Maximizing Your Financial Potential
While the typical American worker has decades to build their career and secure a comfortable retirement, professional athletes face a unique situation. From the moment you sign your first contract, your financial journey takes a different path.
Unlike careers that span decades, sports careers typically have a limited earning window of about ten to fifteen years, assuming you remain injury-free. However, this reality shouldn't be discouraging. It simply emphasizes the crucial need for proactive planning. It’s important to ensure that your high earnings during these prime years pave the way for a lifetime of financial security.
Financial Planning for Professional Athletes: Achieving Long-Term Success
Let's take a look at Michael Jordan, a prominent figure in the world of professional sports, whose story provides priceless insights into the importance of financial planning for athletes.
Following his retirement in 1998, Jordan amassed a considerable fortune, earning approximately $100 million from his contracts with the Bulls and the Wizards. Believe it or not, he was only the top earner in the league for two seasons. Fast forward to 2014, a seemingly distant 16 years after his retirement, and Jordan joins the exclusive billionaire club.
That’s the result of a lot of things – his skill on the court, the deals he was able to make during that time, and the way he looked after his money. If there’s one thing you should take from this shortened version of his story, it's this: an expert financial planning team that genuinely cares about your long-term well-being can make a tremendous impact on your wealth.
Now let’s look at the flip side. You’ve got a big contract right now – but what happens if you sustain a career-ending injury? What seems like an ever-increasing fountain of cash and sponsorship deals just… stops. What does your financial situation look like right now if your income ends? Have you got a plan in place to make the most of your current finances, or are you burning through it as fast as you can earn it? You need high-net-worth financial planning.
What is Financial Planning? (Enjoy Your Money Now AND Later)
We’re not trying to ruin the fun for you. It’s your money: you’ve earned it, you should enjoy it. The point of financial planning is not about limiting your current lifestyle. Instead, it allows you to keep living a comfortable, and ideally luxurious, lifestyle well past your earning prime.
- Optimize your tax situation now and every year
- Invest in appreciating assets like property and trusts
- Set aside a percentage of your income for your retirement fund
What does this mean in real terms? Let’s take a look.
Tax
A pro athlete who performs around the US has a range of tax liabilities to consider: including the so-called jock tax. For example, taking a higher-paying contract with the Lakers might actually cause you to end up with less net earnings than a lower-paying contract with the Heat. This is because California taxes top earners more than 13% of their income, while Florida has no income tax at all. When Rob Gronkowski came out of retirement for the Bucs in 2020, he made an extra half a million on the same contract he had before, just because he was now based in Florida. Whether deliberate or not, this was a great financial move.
Investing
Investing has a couple of tangible benefits. Particularly when it comes to property and trusts, you can rely on a (usually) appreciating asset – buying a million-dollar property now means you should have a two or three-million-dollar property to sell down the line. The second benefit rarely touched on is that your money will be tied up. Why is this a good thing? When people come to you with their hands out, you can simply say that you don't have any money for them because it’s tied up in an illiquid asset. Similarly, you won't be able to spend it yourself, which could be a good thing if you like to spend as-you-earn.
Retirement
Setting aside a percentage for your retirement is the most basic tactic. You probably have some kind of pension with your team, league, or association, but make sure you are optimizing any 401(k) contributions and consider moving from basic league-related packages and arrange your own IRA if it makes fiscal sense.
What Next?
Talk to the pros. TXS Soar provides financial planning services and tax optimization for professional athletes across the country – and we can help you too. Reach out today to take care of tomorrow.