An athletic career is an exciting one that can generate large sums of money, including but not limited to multi-million dollar contracts. The amount earned by professional athletes in relatively short periods of time is more than what the broader population sees in a lifetime in a typical career.
The large salaries professional athletes make while playing on a team or as an individual competing sometimes create negative press and publicity, especially when news outlets report athletes quickly burn through their earnings. Sometimes this is true, other times less so. It really depends upon the individual and how responsible and proactive they are with their money and whether they obtain financial guidance.
Due to the short-term nature of professional sports, athletes who are high-income earners face unique financial challenges, making it essential to work with a financial advisor who can help secure their financial future—take the next step by seeking expert guidance today.
Want to start mapping your financial future? Use our free financial advisor match tool.
Understanding the Financial Needs of Professional Athletes
The high salaries pro athletes command can lead them to a false sense of security because it seems like the influx of money will last forever. The reality is, that financial stability won’t last if proactive planning and savings aren’t taken.
Obtaining specialized guidance from financial advisors can go a long way toward structuring financial security both in the peak earning years and in the future when the high earnings dwindle or end completely.
Let’s take a look at the specific and unique financial issues many professional athletes typically face.
Reason 1. Managing Sudden Wealth
Professional young athletes often find themselves with a sudden amount of cash flowing in and don’t hesitate to spend because the salary they signed a contract for feels like a lot of money – and it is!
However, it can also lead them to feel a false sense of security. It’s important for pro athletes to realize they need to carefully manage sudden wealth.
To ensure a full understanding of this sudden wealth, professional athletes must understand not all of it will end up in their bank accounts. Agent fees will take a portion of their income and athletes are likely to land in an upper tax bracket with higher tax obligations in multiple states.
To help manage sudden cash flow, it’s a good idea to treat it like a scarce resource. While it’s tempting to buy gifts for people, go to pricey restaurants, purchase homes for family members, and generally spend a lot of cash, it’s important to realize this isn’t a sustainable lifestyle. At some point, the inflow of money will dry up.
Professional athletes should plan to transfer cash to savings and investment accounts early on to have a nest egg as they get older. The money being earned now may not be representative of their lifetime earnings.
Reason 2. Short Career Spans
It is easy to think high-earning professional athletes should be financially set for life, but in many cases, this high net worth creates massive financial challenges and risks, especially because they must learn to stretch out short-term earnings to last a lifetime. If not thoughtful about money, athletes could find themselves broke a few years down the road.
Pro Sports Can Be Volatile
The nature of professional athletics isn’t a sure bet. Injuries happen that cut short a playing career, ownerships might sell their team, performance may falter, or other events can occur that lead to irregular incomes or sudden retirement.
Professional athletes must consider these and other potential events to create long-term financial and investment plans to mitigate running into money problems at a later time.
Second Career Opportunities Once the Pro Playing Years End
Athletes also should plan to look at a potential second career once they’re playing time ends. This might include coaching, managing, broadcasting, sports analysis, opening a training facility for young athletes, or working in other capacities for sports owners.
A bonus is completing two careers leads to two retirements – a great way for a professional athlete to generate income for future financial security from their pro sports playing and a second retirement from their chosen secondary job choice.
Financial Planning for Professional Athletes
Athletes, like everyone else, need to create a life plan, including for retirement – the sooner the better. This might mean setting up high-interest-bearing accounts, low-risk investment opportunities, and living in no-tax states (to retain as much income as possible).
All pro sports players should plan to build up cash reserves early on, especially since it can be hard to transition from a massive income to a more modest one once the large contracts end.
Reason 3. Complex Tax Situations
Many athletes often find themselves facing complex tax situations that need to be considered, including multi-state tax implications and other scenarios.
This comes with many variables, including where their home state is, what states/cities their team plays in for road games, what sport they play, and how much money they earn.
Taxes must generally be paid on all income, including salary, endorsements, and bonuses. This can be tricky and, if not structured well, the professional athlete could pay more taxes than is necessary. To lessen the impact of taxes:
- Carefully select a state of primary residence with lower or no income tax. Aside from lower tax obligations, this can also generate savings when signing bonuses are received, since athletes must pay taxes on all sources of revenue.
- Learn legal ways to reduce income tax (e.g. some states give credit for tax paid to other states).
- Identify business expenses athletes are permitted to write off on their tax return, such as agent fees for endorsement gigs (e.g. promoting sneakers or nutritional supplements), workout clothing, gym memberships, and any other expenses directly related to their job.
- Identify tax-efficient investments to build wealth while mitigating taxes owed.
