “smartest guy in the room”.

As a professional athlete, you have an opportunity to save a significant amount of money. Your goal should be to invest in a sustainable way that allows you to meet all your goals, both current and future. The numbers show that an approach based on the evidence and not opinion provides the best odds of success. This strategic approach requires careful portfolio construction, regular attention, and most of all discipline. All things that are in your control. One thing it does not require is finding the “smartest guy in the room” or jeopardizing your goals. Perhaps the greatest value an advisor can add is keeping you disciplined.

  • What is your offensive strategy?

The largest driver of investment returns is determined by your asset allocation.  Asset allocation is the percentage you distribute to “offensive” assets (stocks) versus “defensive” assets (bonds).  The larger percentage allocated to offense provides a higher expected rate of return.

Determining your asset allocation requires a deep understanding of your unique situation.  While most financial tools have parameters that help you find this number based on age and other factors these need not apply.  Remember, your situation is uncommon.

Professional athletes have narrow earning windows, uneven cash flows, uncertain job prospects, and 60 plus years to live after playing.  These factors should be accounted for when determining how much risk to take.  Some questions players should consider when determining this are: What guarantees are in my contract?  How much risk do I need to take?  How much income do I need currently? How much income will I need in 1,3, and 5 years?  How much liquidity do I need?  What are my expectations after my career?  Do I have the desire and skills to move into another career post-playing?  This is a sampling of questions that you should consider when making this decision.

Putting a strategic plan in place mitigates the desire to constantly tweak.  It allows you to tune out the noise and stay disciplined.  As your career progress and circumstances change it is important to revisit these questions. 

  • What is your defensive strategy?

As a professional athlete, you have been blessed with an incredible opportunity to create wealth for yourself and your family. The goal should be to create a plan to build and protect this wealth. When athletes think of wealth managers, they tend to equate that to investments and growing wealth.  While these factors are important, it is also important to have a defensive strategy in place.  Defensive includes everything that your team puts in place to protect the wealth you have accumulated.  You are a public figure.  Everyone can google your name and find out how much you have made in your career.  This level of notoriety requires a defensive strategy unique to you.  Here are a few items that should be a part of your defensive game plan.

Learning the Art of “NO”.  You will receive requests to invest, give, and help friends and family.  You must be prepared to say “NO” often.  Using your financial team as the point person and referring all requests to them allows you to avoid unnecessary conflict.  

Property and Casualty Insurance.  While everyone needs these coverages for their primary homes and cars.  Athletes live a transient lifestyle that often means moving upwards of 3 or more times during a season.  With each move comes another short-term rental.  An overlooked item for players is renters’ insurance. This provides coverage in the case of the unexpected happens at one of these properties.

Umbrella Insurance.  Umbrella coverage is an overarching form of coverage that protects things not covered by more specific policies.  As a high-profile public figure having proper umbrella coverage is one of the most important defensive strategies to implement. 

Life Insurance.  Depending on the coverage provided based on your roster status and your situation there might be a need for added coverage. Life insurance should be viewed as solving a need and be grouped into your defensive bucket.

Estate Planning.  As your career, life, and family grow there becomes an increased need for proper estate planning.  A basic suite of services all athletes should have are trust, will, medical directive, and financial directive.  These provide protection and guidance should something unexpected happen. 

You have been blessed with an incredible opportunity to create wealth for yourself and your family.  The goal should be to create a plan to build and protect this wealth.  Implementing these strategies helps players achieve this. 

  • How do you minimize your taxes?

Players are provided a distinctive compensation structure that lends itself to strategic tax planning opportunities.  These opportunities can provide huge savings when properly implemented.  While each athlete’s situation is unique here are a few things to consider.

Invest tax-efficiently. Depending on the league, access to a 401(k) might not be initially available.  As such, most of your investments will be in a taxable account. This means that as your account goes up in value and you look to spend that money there will be taxes due.  Investing in a tax-efficient manner allows you to keep more of those investment gains.

Maximize your signing bonus.  Athletes are unique in that they can receive large up-front signing bonuses.  Establishing residency in a state with little or no income tax can provide huge tax savings.  This should be done in coordination with a CPA who has experience in establishing residency and multistate taxation.

Develop a plan.  Creating a comprehensive strategy helps you to maximize your on-field income, off-field income, as well contract bonuses. When planned and executed correctly these years provide unique opportunities due to the uneven nature of athlete incomes.  Some strategies to consider are Roth IRA contributions and conversions, SEP IRA contributions, establishing a solo 401(k), and contributing to a Donor Advised Fund as well as other advanced planning strategies.

Build a team.  A team operates efficiently when all the players are constantly communicating with one another.  Your financial team should be operating in the same way.  Managing your investments, tax, legal, and estate implications collectively provides players with increased efficiency.  This ensures that nothing is falling through the cracks.

You need a wealth manager.  So how do you choose?

Choosing an advisor will be the single most important off the field decision of your career. There are three main boxes that an athlete’s advisor should check. Those three criteria are fee-only, fiduciary, and fit.

Fee-Only.  This means that your advisor receives his compensation by advising you and not selling you products.  In this structure, your advisor has no incentive to push a certain product or investment.  You want an advisor who partners with you on your career journey. This alignment of priorities creates less conflict of interest.

Fiduciary.  Being a fiduciary requires that the advisor be legally obligated to act in your best interest, putting your interests ahead of their own.

Fit.  While this is more subjective, to receive maximum value from this relationship you should consider a few questions.  Does this person have a deep understanding of the intricacies that come with being a professional athlete?  Do they have expertise in dealing with your accelerated career trajectory?  Are they willing to explain investments in terms you understand?  What services do they provide?  Can they be two steps ahead as your career plays out?

Jacob Turner is a Partner at JL Strategic Wealth