Special Needs, Special Families – 2/2/11
Don’t Manage Your Money Like The Pros
By Rob Wrubel, CFP®
Most of us think it would be great to get the big contract that young athletes get coming out of college to play baseball, football, basketball or another other high-profile, high-paying sports career. It sure sounds like a lot of money when the newspapers report a $20 million contract with a $2 million signing bonus.
Guess what, your financial life could be a lot stronger by never having gotten the big break into professional sports.
Sports Illustrated last year ran a story on professional athletes and how and why they go broke. The numbers quoted are startling and distressing.
• By the time they have been retired for two years, 78% of former NFL players have gone bankrupt or are under financial stress because of joblessness or divorce.
• Within five years of retirement, an estimated 60% of former NBA players are broke.
Some of these people have made multiple, tens of millions of dollars during their careers and still found a way to become bankrupt. Impressive.
Why does this matter to you as a parent, spouse or relative of a special needs person? You can learn. You can put yourself in position to have more money and wealth than so many professional athletes do by the end of their careers. You can use this money to create a high quality of life for yourself and your family. You can put some of this money into a special needs trust and help improve the quality of life for your family member.
The article suggests that the professional athletes fall into several traps.
First, they spend too much. How is it possible, you say, when they make so much money. We have all seen the reality shows with big houses, too many cars and the entourage. It’s easy (and pretty fun) to spend, spend and spend, especially if you think more is coming next year.
Spending and savings are relative to your earning power. Generally speaking, you need to think about saving between 10% and 15% of your earnings for retirement. That number works for people expecting to earn similar or increasing amounts over the course of their lifetime for the purpose of having retirement income. Those earning millions over a few years need to save a much higher percentage to be able to make up for the many years of uncertain income as they retire from professional sports. There are not too many coaching or analyst jobs available at the end of a playing career that pay close to the player’s athletic earning years.
Also, earning $1 million per year for two or three years do not leave enough money to last a lifetime. A person earning $100,000 per year over a lifetime of work will generate $3 million of income. Sounds like more than most NFL player makes during their work years.
Second, watch what you “invest” in. The Sports Illustrated article mentioned that most of the athletes who get into trouble have too high a ratio of tangible assets and business interests to more liquid, understood investment assets.
Many times, these tangible assets come with high price tags, high leverage or are bought as investments when they are really toys. Cars, for instance, rarely appreciate in value. Many collectibles are purchased at high market values and lose value as the once hot item cools off. Cars and collectibles generally are not “investments” as much as items to be used and enjoyed. They can be investments but usually require significant understanding of the particular market.
Homes and investment real estate can be purchased with little money down. The debt payments on real estate can easily become unaffordable. Rentals may be vacant. Second, third and fourth homes have mortgages that need to be paid even if the income is cut off from injury or retirement. Often, the homes are purchased at a premium due to significant customization that cannot be recaptured at sale. Homes require upkeep through maintenance and taxes, insurance and mortgages to be paid. All of these expenses reduce the potential return over time. Real estate can work well as an investment; again it requires time to understand the market, patience for values to increase and the ability to hold the asset over time.
Third, too often people in professional sports do not keep a close watch on their finances. They become extended in the number of financial activities and payments without knowing how all the pieces fit together. One player had thousands of dollars being siphoned off to pay auto insurance in another country that far exceeded anything close the amount he should have been paying. He had too many moving pieces without understanding reasonable costs.
Learn the lessons from the pros? No thank you. I prefer the lessons from people with success in creating and managing wealth.
Manage spending so that is reasonable relative to your income.
Invest rationally for the long-term instead of chasing the hot deal.
Seek to eliminate debt.
Keep a close eye on your finances and understand how each dollar is spent.
Creating wealth is one sport every person can play and find ways to win for their families.
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Rob Wrubel is a Senior Investment Consultant with Cascade Investment Group, member FINRA & SIPC. Cascade Investment Group is not a tax or legal advisor. You should always consult with your tax advisor or attorney before taking any actions that may have tax consequences.
