Financial Planning for NFL Athletes

While the debate often rages over the relative worth of professional athletes in relation to their salaries, the market demand for professional sports continues to drive earnings for athletes into the stratosphere. From humble historical beginnings where the athlete would participate at the professional level for the love of the sport or for less favorable wages than other professions, often at the mercy of the owners, athletes have vaulted their earning potential to the top tier of career opportunities.

Amateur athletes are often abandoning their educations, typically a wealth-building strategy, incomplete in favor of the lure of multi-million dollar contracts, signing bonuses, and endorsement potential presented by professional sports leagues. What seems too good to be true for many aspiring professional athletes often turns out to be just that. There are many unique, inherent risks in the athletic profession. The reality faced by many athletes is that their careers are, on average, extremely short. For many, the income earned during their time as pro athletes is the highest they will see in their lifetimes.

Adjusting up to, and back from, the salaries enjoyed during their professional employment implies tremendous fiscal and emotional responsibility at odds with the maturity of the athletes who are extremely young during their peak earning years. This paper intends to examine applicable financial plans available in the market and their suitability for professionals, explore the unique risks presented to NFL athletes relative their professional and athletic counterparts, and ultimately conclude through analysis what would be the most suitable professional planning products for NFL athletes.

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Financial Planning

A financial plan is “a comprehensive evaluation of an investor’s current and future financial state by using currently known variables to predict future cash flows, asset values and withdrawal plans” . In choosing an appropriate financial planning product, investors must take the following factors into consideration. What is the investor’s current financial situation, what are their goals, current income and expenses? What protection does the investor have against unexpected events, such as job loss or illness, and how have they prepared for these?

How much wealth do they need to accumulate and how soon do they need it? What are the tax implications of their earnings and what tax benefits are available for their choice of investment? What do they want their retirement to look like, how much would they like to consume during their retirement and what is their expected life p? What, if any, type of legacy would they like to leave behind to their loved ones and the community, and what is required to create this legacy? Before deciding on an appropriate financial plan product, professionals must have clearly defined financial goals for their current and future needs.

A critical component in determining the viability of a financial plan is consumption. Investors must decide what level of their current income they which to consume and what portion they are willing to forgo consumption towards reaching their longer term financial goals. Investors must determine their risk tolerance. Creating a financial plan involves an acceptance of risk factors, typically higher risk financial products have the potential to yield higher rewards, lower yield financial products yield steady returns but at lower rates of return.

Professionals, in opting for a suitable financial planning product, must be prepared to answer these questions at the outset of their decision process. “A good financial plan can alert an investor to changes that must be made to ensure a smooth transition through life’s financial phases”.

Available Financial Plans on the Market

Competition in the financial markets has yielded a great variety of options for professionals to meet their financial planning needs. The era is one of specialization, suitable financial products are highly specific, designed to meet individual needs.

The following are currently available financial planning products on the market. 401K The 401K is an excellent tool for investors to build their financial plan around, “a 401K plan is simply a tax-deferred compensation plan that is structured to supply employees with income when retired”. 401K plans imply unique tax advantages, funds placed into a 401K plan “can continue to grow on a tax-deferred basis until the money is withdrawn”. In many cases, employers use matching contributions to their employee’s deposits as a form of employee benefit.

In 2009, employees are allowed to contribute, including matching employer funds, up to $49,000 of their earnings in tax-deferred saving towards their retirement (Money-zine). Due to the robust tax benefits, a 401K is an optimal financial planning product for investors who are willing to forgo current consumption towards their retirement goals. Employees are typically eligible for 401K benefits after vesting one year of service. Any company can provide the 401K benefit as long as they keep the plan in writing, invest the assets in a trust fund, have a recordkeeping database, and provide updates to their employees (Money-zine).

Employers have incentives to provide matching contributions as the IRS requires certain rates of a subscription among rank and file employees to maintain eligibility for higher-income earners within the corporation to enjoy the benefit of tax-sheltered saving. Maximizing 401K potential is a superior product as part of a well-formed, financial plan. Annuities While the 401K plan is a form of deferred annuity, money invested on a scheduled basis in the present that generates repayment in the future, immediate annuities are a form of current investment that can generate scheduled future payments.

