Wednesday, June 26, 2013

Rational Level of Saving for Athletes

We’re used to hearing stories about very highly paid athletes running out of money (http://www.sportsnet.ca/magazine/sportsnet-magazine-the-money-issue/). Reportedly, more than half of professional basketball and football players run out of money a few years after their careers end. To deal with this problem, the NFL Players Association announced “that it is expanding its financial education program for players and former players.” (See this news release.)

The part of the news release that struck me the most was the following result of an effort to get players to save:
“The results were groundbreaking, with over 1,000 players participating in the program, most engaging on an ongoing basis, and 48% saving at least 20% of their annual earnings in preparation for a potential lockout in 2011 based on the results of a lockout preparedness assessment.”
With a league minimum salary of $375,000 in 2011, it’s painfully obvious to me that saving only 20% of income is far too low. And this was achieved by only 48% of players who participated in a program. Further, this was only achieved with the threat of a lockout.

To demonstrate that 20% is too low a saving rate, I did a few calculations (surprise!). Let’s assume that players want to smooth their spending evenly over their remaining lifetimes (adjusted for inflation) and conservatively assume this may be 70 years. Further, let’s assume that their incomes after retirement with be insignificant compared to their pay as players.

The question I sought to answer was what percentage of their incomes should athletes save? This depends on the assumed rate of return on savings and on the number of years they play. The following chart summarizes the results:


As you can see, it never makes sense for an athlete to save less than 40% of income. More realistically, if they don’t count on playing for more than 5 years, they should be saving over 80% of their take-home pay. This contrasts sharply with a saving rate of 20% for only a minority of players.

It’s probably difficult for great athletes who have dominated opponents for most of their lives to accept that they won’t be able to succeed at some other money-making venture after they retire. I wish the NFL Players Association good luck in convincing its members to save more of their incomes. I find the stories of destitute players quite sad.

I’d be willing to try to help in some way, but be forewarned: I’m a terrible salesman and wouldn’t bother trying to line my own pockets by stroking player egos and offering them “exclusive” investments. The solution is a high saving rate, no debt, and boring index investing.

3 comments:

  1. Given the current studies showing the high level of brain injuries in NFL and other contact sports players maybe there should be some mandatory savings plans built into their contracts. And for sure it would be a good idea for the players to arrange someone very competent and trust worthy to have financial power of attorney in their later years.

    I have a bad feeling many of these young athletes put a lot of trust in their agents and managers. The problem is the agents and managers will move on to the next athlete once the first one is retired or injured out--it's only the athlete that will be left with no steady income.

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    1. @Bet Crooks: Even if a mandatory savings plan were imposed on a player, there would be plenty of "helpers" to arrange for loans against the saved money. I like the idea of saving, but it will work best for players who understand and believe the importance of saving.

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  2. I'm surprised that given there are players' unions that they don't have a pension program.

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