WHY ATHLETES GO BROKE
How often do we read stories of multimillionaire athletes losing all of their money? Although they have amazing opportunities, somehow many successful athletes end up blowing it all. Why does this happen? The typical person earns approximately two million dollars over the course of their lifetime, yet many athletes earn substantially more than that amount on an annual basis and still end up broke. It is hard to feel sorry for people who squander great wealth, but analyzing the common misperceptions about why super rich people go broke may provide important lessons for everyone.
Many people believe that the reason many athletes are broke after earning ten million dollars or more over the course of their career is because they are not smart about money. That may be true, but there is no one more suited to find good financial and career advice than a professional athlete. Athletes have access to the best lawyers, business managers and financial advisors, yet many athletes seem to do a horrible job of picking people to help them as well as picking their investments. One of the biggest mistakes that athletes make is having an unqualified friend or family member as their manager (think E from Entourage). Often their managers are incompetent, inexperienced or even worse, corrupt. One of the most common causes of athletes going broke is their business managers. That's right, the same people that they hire to protect and grow their wealth somehow manage to lose their money - or worse - steal it.
PICK YOUR ADVISORS CAREFULLY AND WATCH YOUR INVESTMENTS
The more puzzling question is why athletes get preyed upon. Unfortunately it is often because athletes tend to focus on their job, and not their money. They think they've hired people to take care of their money so they focus on their sport. The problem is they do not check account statements or balances, or even care about a budget or investment goals. Taking a hands off approach to money on the assumption that things are taken care of, can make athletes vulnerable to fraud and mismanagement of their funds. The best thing an athlete can do is to spend some time having their advisors explain their investments, their budget and how it fits into their financial plan. If they cannot understand what they are invested in, they should not invest in it. The number one reason athletes go broke is because of bad advisors.
IT'S YOUR NET EARNINGS, NOT YOUR GROSS EARNINGS THAT MATTER
Another myth is that because athletes end their career by the time they reach 40, they will run out of money as they get older. It doesn't have to be that way. It is a huge advantage to make the bulk of your lifetime earnings while you are young - not to mention that it sounds pretty good to be able to retire at 40. If athletes invest their earnings wisely they could live off their investment income for the rest of their lives. The reason that this plan does not work with athletes is that many of them live a very lavish lifestyle and spend most, if not all of their money as they earn it. When they stop playing their sport, which could be any time, they do not want to cut back their lifestyle and they deplete their savings and credit. Creating a sustainable lifestyle is the key to long term success at retirement, no matter what age you retire. For example, if an athlete wanted to maintain a two million dollar per year income at retirement, he would need forty million dollars to invest for retirement, while withdrawing 5%. The problem is that there is no way for that athlete to save forty million dollars. Let's say that they earn two million dollars a year for ten years, after paying taxes and managers' fees, they would net approximately seven million dollars over their career. Many support lavish lifestyles that cost at least a million dollars per year. The result is that they run through their earnings and credit. Creating a sustainable lifestyle is the key to long term success at retirement, no matter what age you retire. If that athlete chooses to live on $250,000 a year, he could retire with approximately a five million dollar asset base. It is possible to retire in that lifestyle in this scenario. Imagine advising a star athlete who is earning two million dollars or more a year, that when he retires he has to live on $250,000 a year. Only the savviest of athletes listen to that kind of advice. More common is that the advisor is fired for bringing financial reality to the table. They shoot the messenger and then they go broke.
ALWAYS PAY YOUR TAXES
Another way that athletes go broke is that they fail to pay their taxes. This is a very common mistake. Taxes substantially reduce their gross income and a high income requires sophisticated advice that many athletes don't use. They don't want their two million dollars to shrink to approximately $850,000 after taxes and fees are paid, so they don't pay their taxes. Often taxes are not paid because all of their income has been spent without withholding tax money from the gross amount, or because the athlete has spent all of his money on his lifestyle. Unpaid taxes accumulate interest and penalties. When you don't pay your taxes the government takes anything and everything that you own to pay the taxes, interest and penalties. Unfortunately, this happens all the time.
DIVORCE AND LITIGATION COSTS
Legal fees can make even the richest person poor. Some athletes and their advisors do not understand the cost of full scale litigation resulting from business deals gone bad, harassment suits, domestic disputes, real estate, etc. as well as criminal charges that might be filed against them. For a super star athlete, getting into a fight can cost a fortune. A bar fight often results in criminal and civil charges, criminal and civil lawyers and a slew of other experts needed to defend the athlete. The costs are huge and then there is the cost of a settlement or judgment. And, of course, there is divorce, domestic violence, custody battles...The lesson to be learned is to stay out of legal trouble.
Over the course of my career I have attempted to advise several athletes and their managers. I always feel like a parent who comes home in the middle of a high school party and tells everyone to leave. Proper money management, living within your means, paying your taxes and avoiding trouble isn't always fun, but nevertheless, if you want financial stability and a happy, financially independent retirement, these are the rules, in sports and in life.
Gerber Kawasaki Wealth Management
2716 Ocean Park Blvd #2020
Santa Monica, CA 90405
Securities offered through LPL Financial, member FINRA/SIPC. Investment advisory services and fixed insurance offered through Gerber Kawasaki, Inc., a registered investment advisor and separate entity from LPL Financial.
This material contains forward looking statements and projections. There are no guarantees that these results will be achieved. Investing involves risk including potential loss of principal.