What Is the Best Financial Planning for Professional Athletes?
Professional athletes need to be smart about their money. They may make a lot of money in a short amount of time, but they need to plan for their future. Many athletes go into “big-time” debt and go broke after they retire because they don’t know how to manage their money. Financial Planning for Professional Athletes is key.
Many professional athletes find themselves in difficult financial situations due to making the same mistakes that others often do – helping out struggling friends and family, buying too many luxury items, purchasing more houses than necessary, divorced, and not saving for the future. In addition, some athletes fall behind on their taxes and end up with expensive alimony and child support payments after a divorce. This is compounded by the fact that athletes are often young when they suddenly have a lot of money.
- As professional athletes, we must be mindful of our earnings throughout our lifetime.
- Athletes often spend lavishly while they are young and at the height of their financial and career success. However, this mistake can leave them short later in life.
- As professional athletes, you have a unique opportunity to save for retirement in a way that most people can’t.
- There are several ways to minimize the amount of taxes an athlete has to pay, such as living in a state with no income taxes. Athletes can keep more earnings by being strategic about where they live.
As a high-earning professional athlete, managing your income wisely and making it last beyond your playing years is essential. A financial planner can help you make the most of your money and ensure that it lasts for years.
Strategies – Financial Management for Professional Athletes
The life of a professional athlete is often thought to be one of luxury and ease. However, the reality is that for most athletes, their career is relatively short-lived and filled with uncertainty. While they may receive a hefty paycheck during their playing days, it is often only for a few years or, at best, a decade or two.
From the moment you start earning a paycheck, start saving as much as possible. It may seem not easy initially, but it will pay off in the long run. Just ask Ryan Kwiatkowski. He earned a college education while playing Division I men’s volleyball and then worked as a professional volleyball player for two years in Belgium after graduation. Now he works as a financial advisor for the firm his parents founded and still runs, Retirement Solutions in Naperville, IL.
“To maintain a luxurious lifestyle, you need to earn a good income,” Kwiatkowski says. “However, you can still have a great lifestyle on a fraction of what you earned during a season. Jumping into a lavish lifestyle as soon as you sign a contract may seem like a good idea, but what will you do when you get injured and don’t have a guaranteed contract?”
According to Kwiatkowski, it is a mistake for high-earning professional athletes to immediately spend their money on luxury items like Lamborghini or mansions. He suggests that athletes paid only during the season should plan and budget their money so that it lasts throughout the year.
Essential Financial Planning for Professional Athletes: Professional athletes often have short careers and need to plan for their financial future when they no longer earn a high salary. They need to be careful with their money so that they can maintain their lifestyle after their career is over.
Tax-Minimizing Strategies for Athletes
As an athlete, it is crucial to be aware of different ways to minimize your taxes. Certified public accountant Steven Goldstein, a former partner in charge of the sports and entertainment practice of Grassi & Co., provides some insight. He suggests the following three strategies:
- Choosing a proper domicile. Do the taxes in the team’s home state offer advantages for high-income earners? “Otherwise, living in a state with no income tax, like Texas, Tennessee, or Florida, can result in serious tax savings,” according to Scott Cooper Florida’s demographics website.
- Mitigating the jock tax. Different states have different tax rates for professional athletes. Players must pay withholding tax to the visiting state for road games, but they also receive a tax credit in their home state for taxes paid in other states. Home state tax rates may be higher than the rate in the visiting state, so players could end up owing more taxes than expected.
- Understanding the impact of taxes on signing bonuses. Players can save on taxes when signing with an MLB team by allocating their signing bonus to their state of domicile—especially if that state doesn’t have an income tax.
- Allocating professional athlete tax deductions to earned wages vs. earned income from endorsements, appearance fees, and residuals. As an athlete, you must know your different deduction options to minimize your taxes. A certified public accountant (CPA) can help you determine the most advantageous method for your specific situation.
As an athlete, one of the most important things you can do is to ensure you take advantage of all the tax deductions available to you. This can include expenses such as agent’s fees, workout clothing, gym memberships, massages, nutritional supplements, athletic equipment, and more.