Typically, deferred annuities are used by investors looking towards a long-term payback schedule, and immediate annuities are favored by the recently retired to create a guaranteed stream of income to cover living expenses. Annuities represent a strategic financial planning option for professionals to create income streams designed to meet their goals. Insurance To protect against unforeseen work stoppage due to illness or injury, professionals can opt for insurance coverage as part of their financial plan.

Specifically, plans designed to protect workers from loss of income are a viable option to provide financial support in the event of unforeseen circumstance. In addition to disability insurance, professionals will often require some form of life insurance, to provide for family in the event of death. Further, given a wealth portfolio that typically involves property, in the form of personal residence or investment property, professionals will require property insurance to protect their assets in the event of accident or catastrophe.

Health insurance must be considered by the professional for themselves and their families in their financial plan, to protect against the prohibitive cost of health care in the event of accident or chronic illness. Though most large employers typically provide a form of health care coverage as part of a comprehensive benefits package, self employed professionals and entrepreneurs will require health insurance within their portfolio of financial planning products. Tax Implications Professionals who work on a “time for money” basis face severe restrictions on their ability to maximize their earnings due to taxation.

Certain investment vehicles and decisions can defer the impact of taxation on earnings. Mortgage interest on a primary residence is tax-deductible; professionals may accrue wealth building in their financial plan through the value of their home using this lever. Further, interest on home equity loans that may be used to invest in other income generating assets such as stocks or bonds is also tax-deductible up to the first $100,000 (Bankrate, n. d. ). Charitable contributions are also tax-deductible and can enhance the legacy aspirations of the working professional.

Professionals should consider incorporation or self-employment as an option to reduce their tax limitations, as self-employed professionals or consultants enjoy significant tax benefits over their counterparts employed by corporations where they are not the primary owner. Equity Investments Either purchased as individual stocks or diversified to minimize risk and exposure to individual stocks through mutual funds, investment in equities are an excellent option for professionals looking to accumulate wealth through financial planning.

Typically, age plays a role in determining the risk acceptance/aversion profile of an investor. At a younger age, investors are less sensitive to risk as they have more potential earning years to generate revenue, usually earning higher wages as they gain experience in their professions. As the chosen retirement age approaches, investors will, as a rule of thumb, be more averse to risk as they have fewer years left to compensate for losses accrued through exposure to risk in their portfolios. Bonds, CD’s and Treasury Bills

Bonds are ideal for risk-averse investors as they imply a high level of security in the principal invested by a bondholder. As a consequence of the higher security, bonds typically yield lower rates of inflation to other investment vehicles. The exception to the rule is speculative, or “below grade” issues, these high yield bonds perform at higher rates of return than investment grade, or “AAA” rated bonds. This type of vehicle represents a market estimated at half a trillion dollars, and up to 95% of the debt of US companies with more than $35 million is rated non-investment grade (Yago, n. d. ).

Treasury bills (T-bills), a debt financing instrument used by the Federal government, are considered the least risky investment vehicle and they are highly liquid. Typically sold at a discount from the face value, they represent an investor option usually held from periods of 28 days to one year (Treasury Direct, n. d. ). Certificates of deposit (CD’s) yield better than typical savings account rates of returns with limited exposure to risk. Most CD’s offered by banks are insured by the FDIC, potential investors are protected on their CD investments up to $250,000 by the FDIC (Federal Deposit Insurance Corporation [FDIC], n. d. ). Professionals who accrue a short-term windfall in the form of performance bonus, for example, and are undecided on a long-term choice of investment may opt for CD’s and T-bills for short run asset allocation. Further, T-bills, investment-grade bonds and CD’s will reduce exposure to market risk in creating a balanced portfolio. The Unique Risk/Reward Scenario of the NFL Athlete Despite the enormous earning potential afforded pro football players, 27% of retired players claim financial problems within their first year of retirement, with the number climbing to 36% within the first three years (Weisman, 2004).

National Football League (NFL) athletes are possibly most at risk by comparison to their professional counterparts in other sports, certainly more so than white collar professionals. Regardless of what contract is signed by an NFL athlete, the compensation is not guaranteed: if the athlete is cut, the contract is forfeited (Lackner, 2008). Players in the National Basketball Association and Major League Baseball, from the terms of their collective bargaining agreement, have guaranteed contracts.

