Financial planning is a must for professional athletes, who are famous for burning through their six-, seven- and even eight-figure salaries. Many professional athletes earn in a single year or a few years what the average worker may not see in a lifetime, but this can give a false sense of security. Professional athletes make the same mistakes that others often do helping struggling friends and family members; buying too many toys, clothes, and restaurant meals; purchasing more house (or more houses) than they need; and not saving for the future. Some also fall behind on their taxes, divorce, and end up with expensive alimony and child-support obligations. A multiple factor is that athletes tend to be young when they suddenly find themselves with abundance of money.
Here’s an inside look at what financial advisor Birmingham recommend for high earning professional athletes who want to manage their income wisely and make it last beyond their playing years.
Understanding Financial Management for Professional Athletes
Professional athletes may receive a large paycheck, but that paycheck is only large for a few years or, at best, a decade or two, depending on what sport they play, their contract, how good they perform, and how injuries have an effect on their career.
While professional athletes may earn high salaries during their career, their careers are often short-lived. Consequently, they require to carefully planning for their future financial security when the money may not be rolling in quite so progressively.
Tax strategies can help professional athletes keep as much of their earnings as possible, says certified public accountant Steven Goldstein, who is the partner in charge of the sports and entertainment practice of Grassi & Co., a public accounting firm in New York City. Goldstein says the following tax strategies can help:
Choosing a proper domicile. Does the team’s home state have tax advantages for high-income earners? If not, residing in a no-tax state like Florida, Texas, or Tennessee can mean significant tax savings.
Mitigating the jock tax. This involves projecting the tax impact of playing in various states and paying tax to those states. Players have to pay withholding tax to the visiting state for road games, but they also receive a tax credit in their home state for taxes paid in other states. If their home state has a higher tax rate, players may owe more tax than they expected.
Understanding the impact of taxes on signing bonuses. A player’s signing bonus is only allocated to their state of domicile. If that state does not levy income tax, it can mean huge tax savings.
Allocating professional athlete tax deductions to earned wages vs. earned income from endorsements, appearance fees, and residuals. Certain deductions can be taken as itemized deductions or as business expense deductions. A certified public accountant (CPA) can help an athlete determine which method is most advantageous.
It is also important for professional athletes to claim all the tax deductions they are entitled to. These include business expenditures such as agent’s fees, workout clothing, gym memberships, massages, nutritional supplements, athletic equipment, and many more, according to Goldstein.
Tax planning for retirement is a requirement. Retirement payment limits to 401(k) and IRA accounts are so low comparative to what many professional athletes earn each year that athletes must do the bulk of their investing for retirement in accounts that do not have the tax advantages of 401(k)s and IRAs. Choosing tax-efficient investments is essential.
Think Long Term Recommends that professional athletes prepare a goal-based financial plan. A goal based plan give confidences to the athletes to focus on what is important for their future life. Such a plan is a road map to ensure that early success does not lead to poor financial habits that are detrimental in the long run.
Managing Relationships with Financial Advisors and Others
“Unfortunately, one of the biggest challenges for professional athletes is managing relationships with friends and family,” Tharp says. “Many athletes feel an obligation to give back to those who have helped them achieve success.” But this should be done in a responsible manner that does not interfere with the athlete’s own financial security. Tharp recommends quickly establishing boundaries with friends and family and involving third-party professionals to handle requests for money. If the athlete wants to help others, it is best to do so with patent guidelines in place, such as determining a precise sum that will be deposited into the recipient’s bank account on the first of each month.
Tharp says determining which professionals to work with is tricky for young athletes not only because of the complexities of their contracts, investments, insurance, estate planning and tax planning, but because they are bombarded by slick-talking salespeople. Such influences can make identifying knowledgeable advisors with their best interests at heart difficult. Tharp suggests looking for a fee only professional such as a certified financial planner (CFP) who has experience working with other athletes and who always serves as a fiduciary. Tharp said that professional athletes should be suspicious of would-be advisors who act too much like fans because these advisors will not be able to objectively consult with the athlete as a client.
Many professional athletes have a hard task ahead of them. Mounting a wealth management strategy and planning for retirement when they are young and when a large proportion of their lifetime earnings will be obtained during a short time frame.
Special Considerations for Athletes
Professional athletes face some of the same financial challenges that the average person faces, for example, not saving and investing properly for retirement, being tempted to overspend, and wanting to help struggling friends and family. They also face the unique challenge of receiving a large percentage of their lifetime earnings over a short time frame, which requires special tax planning and wealth management strategies.