In 2009, Sports Illustrated published a mind-boggling article, which found that:
1. By the time they’ve been retired for 2 years, 78% of former NFL players had gone bankrupt or were under financial stress because of joblessness or divorce
2. Within 5 years of retirement, an estimated 60% of former NBA players were broke
3. Major League Baseball players encountered similar financial issues.
4. Some of the issues faced by retired players were also faced by current active players.
These are athletes who’ve made or are still making many millions of dollars. How can this be? There are lessons to be learned here regardless of whether you’re a professional athlete, an individual who has quickly amassed wealth or someone interested in sound entrepreneurship.
Perhaps the number one problem is faulty investment advice. Athletes in particular receive investment pitches for restaurants, movies, real estate, nightclubs, inventions, car dealerships and other businesses which don’t stand on solid business footing, and may ultimately fail. Moreover, the athlete has no clue what the investment is, nor the business background to make a sound judgment, nor the right people to help in decision making.
Similarly, athletes tend to be, by nature, risk takers. For many athletes, the asset allocation trends more towards riskier investments such as private equity and real estate.
Athletes are like lottery winners. It is the “sudden wealth” syndrome going from very little to having everything. And, this occurs with players who are in the earli 20’s without life experience. They haven’t even learned the basics of budgeting, managing cash flows or balancing a checkbook. As a result, athletes are often huge spenders: they buy several houses, many cars, picking up dinner and drink tabs, and paying friends, as well as friends of friends, for imaginary entourage services. By the time they get some life experience, their playing careers are over. Professional athletes rarely play beyond 6 years and in some cases, a lot less, depending upon the sport. They’re also the prey of misplaced trust. NBA legend, Magic Johnson, a very successful entrepreneur, said in the article: “They hire these people not because of expertise but because they’re friends. Well, they’ll fail.” Unfortunately, athletes are also victims of unscrupulous financial professionals who put the players into unsuitable investments and overcharge greatly for their services.
Family issues are also a big factor for professional athletes. The divorce rate is alarming. The number of children born out of wedlock is often high. Prenuptial agreements are rarely considered. The amounts paid for alimony and child support are huge. Estate planning is ignored.
Professional athletes already have wealth. It’s not the money they make, but rather the money kept. What they need is advice and education on cash flow management, budgeting, life and disability income insurance, conservative investments to ensure that wealth will last well beyond the short lifespan of playing professional sports. They also need comprehensive protection planning, including asset protection planning because they’re now high profile marks for litigation, estate planning, retirement planning, and business planning for those who desire to be entrepreneurs.