The 2018 NFL draft has passed and a new class of professional athletes has emerged. Most of these young men will have the opportunity to build and grow wealth that could last for generations, but unfortunately, many know very little about personal finance. Some may never have had a bank account or a credit card, and others may not know what their credit score is. Unfortunately, rookies are too often ill-equipped with the knowledge needed for handing their surge of cash. The financial decisions players make early on in their careers can affect the quality of life years after their playing days are over. It is never too early for these rookies to develop smart financial habits to insure they are financially secure when they turn their pads in for good.
There are little to no salary guarantees for most of these rookies. While the first-round draft picks will sign four-year contracts, with large salaries and guaranteed bonuses, most other rookies will not, leaving many with little financial security. Players picked during the second round receive four-year contracts with salaries that are only guaranteed for the first two years, while players picked after the second round, roughly 75% of this year’s draft class, likely won’t receive any guaranteed salaries. Furthermore, draft picks can get cut before the start of season. According to The Great Blue North Draft Report, about 10% of those drafted in 2017 were cut before last season even started, illustrating just how uncertain professional football careers can be right from the get-go. Signing bonuses and roster bonuses may be the only guarantees many players will receive.
Easy Come, Easy Go
It can be easy for these rookies to succumb to costly temptations. Many young players are surrounded by seasoned teammates that earn more money and can afford to live extravagantly by purchasing multiple luxury cars, going on fancy vacations, and buying designer jewelry and clothing, to name just a few. The pressure rookies experience to keep up with their fellow athletes can lead to a rapidly depleting bank account.
These factors, in addition to the pressure for financial support from family and friends, poor investment choices, as well as personal lack of financial knowledge can quickly lead to debt. Due to receiving only 17 paychecks a season and none during the off season, many players find themselves penniless once the season is over. Additionally, if a player gets hurt or injured during the season, it can negatively impact their pay. Considering the risk of overspending, getting injured, and mostly non-guaranteed pay, it becomes clear why so many players struggle with their finances.
The reality, and what many fans and players often don’t realize, is that after taxes, agent and business manager fees, and NFL Union dues, there is little money left for a rookie to live off. If a player in the top 91 drafted receives a standard non-guaranteed 4-year rookie contract of $2.37 million plus a $1 million dollar signing bonus, and has annual living expenses of $150,000 and net of above mentioned fees and taxes, they would be left with $1.25 million in savings after four years. Further, if player kept spending the same $150,000 annually in retirement, their savings would run out in about 15 years – assuming an annual investment return of 7%. Too often players think that their sports careers are going to be long and lucrative. Couple that with many thinking they shouldn’t have to reduce their post-career spending habits, it is no surprise that, as Sports Illustrated found, that 60% of players go broke within five years of retirement, and nearly 80% of all NFL players to go bankrupt within two years after retiring. Unfortunately, rookies are too often unequipped for preparing for what lies ahead, and don’t realize that the poor financial decisions make early in their careers could harm them when they retire.
Blueprint for Success
A strategic plan in the early years of a rookie’s career could be critical to ensuring ultimate financial success. The earlier a player makes wise and strategic financial decisions, the more likely they are to achieve long-term financial security. Rather than spending, players need to save – but as we know, that is much easier said than done. There are multiple ways in which new professional players can financially prepare for their future.
For one, keeping a portion of one’s earnings invested in safe short-term cash and cash equivalents can help in creating “rainy day funds” and peace of mind. Additionally, maintaining a form of forced savings could start building a nest egg for retirement. Through the NFL Player Second Career Savings 401(k) plan, a player’s NFL team will match the players annual pre-tax 401(k) contribution up to $26,000. So, players who elect to contribute the maximum of $18,500 annually into their 401(k) from their paychecks would have a total of $44,500 contributed annually.
Furthermore, many athletes do not realize that the state in which they reside can significantly impact how much they pay in taxes. It is always a good idea to establish personal residency in states such as Texas, Florida, Tennessee and Washington given no state income taxes. It is crucial for them to hire a CPA well-versed in athlete taxation as it is a specialty.
Another strategy to save on taxes while adding more money to retirement is to set up a limited liability company (LLC) for all their marketing and endorsement incomes. An LLC can allow an individual to elect to make additional pre-tax retirement contribution for up to 20% of their net LLC income, as well as the potential to reduce taxes on this income by deducting certain expenses like travel, entertainment and even professional fees.
A recent New York Times article speaking to the wider public urged that “…Even if you know you should plan for the future, a professional can help you enact and stick to a solid plan. “With a financial plan, [clients] receive a road map for the future and someone who catches things that slip through the cracks…” This is even more true, and at draft time, urgent for rookie NFL players. Planning for one’s financial security just as these players prepare for Sunday’s games, can significantly improve their odds of being financially sound during and post career. Just as a team couldn’t be successful without a coach, many professional sports players won’t succeed without the advice of a professional to help them making smarter financial decisions. Hiring an objective financial advisor is likely to prevent many footballers from accumulating major debt or worse, filing for bankruptcy after retirement.