According to Sports Illustrated magazine, 78% of NFL football players are broke within two years of retirement. NBA players fare a little better with an estimated 60% of them broke within five years of retirement. Jonathan Chevreau reported these statistics along with some good financial advice for millionaire athletes.
Ordinarily, I avoid directly giving financial advice. I don’t know all relevant factors in someone else’s life, and people are unlikely to follow the advice anyway. However, in the case of wealthy athletes, I have some advice in the form of a simple rule:
Treat every sports payment as though it is the last one.
I feel safe giving this advice for two reasons. Firstly, it is very conservative and the likelihood of getting into trouble with it is low. Secondly, there is a good chance that no athlete will ever follow this advice.
I don’t believe that this rule is too conservative. A career-ending injury can happen at any time. Even so-called “guaranteed” contracts have outs for the team if the player is caught engaging in some prohibited behaviour. Any payment could be the last one.
The implications of my rule can be sobering for the young athlete anxious to live it up. After contracts are signed but no payments made, the athlete shouldn’t begin spending any future income at all.
Even after a $1 million signing bonus is paid, the athlete should think in terms of spreading this out over the rest of his life just in case that’s the last sports money he ever gets. Some advise the 4% rule as the most that should be spent from a lump sum each year to then have the principal grow with inflation. The $1 million signing bonus becomes $40,000 per year or a modest $3300 per month.
Of course this 4% would have to be reduced by the amount of any management fees paid on investments. The 4% would have to be reduced further if too much of the money is invested in low-yield investments like bonds.
Even an athlete who has accumulated a wisely invested $10 million would have a budget of $33,000 per month, which would require a few months of saving to buy a fancy car.
The reality of the length of a human life makes large sums of money, like lottery winnings and sports contracts, look small when spread out over a lifetime.