As people approach retirement, they must consider how to best manage their taxes. For many professional athletes, this can be a difficult task. Retirement contribution limits to 401(k) and IRA accounts are often relatively low compared to annual earnings. As such, athletes must look into other investment options for their retirement that are not subject to the same taxes as 401(k)s and IRAs.
Plan for the Long-Term
“A high income may not be as great as it seems when you think about how long a typical career is,” says Derek Tharp, a certified financial planner and fee-only financial advisor. “This is especially true for people who have to pay taxes on their income.”
As a certified financial planner, I often encourage professional athletes to create goal-based financial plans. This type of plan helps focus on what is essential for the future and provides a road map to ensure early success doesn’t lead to detrimental financial habits down the road.
“Having a plan and monitoring progress can help obtain the financial freedom they want after their playing days are done,” I say. “A financial plan can also serve as a guide to a second career since most players will be out of work by age 30, with much lower incomes on the horizon.”
There are many things to consider when planning for retirement, but for professional athletes, there are a few extra factors. Lauryn Williams, a four-time Olympian champion and founder of Worth Winning, a fee-only, virtual comprehensive financial planning firm focused on serving millennials and professional athletes, suggests planning for two retirements: one from pro sports and one from working altogether.
“Many athletes don’t earn enough to retire when their sports career is over,” Williams says. One strategy she recommends is setting aside money to gain time to figure out what you want to do next. “The transition can be emotional. You don’t want to have to jump into something to make a living while trying to get closure.”
Managing Personal Relationships
The biggest challenge for professional athletes is not the physical demands of their sport but managing relationships with friends and family. According to sports psychologist Bob Tharp, many athletes feel obligated to give back to those who have helped them succeed. However, this can interfere with the athlete’s financial security. Tharp recommends quickly establishing boundaries with friends and family and involving third-party professionals to handle requests for money.
As an athlete, giving back to the community is always good. However, before doing so, it is essential to have clear guidelines in place. For example, determine how much money you will donate each month and deposit it directly into the recipient’s bank account on the first of every month.
Choosing the Right Financial Advisor
As a young athlete, it can be tricky to determine which professionals to work with. You may be bombarded by slick-talking salespeople, making it challenging to identify knowledgeable advisors with your best interests. Complexities of their contracts, investments, insurance, estate planning, and tax planning can make the decision-making process even more daunting. Fortunately, there are some key things you can look for that will help you find the right team of professionals to support your career.
As a professional athlete, finding a fee-only financial planner (CFP) who has experience working with other athletes and always acts as a fiduciary is vital. This advisor can objectively consult with you and provide the best possible advice. Be wary of would-be advisors who act too much like fans, as they will not have your best interests at heart.
As a cautionary tale, Dias points to the example of Ash Narayan, a financial advisor who was approved to manage assets for NFL players but has recently been accused of cheating several clients and has had his assets frozen by the Securities and Exchange Commission. While this is an extreme example, it highlights the importance of understanding how your financial advisor is compensated and what their outside conflicts of interest might be.
Quick Facts for Financial Planning For Professional Athletes
As professional athletes, we have a unique challenge regarding wealth management and retirement planning. We tend to earn a large proportion of our lifetime earnings during a relatively short time frame, making it difficult to save for the future.
However, we must stay engaged with our finances and ensure that our money is invested wisely. Dias says that we need to take responsibility for our money and not rely on others to manage it. “I always say no one is responsible or accountable for their own money except for themselves.”
Williams also emphasizes the importance of understanding our finances and says we should expect our financial advisors to help us. “Athletes often think it is cool to say, ‘I have people that handle that stuff for me.’ However, according to Williams, athletes should expect financial advisors to help them understand what they have.
While the average person may face financial challenges like not saving enough for retirement or being tempted to overspend, athletes, in particular, face the unique challenge of receiving a large percentage of their lifetime earnings over a short time frame. This requires special tax planning and wealth management strategies to ensure that these earnings are used wisely and not squandered.
There are a few things that pro athletes need to keep in mind when it comes to their finances. First, they need to be aware of the potential pitfalls that can occur. Second, they need to know how to hire a trustworthy advisor. Both can help athletes turn an immense but short-term paycheck into a lifetime of financial stability.