Financial Lessons To Learn From Broke Athletes

Several years ago, I had an article published on Yahoo Sports site detailing seven professional athletes who went in the reverse direction from riches to rags. Sadly, the trend of athletes losing their fortunes has not changed much over the years. Adrian Peterson is the latest example of a professional sports star who is facing financial peril. The future Hall of Fame running back is financially insolvent due to his inability to pay back creditors despite the fact that the former Vikings star and Redskins running back has made nearly 100 million dollars in his career. His career earnings check in at $99,223,319 over 12 seasons. For all of his tremendous work on the field, Peterson seems to have little to show off the field for all of his prolific efforts. This is a troublesome trend. There are far too many athletes in professional sports who have lost potential life changing generational wealth for a variety of reasons. Today, I want to highlight the problem and suggest solutions that can keep future professional athletes from leaving the playing field as broke athletes.

Different Ways In Which Athletes Lose Their Money

Taxes

Athletes are forced to pay a small fortune in taxes. As high-income earners, most athletes are subjected to paying the highest federal tax rate in the United States. Over the past 15 years, taxes have ranged from 35% to 39.6% for those in the highest tax bracket. The current rate of 37% was lowered from 39.6% in 2018. Professional athletes have to pay the 6.2% payroll tax for Social Security and 1.45% in Medicare taxes just like regular employees and they also have to pay an additional 0.9% in Medicare taxes imposed on those earning over $200,000 per year. The tax code is most punitive to individuals who earn high amounts of money by working actively for it compared to the much lower tax rates that private equity and hedge fund millionaires receive due to the carried interest provision.  

The taxes of athletes are incredibly complicated because they have to pay taxes in every state that they play in and practice in since the income is earned outside of the location of their home state The taxes are based on the number of days worked in the state. It is known as a “jock tax”. NBA, NFL, and MLB players pay taxes in nearly half of the United States with some being charged state income taxes in over 20 different states. States like California have a 13.3% income tax for earners who make over $1,000,000 a year. Oregon has a 9.9% tax rate on all incomes over $125,000. Minnesota charges a 9.85% income tax to those who earn over $156,911 a year. New Jersey, Washington D.C., and New York all have state income taxes approaching the 9% level for high-income individuals. Some cities tack on an additional 3 to 4% municipal tax on athletes as well.

Imagine losing 50 cents out of every dollar, before you ever receive your check. That $100 million contract that you sign is really worth just $50 million dollars. It’s still a lot of money but nowhere near the contract amounts promoted on networks like ESPN and FS1. It’s easy to see how there are so many broke athletes with Uncle Sam taking half of their cash.

Lesson #1: Keep taxes from eating up your income by having as many pre-tax assets as possible. Contributions to retirement plans and tax deferred investments are made before federal and state taxes are deducted thereby reducing your tax liability. The distributions from these plans can be structured so you pay lower taxes in retirement.

Friends and Family

The greatest threat to the wealth of many athletes can be often found in their own homes. Family and friends often take advantage of the generosity of their famous relative. They can become leeches sucking every dime that they can get out of the athlete’s pockets. They use their relative’s income and credit to purchase new homes, buy fancy cars, get business ventures financed, and to obtain permanent employment. These individuals rarely bring much expertise and knowledge to the table instead they are an albatross draining the finances of the athlete. Broke athletes soon find that they have fair-weather friends. Once the gravy train falls off the tracks, they are nowhere to be found.

There are however some friends and family who provide valuable services like Dennis Robertson who represents his nephew Kawhi Leonard. Maverick Carter, Rich Paul, and Randy Mims whave risen to success based on their friendship with Lebron James. Those examples however are the exceptions and not the norm.

Lesson #2: It’s best to give a one time lump sum to a family member or friend rather than have them continually use you as an ATM.

Poor Investments & Poor Financial Advice

Once you have reached the ranks of millionaire status, you should not be investing heavily in risky assets. Large amount of capital should not be allocated to cryptocurrencies, speculative startup ventures, restaurants, trucking companies, real estate or any other industries. Bad real estate investments and a failed trucking company ran Jamal Lewis into bankruptcy. Car washes, barbeque restaurants, and auto dealerships are amongst the common failed ventures started by athletes such as Andre Rison. Athletes are often advised by close associates to invest in areas outside of the scope of their area of expertise. 

Lesson #3: Be careful who you take investment advice from. Hot investment tips like place all your money in cryprtocurrency, a hot stock, a business, or gold can drive you into bankruptcy.

Scams and Schemes

Going broke is not always the fault of the athlete. Shady financial advisors are robbing athletes of their fortunes through financial mismanagement. The athletes are making the money and crooked money managers are stealing it. They are using the money to enrich themselves at the expense of their clients. Kevin Garnett’s “wealth manager” defrauded him out of $77 million dollar. John Elway was tricked out of $15 million in a Ponzi scheme. Tim Duncan’s financial advisor stole $20 million dollars from him. Scammers deliberately target high net worth athletes promising to manage the assets of busy athletes but instead these charlatans are pilfering the accounts of athletes. Unfortunately, the financial malfeasance is often not discovered until the athlete is past their peak earning years and has entered into retirement. While the money manager may end up in jail; only pennies on the dollars are ultimately recovered.

Lesson #4: Take control of your own finances. Check your bank accounts, investment accounts, and retirement plans on a regular basis. Find out exactly what your funds are investing in and whether that is the right asset class for you.

