It is very common to hear about a professional athlete who went from making millions of dollars to bankruptcy shortly after retiring. Many of these athletes go from having nothing to having more money than they know what to do with, so it’s no surprise that they commonly make mistakes that could lead them down a bad financial path.
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Chad Willardson, president of Pacific Capital, advises ultra-high net worth individuals and several top athletes, so he knows firsthand what mistakes often lead professional athletes to bankruptcy. And while he may not have a multimillion-dollar contract, it’s important for everyone to be aware of many of these mistakes.
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They do not set financial goals
Without setting clear goals, athletes simply may not know what to do with their money.
“Before I recommend any specific financial strategies or investment options for professional athletes, I want to make sure we understand very clearly what their long-term goals are,” Willardson said. “Their long-term goals determine the investment strategy and investment options presented to them.”
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They take advantage of investment opportunities without properly evaluating them
Lack of advance financial planning can also lead athletes to make impulsive investment decisions.
“What I’ve seen a lot of professional athletes do is get a lot of money and make investment decisions based on the potential excitement around an investment idea or a new business idea,” Willardson said. “Opportunities come to them because they are famous and they evaluate the investment based on a forecast and the presentation, rather than thinking about the investment and how it relates to their financial plan, because they typically didn’t create a financial plan. To begin with, a deep financial (plan).
They can also get caught up in “get-rich-quick” types of investments.
“They hear other athletes are investing money in it, so they decide to do it and it ends up being a really bad business,” Willardson said.
They forget to file taxes
Taxes can take a significant chunk out of a signing bonus or seven-figure-plus salary, and Willardson said his professional athlete clients often underestimate how much they will need to set aside to cover the taxes owed.
“A new NBA player was only 19 years old when he became our client and had signed his first big contract worth many millions of dollars. He knew taxes had to be paid, but he didn’t realize how significant it would be,” Willardson said. “He also didn’t realize that he would pay taxes in more than 20 different states, because they pay taxes in all the states where they have games. When it came down to the actual amount of money he was going to keep, it was much less than he expected, because those taxes were almost 50%.”
They don’t plan for the worst case scenario.
Some athletes will have to withdraw earlier than originally planned due to injury or other circumstances. Failure to plan for the “worst case scenario” can put an athlete in a bad financial situation if he is forced to retire early.
“We want to discuss the best case scenario for his professional athletic career and the worst case scenario,” Willardson said. “How can we set up some safety nets with their new money to protect them against the possibility of not having the ideal professional sports career they hope for?”
They take bad financial advice
Whether well-intentioned or not, many people will chime in with financial advice when an athlete makes a lot of money, and it may not be the best advice.
“They often get financial advice from the wrong people,” Willardson said. “They do not work with an independent fiduciary who is legally obligated to provide objective and independent advice and put his interests first. Unfortunately, 95% of financial advisors in the US are not independent fiduciaries, so they are most likely talking to people who are brokers, agents, and salespeople who are not legally required to put your interests first. “A big contributing factor to professional athletes going bankrupt is poor financial advice.”
They don’t keep lifestyle inflation under control
Many people compromise on their lifestyle as their income increases, but this can be particularly problematic for professional athletes.
“They often have a lot of pressure to maintain a lavish lifestyle and high spending habits,” Willardson said. “They may have to financially support family and friends, which is a significant loss of their money. “If they don’t do a thorough financial plan, they might think they are fine with withdrawing and spending the amount they are withdrawing and spending, and then they will find out that it was too high a withdrawal rate.”
This is particularly problematic when you only receive income for a limited period of time.
“They could have a short run, so their earnings window is really short,” Willardson said. “They won’t be able to add money.”
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This article originally appeared on GOBankingRates.com: I Manage Money for Professional Athletes: 6 Major Mistakes That Put Them Out of Business