- Include ways to gain access to tax credit opportunities and tax strategies when developing a wealth management strategy.
Working with a skilled financial planning advisor can help mitigate many aspects of the above issues and help develop strategies to optimize a tax situation to not only help with finances now, but for future years and, ultimately, retirement.
Are you ready to speak with a skilled financial advisor for athletes to discuss tax planning? Find a financial advisor today!
Reason 4. Protection from Financial Exploitation
With visually prominent profiles, which most often include some level of financial information, many athletes are often targeted for predatory schemes and other forms of exploitation. Examples include:
- Unscrupulous people in their lives, whether related or newly acquainted
- Individuals looking to “help” athletes invest or jump into business opportunities that are either fraudulent schemes or high-risk machinations.
- Salespersons trying to boost their own commissions by targeting athletes with unnecessary expensive products.
- Divorce and spousal support if pre-nuptial agreements aren’t put into place before the marriage occurs.
To safeguard assets, pro athletes should carefully vet business and investment opportunities before investing any of their money and they should strive to work with reputable, skilled, and experienced professionals to help manage their financial planning, such as specialized financial advisors.
Reason 5. Estate and Legacy Planning
Everyone should plan to do some level of legacy and estate planning. Those who accumulate wealth through professional sports want to make sure they actively plan measures to protect their assets for their heirs, charitable giving, or any other wishes they have (e.g. building a ball field complex or starting a non-profit to help young athletes).
- Last will and testament
- Irrevocable and revocable trusts
- Powers of attorney to handle healthcare directives and financial decisions in the event of incapacitation
- Insurance policies, including life insurance
Working with a skilled financial advisor who knows how to create a financial plan that includes estate and legacy planning is in the best interests of protecting assets accumulated by the athlete.
This way, a strategy can be established to avoid high taxes, reduce the odds of individuals contesting a will, and protect the future of an athlete’s loved ones.
Choosing the Right Financial Advisor
According to statistics, almost 80% of professional athletes are broke just a mere three years post-retirement. This is unfortunate since they could have consulted with an experienced financial advisor ahead of time to help them plan their finances once their playing days are over.
Financial Advisor Qualities Athletes Should Seek
Qualifications athletes should look for in a financial advisor include, but are not limited to:
- Strong communication with clients about their finances
- A philosophy that aligns with an athlete’s risk aversiveness
- Understanding of tax consequences in the states the athlete lives or works in
Additionally, the ideal advisor should have experience in financial planning, retirement planning, and tax planning.
Key Questions to Ask Financial Advisors
Before hiring a financial advisor, athletes should plan to ask key questions, such as:
- How much experience do you have working with professional athletes?
- What are your credentials and professional qualifications?
- What is your risk philosophy when it comes to investment options?
- Does your track record align with your philosophy to achieve success in financial stability?
- What kind of tax strategies do you typically recommend athletes integrate into their financial plan?
- How would you approach planning for the retirement of a pro player?
- How do you plan current and future financial planning for an athlete’s irregular income patterns?
- How transparent are you with your clients when it comes to investment priorities and where money will be allocated for investments?
Financial planning professionals will be happy to answer any and all questions. If an individual is evasive, this is a pretty good indicator they aren’t the right financial advisor to consult with for income, investing, and other financial matters.
Long-Term Financial Planning for Athletes
A long-term plan for athletes is vital to their future financial health. A comprehensive plan will consider smart investments, diversification of income streams, feasible spending, post-career transitions, and estate planning, along with any other factors related to overall wealth management.
An athletic career can be an amazing experience, but for many, it will only last a few years – roughly three to 10 – depending upon the physical impact of their sport (e.g. NFL players tend to have shorter career spans than golf players) and whether or not they suffer injuries or begin to slump in their athletic abilities.
It’s a great feeling to achieve success at the highest level in a respective sport, however, it’s important to have a contingent plan, along with a solid, long-term financial strategy to build security beyond a sports career.
Conclusion
It is common to find out that professional athletes face challenges with the management of their money. Even high-earning athletes may find themselves broke after earning millions of dollars.
It is important to remember, that while a contract may be worth big money, playing time can be cut short, resulting in no future contracts.
Athletes who work with financial professionals can obtain assistance with managing sudden wealth, dealing with short career spans, complex tax situations, protection from financial exploitation, and estate and legacy planning.
Consulting with an experienced financial advisor for athletes early on after signing a contract can go a long way toward ensuring stability and comfort down the road. The long-term benefits of professional guidance can help with good management of finances.
Don’t delay, get matched with a financial advisor today!
