For the most part, professional athletes enjoy the life that others can only dream of. From considerable salaries, endorsement and television deals, and an enormous fan base are the result of hard work and dedication.
The end of a career in the public eye for an athlete is almost synonymous with death. The word “retirement” typically signifies the end of a career, which can terrify anyone that is not prepared for uncertainty and the future. As a professional athlete, retirement can be full of financial traps, and it’s simple to make several “rookie” mistakes.
Athletes are learning from their financial mistakes only years after being away from their career. Often, these mistakes occur in their peak income-earning years, ranging from family issues and failed investments.
The following is what most professional athletes should expect from each category after retiring from their respective sport.
Even with major sports leagues offering 401(k) plans and matching contributions, it is difficult to save in a relatively short period of time. Considering that the average career for a professional athlete is around 3 to 5 years, they will have to plan for 55 years or more in retirement.
Professional athletes often rely on the rate of return of their investments, when in fact they should be controlling their spending and interest rates on debt. Even if they earned 12 percent on their investments, interest on debt at 19 percent is a net 7 percent loss. The bottom line for athletes is to not live beyond their means, maintain a budget, and have a long-term savings plan
Remarkably, pension plans vary from each league, with some offering pleasant incentives, and others giving the bare minimum. Professional athletes are entitled to some sort of pension, assuming they attain the necessary time period.
Here are the different timetables and amounts for each league:
- The MLB offers a pension of roughly $34,000 a year with 43 days on an active roster and about $200,000 a year after 10 seasons. After 1 day on an active roster, an athlete has the right to lifetime medical benefits.
- The NFL offers a pension that is calculated as the sum of all benefit credits vested after 3 seasons. For example, the credit for each season earned between 1998 and 2011 is $470 (which equals an annual benefit of $28,200 a year after 5 seasons). After attaining 4 or more seasons, an athlete is eligible for an additional $80,000 annuity benefit from 2014 to 2017, and $95,000 from 2018 to 2020. Also, the NFL will match contributions up to 200 percent in their optional 401(k) plan. Full retirement age for the pension is 55 years old.
- The NBA offers a pension of roughly $60,000 a year that is vested after 3 years and $200,000 a year after 10 seasons. Also, the NFL will match contributions up to 140 percent in their optional 401(k) plan. Full retirement age for the pension is 62 years old.
- The NHL offers a pension of roughly $50,000 a year after participating in 160 games. Full retirement age for the pension is 45 years old.
Although early retirement with reduced benefits is an option, the longer an athlete waits to receive payments; more benefits are available. Pensions work like annuities, and are often funded with annuities to guarantee the payments promised. In fact, a pension can be taken in payments or as a lump sum and converted to an annuity to create a guaranteed stream of income.
Note: If taking a lump sum distribution from the pension plan, one should feel comfortable and know how they are being invested.
Avoiding Scams and Investing Properly
For the typical retiree, mistakes in retirement can be costly. However, for professional athletes, miscalculations can be detrimental. Many athletes often don’t have the time or know-how to effectively manage their own finances. It is crucial that they not place blind trust and research the individuals that are handling their financial affairs.
During their career, most (if not all) professional athletes will encounter several attractive investment propositions, with supposed guaranteed high returns. After their playing days are over, these investment scams may seem more attractive because of the sudden loss of income. Athletes should be diligent, ask several questions, and even obtain a second opinion before they invest.
Most of all athlete investment fraud abuses are never reported because they feel embarrassed and assume there is no recourse against these scams. Sales pitches need to be investigated before action is taken; whether a broker, investment advisor, insurance agent, or any person approaching an athlete.
A typical retiree is told they need to rely on about 60 to 70 percent of their income in retirement. For a professional athlete, that sudden decline in income can be overnight. Most athletes earn the majority of their income in a short period of time versus a business owner or entrepreneur that will earn it over their entire lifetime.
After retiring, professional athletes need to take their earnings and conservatively allocate a sensible amount to preservation and lifetime income. Also, determine if keeping your agent or the fees you are paying your financial advisor make sense. Most investment advice given is generic that it should be placed in a low-cost structure. Retirement is the time to revisit and review your goals and aspirations.
Unfortunately, professional athletes retiring from the game don’t retire from the fame.
Photo is a modification of “BSWA Basketball Court” by John Walsh, used under CC BY-ND 2.0 license.