Pro athletes: How to navigate short careers, long retirements

September 04, 2020 | RBC Wealth Management


It can be overwhelming to be on the receiving end of a financial windfall. What pro athletes need to know.

For many professional athletes, the glory of winning and the agony of defeat aren’t limited to the field. The initial thrill of a multimillion-dollar salary can quickly turn into financial ruin if athletes are unprepared and inexperienced about managing their money.

“It doesn’t take many wrong financial decisions to lose a fortune,” said Jay Liberman, a financial advisor with RBC Wealth Management. For many athletes, the issue is often compounded by extreme youth. “Some of them come into money at the age of 18,” Liberman added. “It’s almost inconceivable that anyone that age would have a good set of financial skills.”

Though sports contracts can be highly lucrative, many pro athletes have shockingly brief careers. A 2013 study by Sports Interaction found that in most major sports, the average career length is less than six years. That heightens the need for specialized wealth planning that will take an athlete from initial contract-signing through a potentially lengthy retirement.

Sudden riches and fame

It can be overwhelming to be on the receiving end of a financial windfall, said Liberman. Signing that first contract may be intoxicating but all too often, many athletes don’t realize the importance of seeking professional guidance to help manage their finances.

Part of the problem is that there’s no time to adjust to the dramatic change in income. “It’s not isolated to pro athletes,” Liberman noted. “We tend to find it in situations where people come into wealth suddenly, whether they won the lottery or had a liquidity event from the sale of a business.”

Recipients of sudden wealth don’t have years of money-management experience on their side. “If people grow wealth slowly over time, by the time they are ready for distributions, they’ve developed some of the skills to manage it,” he added.

Pro athletes also discover that their fame often affords entry into the rarefied lifestyle of celebrities, said Susan Bradley, founder of Sudden Money Institute and member of the Financial Education Advisory Board for the NFL Players Association.

“There are a lot of concierge services built into their life because of who they are,” Bradley said. When athletes are getting VIP treatment, they can become insulated from the real world of day-to-day finances and end up overspending as they get accustomed to a richer lifestyle.

Spending big without a spending plan

Youth, peer pressure and an unfathomable sum of money can easily lead to overspending. Athletes who refuse to acknowledge that their future income is dependent on the next contract typically ramp up spending to a level that’s not sustainable over a lifetime.

Liberman said many athletes who sign a seven-figure contract at a young age often don’t see the consequences of spending because they’ve just come into an amount of money that could make any purchases seem reasonable. “It doesn’t even have to be dramatic spending,” he said. “It could be buying a home or two, but those first contracts can be spent pretty quickly.”

He counsels athletes to think of each contract as their last. “I tell them to build a lifestyle around the current situation and one that can be sustained. We figure out a distribution that is reasonable,” he added.

“Their initial earning power can support a big lifestyle, but if they let the lifestyle continue to grow to match what they are earning, they won’t be able to sustain it once their career ends. It’s very hard to go backward in lifestyle once they’ve become used to a higher one.”

Developing new attitudes about money

Fiscal education is typically not enough to put athletes on the right path to a solid financial future. “In reality, the culture they live in is pretty tough to crack,” said Bradley.

But increasingly public tales of athletes making regrettable financial decisions that left them bankrupt have helped reinforce the importance of fiscal responsibility, Bradley noted. “They hear it and they know it. Some say, ‘that’s not me,’ or ‘it won’t happen to me,’ but others try not to be a cliché.”

Counteracting the celebrity-athlete culture that encourages a lavish lifestyle requires more than just teaching money management skills. “The best way I’ve found to make a difference is to help them understand what we call their ‘money story,’ which is basically the hardwiring they learned as a kid,” Bradley said.

Whether they recognize it or not, everyone has absorbed money lessons in childhood and their behavior as an adult reflects these habits. Athletes are in a better position to reject bad habits in favor of developing good ones after they’ve exposed the roots of their attitude and behavior around money, Bradley said.

The upside of working with athletes on a fiscally-responsible approach to wealth is they are very focused on goals, Bradley added. “I go right to their strengths: They’re disciplined and easily coached.”

She teaches them to practice good habits early while they’re still earning big paychecks. “I tell them if they save 30 percent, or even 50 percent of their income now, they won’t even feel it.” With good spending habits, they can keep some of their luxuries during the years they earn less.

A new investment playbook

Wealth planning for pro athletes can seem counterintuitive to the average person. A career arc in more traditional professions can span 50 years with employees usually realizing their highest earning power the closer they are to retirement. But for athletes, the high-earning years usually come sooner, followed by many years of little or no income. Investment rules are different in this scenario, Liberman said.

“Typically, people can take investment risk at younger ages because they have a better idea of their time horizon [for accumulation] and can ride out the market cycles,” Liberman said, pointing out that many people plan to take distributions from their portfolio after they’ve allowed it to grow for 30 or 40 years.

Liberman noted there is very little time for athletes to transition from saving for retirement to spending in retirement. “The time horizon for when they need the money is potentially short.” The possibility of early distributions and the volatility of an athlete’s salary should be carefully considered in a portfolio that initially errs toward safety rather than risk.

“It could be very dangerous to have a significant loss during the early earning years,” he said.

Liberman said as athletes accumulate more money, their portfolios can be allocated more aggressively toward growth. But this is not true for rookies with just one contract under their belt. “We have to be honest and tell them we can build a portfolio that can give them assistance, but probably won’t support them for the rest of their life.

“If they are fortunate enough to have their career extended and higher contracts, we can reposition the portfolio to be more aggressive,” he added. “We’re constantly pushing the goalposts back, so to speak.”

Risky ventures

With a large paycheck in hand, pro athletes can be attracted to risky business ventures. The temptation to put your name on a restaurant is hard to resist, said Bradley. “It’s kind of the cool thing, but there have to be policies around tangible investments.”

Bradley added that one of the biggest surprises she’s found when working with athletes on an investment approach is what she calls the “predatory activity” among players. “A lot of times, the craziest schemes come from other players.”

Some of these investments sound interesting and sexy, she noted, but they have many layers to them with outsized performance numbers attached. “Let’s just say these are not mutual funds,” she said.

Bradley advises athletes to work only with highly-credentialed financial advisors who will do due diligence on investments and help them set up a manageable budget.

“Don’t make it complicated,” she added. “Adopt a disciplined saving program, pay off credit card debt in full every month, and only work with legitimate financial advisors. Even those three policies will make a big difference in their success.”

This article was originally published on Forbes WealthVoice.

RBC Wealth Management, a division of RBC Capital Markets, LLC, Member NYSE/FINRA/SIPC.

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Non-U.S. Analyst Disclosure: Jim Allworth, an employee of RBC Wealth Management USA’s foreign affiliate RBC Dominion Securities Inc. contributed to the preparation of this publication. This individual is not registered with or qualified as a research analyst with the U.S. Financial Industry Regulatory Authority (“FINRA”) and, since he is not an associated person of RBC Wealth Management, may not be subject to FINRA Rule 2241 governing communications with subject companies, the making of public appearances, and the trading of securities in accounts held by research analysts.

In Quebec, financial planning services are provided by RBC Wealth Management Financial Services Inc. which is licensed as a financial services firm in that province. In the rest of Canada, financial planning services are available through RBC Dominion Securities Inc.