Short careers, possible injuries and often-lavish lifestyles put the earnings potential of athletes at high risk.
A career in professional sports — and the fame and fortune that come with it — is a dream for many young athletes. In reality, very few make the big leagues and even then, despite the rewards and recognition, financial success isn’t guaranteed. There is a long list of professional athletes who’ve squandered millions, made bad investments or filed for bankruptcy after a lucrative sports career.
Sports is one of a few industries where professionals make most of their money early in their career, creating more pressure to manage it in a way that ensures it lasts a long time, maybe even a lifetime. Short careers, possible injuries and an often-lavish lifestyle puts those earnings at high risk. According to a study by the RBC Sports Professionals group, the average playing career ranges from five years in Major League Baseball (MLB) and the National Basketball Association (NBA) to six years for the National Hockey League (NHL), and seven years for National Football League (NFL) players.
That means the average professional athlete will likely retire before they hit age 30; according to the RBC research, the average retirement age for MLB players is 29.5, followed by 28.2 for players in the NHL, 28 for NBA players, and 27.6 for NFL players.
“For athletes in any league, it’s critical to start saving and investing as early as possible so the income can grow over time and provide returns,” says Wally Chapman, a divisional director of RBC Wealth Management-U.S., who was drafted in the third round of the 1982 NHL draft and played professionally overseas in Germany and in the American Hockey League (AHL).
Despite some eye-catching, multi-million dollar contracts, minimum rookie contracts are around $500,000 for most sports this season. Signing bonuses for some NFL rookies can boost earnings, but few other sports offer them.
That’s still a lot of money for a teenager or 20-something drafted right out of high school or college. Chances are many of them have never had a credit card or bills to pay, and the financial responsibility can be overwhelming.
Whether purchasing a new home or making an investment in a side business, athletes need to understand financial decisions shouldn’t be rushed in to. “When you start making decisions very fast, that’s when mistakes happen,” says Todd Burach, senior relationship manager for sports and entertainment at City National Bank (CNB) in New York.
The key for young athletes is to become financially literate, which helps players make the right investment decisions early on, says Tom Sagissor, president of RBC Wealth Management in Minneapolis, who, like Chapman, is also a former NHL draft pick. Sagissor was picked in the fifth round of the 1985 NHL draft, and spent several seasons playing in the minor and European leagues.
The more confident players are that their finances, tax and legal matters are in order, Sagissor says, that’s one less distraction they’ll have when they’re out on the field, court or ice playing.
“Players should begin focusing on finances as soon as they’re drafted and stick with it throughout their career. You don’t have to be the highest-paid player to be successful, financially,” he adds.
An athlete’s career, however, can be sidelined for many reasons. Players may find their millions disappear quickly if they spend lavishly on designer wardrobes, exotic trips and mansions.
“Should you buy that fancy car?” asks Burach. “It’s OK to treat yourself, but make sure it’s within the boundaries of the plan you put in place.”
Other risks include major injuries, which can cut a player’s contract or career short. Professional financial advisers suggest athletes consider term life insurance and permanent total disability insurance to protect future income.
Athletes’ wealth also can make them targets of scammers. Chapman advises athletes follow the old adage, “if it sounds too good to be true, it probably is.”
While some players marry before they go pro, those who marry later may opt for a prenuptial agreement to protect their wealth. In California, for example, all earnings and property purchased during a marriage are considered community property owned equally by the couple.
RBC professionals recommend players who have children and more than $1 million in assets establish a trust for estate and tax planning purposes as well as peace of mind.
Retirement for pro athletes is different than for most people, and discussions about life after sports might include paying off all of your debts (if possible) and making income-producing investments to cover retirement expenses.
Many players launch second careers in real estate, fashion, broadcasting or restaurants. But for every George Foreman and Venus Williams who’ve been successful outside the sports arena, dozens of players have gone broke or failed in business ventures.
Around 60 percent of former NBA players have spent their earnings within five years of retiring, according to a Sports Illustrated article.
And NFL players may not save enough for retirement due to a short career, poor financial decisions and an expensive lifestyle. Bankruptcy filings start soon after leaving the league and accelerate through the first 12 years of retirement, according to a study by the National Bureau of Economic Research.
“It’s not necessarily about making money, it’s about occupying your time and not spending money,” Sagissor says. “It’s not necessarily about hitting a homerun with your business, but to find something you’re passionate about.”
Current and former players, such as hoopsters Magic Johnson and LeBron James, sought advice from business moguls like Hollywood agent Michael Ovitz and billionaire Warren Buffett. Today, some players are even investing in startups, hoping that a small stake in a small company will turn into the next Google.
“Athletes like LeBron and his Blaze Pizza [one of his investments] are making it trendy to be business savvy,” Burach says. “It makes younger athletes want to follow suit. There’s a balance between dedicating yourself to your current job and what comes next.”
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