Divorce and Failed Relationships

Child support from failed relationships are far more costly for the rich than the average person. Athletes pay hundreds of thousands of dollars a year in annual child support. Broke athletes have multiple children by different women which amounts to millions of dollars paid in child support payments for years. An example is Terrell Owens who was paying close to $250,000 a year in child support payments. Multiple children by multiple women is a long-term budget buster. The payments may be affordable while playing but they become unsustainable in retirement. Married athletes have an easier time of maintaining financial success due to the lack of child support and spousal support payments. 

Lesson #5: Fathering children by multiple women is a recipe for financial disaster. “It is cheaper to keep her”.

Overspending

Failing to live within your means does not only affect the average person but the wealthy as well. Overspending turns wealthy athletes into broke athletes quickly. Athletes are notorious for having numerous luxurious homes, multiple fancy cars, expensive outfits, jewelry, and shoes. Floyd Mayweather just recent bought an $18 million dollar watch. No one can afford an $18 million dollar watch, not even a billionaire! Too much money is spent on assets that depreciate in value and not enough cash is invested in appreciating assets. Appreciating assets are key in understanding how to get rich. Luxury homes have massive property taxes that must be paid even after the playing career has ended. Luxury cars lose value and are worth nowhere near what they were paid for. Clothes, shoes, and jewelry all cost the player from opportunities to multiply their money. Warren Sapp declared bankruptcy a year ago while possessing 213 pairs of Air Jordans which were subsequently auctioned off.  Too many athletes allow the culture of professional athletics to pressure them to spend on unnecessary items. It’s better to be a millionaire and have no one know it than to look like a million dollars but have nothing to show for it.

Lesson #6: Overspending is the greatest enemy to prosperity. Living within your means is the number one predictor of financial success. I cannot stress enough the importance of investing in assets that multiply your money instead of ones that subtract from your bottom line. Stocks, bonds, mutual funds, real estates, 529’s, and retirement plans funded first then Gucci, Louie Vuitton, and Burberry later.

Strategies To Help Athletes Maintain Their Wealth

Increased Financial Literacy

Financial literacy amongst athletes needs to become a top priority for all sports leagues. The rookie symposium that is given to athletes is simply not enough. Athletes need annual financial bootcamps just like training camps and practices. Athletes are going to have to take greater control of their finances. Having a financial advisor is great but no one cares about your personal finances as much as you will. I always encourage people to manage their own finances. You never give anyone power of attorney over your finances. They can write checks on your accounts, enter into contracts, and transfer your funds. If you earn the money, then you need to manage the money. 

Yearly financial bootcamps would check budgets, evaluate safety of investments, encourage retirement contributions and take a snapshot of the athlete’s financial position. The goal would be to empower each athlete to be empowered to handle the major financial decisions in their lives. This takes power out of the advisor’s hands and places it back in the athlete’s hands.

Deferred Compensation Plans

I believe more athletes should opt for deferred payment plans with athletics apparel sponsorship deals with Nike, Under Armor, and Adidas. They should also take part of their contracts with teams as deferred compensation as well. This would set up a perpetual income stream that lasts into retirement. Contracts should be structured so that athletes are provided with a set amount for 30 years. Instead of a 10 year, $100 million dollar deal, an athlete could opt for the same $100 million dollars to be paid out over a 25 year period. The athlete can still sign another contract at the end of the 10 years and still have locked in a residual income stream for 15 additional years. This gives them the opportunity to structure income distributions in the most tax friendly way. The deferred money can be placed in a guaranteed account until ready for distribution and accumulate compound interest for players.

Also, athletes will make better financial decisions as they age. A 40 year old makes smarter financial decisions than a 30 year old. A 30 year old will make better decisions than a 20 year old. This would save a lot of players from financial destruction. Allen Iverson would have been on the list of broke athletes but was saved from bankruptcy due his deferred compensation contract with Reebok that pays him $800,000 annually plus another $32 million dollars at the age of 55. The deferred compensation serves as a cushion keeping him from entering bankruptcy court. Taking less cash today will ensure that more athletes have money tomorrow. 

Conservative Investment Philosophy

The majority of an athlete’s portfolio should be in conservative investments like Treasury bonds, corporate bonds, balanced mutual funds, blue chip stocks, annuities, and other safe slow growth assets. Small stakes such as 10 to 15 percent of the athletes capital can be placed in speculative ventures that could lose their capital. The rest must be protected. Athletes are being poorly advised by individuals trying to hit a home run with the athletes money failing to realize they are already on third base. A conservative philosophy would lead to fewer broke athletes.

Greater Access To Owners

The rising trend of broke athletes is an indictment on the lack of care and concern of owners for the welfare of players. Players need greater access to captains of industry in the business arena. Kevin Durant had access to Golden State Warriors owner Joe Lacob, who helped Durant make the right connections to build an empire through tech investments in Silicon Valley. LeBron James is able to call Warren Buffett whenever he needs financial advice. The elite megastars of sports have access to the best minds in business. All players should have a degree of access to great business minds who can help guide their decision making. Owners of teams are billionaires who can connect players with financial gurus in business areas that players are seeking to enter into. Athletes have the capital to make building those relationships a winning proposition for both sides. 

Living Within A Budget

Athletes have to do a better job living within the constraints of their income. You can outspend any amount of money and the earning window for an athlete is finite. You have a few years to make a fortune so you have to handle it properly. Even a superstar only has a ten to fifteen year window to secure the bag. That’s why creating a budget is so important. It is a terrible proposition to walk away with nothing from a game that you gave your heart, soul, and body to for years.

Following these strategies will lead to fewer broke athletes and more wealthy ones.

Playing card dealt

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