As college athletes hit the fields and the courts to showcase their talents in advance of the 2021 draft season, they and their family members should also spend some time planning for how they can best manage the windfall of money that will be heading their way when they go pro.
Professional athletes’ salaries are notoriously high. While earnings can exceed hundreds of millions of dollars over the term of a player’s contract, it can all be gone in an instant with one just one wrong move. Wealth planning is a marathon, not a sprint, and athletes, in particular, must prepare to make their earnings last for the long haul.
Your credit history and credit score play important roles in your long-term financial wellbeing. They tell bankers, lenders, credit card companies, auto dealerships, insurers and others whether or not they can trust you to pay back loans or credit extended to you. The lower your credit score, the more you will be perceived as a credit risk, and the more difficult it will be for you to get a loan or credit card to pay for major purchases.
Checking your credit history on a regular basis helps you know where you stand financially and gives you the opportunity to correct mistakes, take steps to improve your credit score and detect any instances of identity theft.
The salary a professional athlete earns in his or her first year is a far cry from the starting salary of the average college graduate. Along with higher earnings come the opportunity for a more lavish lifestyle, which in turn, comes with greater expenses and often higher taxes. It is critical that professional athletes take the time to create budgets that allocate enough funds for living expenses, tax liabilities and emergency and retirement savings. As tempting as it may be to spend your first paycheck on a luxurious new car, house or boat, it is more rewarding to get in the habit of sticking to a budget and paying yourself first.
They say that nothing is certain in life except death and taxes. However, when it comes to taxes, there are a few things that athletes can do to reduce the amount of money they owe to the federal government each year from non-wage income earned from endorsements, corporate sponsorships and appearance fees. By incorporating as a business to receive these off-
court/off-field earnings, athletes can yield significant tax savings and protect personal assets from creditors and potential legal judgements.
As part of their budgets, athletes should set up three separate financial accounts: one for their everyday expenses and cash-flow, one for investments that can yield long-term growth and sustain them long after they retire, and one account to save for off-court/off-field tax liabilities. Not only are there federal taxes to contend with, but professional athletes have the added burden of paying state and local level “jock taxes” when playing in certain jurisdictions. The news is filled with headlines about celebrities and athletes who fail to pay their fair share of earnings to Uncle Sam and were consequently convicted of tax evasion, ordered to pay back taxes, saddled with steep penalties and even imprisoned. Just Google Wesley Snipes, Nicolas Cage, Pete Rose, Laurence Taylor and even Derek Jeter.
There will be a lot of people clamoring for your attention, and it may be challenging to identify the advisors you can trust from those who are simply out for themselves. When assessing the qualifications of financial advisors, be sure to ask if they are licensed fiduciaries who have a legal obligation to give advice and recommend products and services that are in their customers’ best interests, to charge no more than a reasonable compensation and to avoid any conflicts of interest that may do more to line their pockets than your own.
Life is filled with changes, from marriage and childbirth to divorce and death, all of which will have a profound effect on your lifestyle and your finances. As you pass through these transitions, it is critical that you keep your eye on the end goal and protect yourself and your financial future. A comprehensive estate plan helps you to define these goals and put into place the appropriate strategies to help you get there. Key to this aim is the creation of trusts for asset protection and the purchase of disability insurance to protect you and your loved ones in the event you get injured and can no longer play.
With qualified advisors and a well-thought-out estate plan, athletes at all ages and strategies of their careers can preserve their wealth and avoid the devastation of financial ruin.
About the Author: Jamel Gordon, CFP®, is a financial planner with Provenance Wealth Advisors, an Independent Registered Investment Advisor affiliated with Berkowitz Pollack Brant Advisors + CPAs and a registered representative with Raymond James Financial Services. He can be reached at (954) 712-8888 or via email at firstname.lastname@example.org.
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Jamel Gordon, CFP® is a registered representative of and offers securities through Raymond James Financial Services, Inc., Member FINRA/SIPC.
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Posted March 25, 2021