Given the violent nature of the sport, NFL players suffer a higher exposure to risk of being physically unable to continue in their sport due to injury. Of the estimated 1. 5 million athletes participating in football at every level annually, over 600,000 injuries occur as a result of playing football. Compounding the risk associated with injury that could end a player’s career is the long-term risk of disability from the effects of participation in football at the professional level that could significantly impede the quality of life, and ability to work, in later years for the athletes.

NFL athletes are also exposed to significant risk from associates, spouses and other potential hangers on that threaten to damage their career and create risk for their wealth. These risk factors, short career p, high potential for injury, long-term physical damage, social compromise, and non-guaranteed contracts, must be assessed in determining the optimal products comprising a financial plan for an NFL athlete. NFL Rookie Symposium

Dangers to NFL rookies and the unique challenges presented in rational decision making due to youth, money, and celebrity are realized so frequently among young NFL athletes that the league has created a symposium to acculturate new athletes to the dangers of the profession. Designed to protect the athlete and the league’s most precious investment, “the players would sit through lectures about the pitfalls that await the unwary: paternity suits and domestic-abuse charges, bar fights and drug stings, crooked financial advisers and greedy hangers-on”.

All of these risks are endured by the athletes before participating in a single snap at the pro level. NFL rookies are most at risk due to their youth and inexperience relative to their veteran NFL counterparts. 2002 estimates of rookie earning potential pegged average salaries at $460,308, with an average playing career of less than four years. Given that most first year players have limited exposure to that type of wealth, or the trappings of celebrity that follow the high profile, public life, the athletes ability to maximize wealth from professional earnings in the NFL face significant challenges.

NFL Career Span Statistically, the odds of becoming an NFL player are 215 for every 100,000 high school senior football players, or approximately 0. 2%. For the lucky few that break the professional ranks, the average career lifep is about 3. 5 years. Factors contributing to the lifep include injury, self-induced retirement and being cut. The flipside of the long odds against making the league and the short life p relative to other professions is the earning potential of the NFL athlete. Currently the average player earns $1.

1 million per season, not including endorsements. Athletes who break the ranks of the NFL must be realistic about their earning potential and its potential longevity. Injury and Long Term Disability Through 2000 and 2003, NFL athletes endured 6,558 injuries, representing half of the players, reaching a high of 68% in 2003. The injury rate among NFL athletes is unique in comparison to their professional counterparts in other sports. The 2003 data was eight times higher than in any other sport, including hockey.

The crippling effects of football related injury are not limited to active participants in the NFL, “A 2001 survey of 2,552 NFL vets by the Center for the Study of Retired Athletes at the University of North Carolina found that nearly two out of five former players suffer from arthritis after leaving the game. Sixteen percent of former NFL players reported arthritis so severe that it often limits their activities". This evidence is further supported by a survey conducted by the NFLPA where two in three retired players reported they left the game with some form of permanent injury (Weisman, 2004).

NFL athletes are not merely exposed to much higher risks of injury during their playing days, but must account, in their financial planning, for the potential of lingering long term injury such as arthritis and head trauma, on their earning future earning potential and needs. Social Compromise NFL athletes are at risk of social compromise through a variety of dangers. Paternity is a big issue among NFL athletes. Stephen Dubner estimated that 50% of NFL rookies had fathered a child prior to entering the NFL, though only approximately 10% were married.

The potential for wealth erosion through paternity lawsuits, child support payments and divorce during the peak of their earning years is a real danger to players. One third of respondents in an NFLPA study conducted between 1989 through the 1990’s reported divorce as their first major problem in the first six months away from football (Weisman, 2004). In addition to these dangers, it is commonplace for NFL players to be approached by friends and relatives, for loans, gifts and “investment opportunities”, often at the expense of the player.

For first year pro’s, the “leeching” begins early, requests for money “started back in April, when the rookies were drafted”. It was reported that between 1999 and 2002, 78 players were defrauded out of $42 million (Bnet, 2006). There exists a strong link between NFL athletes and criminal behavior, possibly through association with the wrong element as a result of their wealth and celebrity status, authors Don Yeager and Jeff Benedict indicate that approximately 21% of NFL players will be charged with a serious crime .

Recent headlines from issues with players like Michael Vick and Plaxico Burress would support this contention. Non-guaranteed contracts Unlike their professional brethren in major league baseball and basketball, NFL contracts are not guaranteed. Through their respective collective bargaining agreements, Major League Baseball and National Basketball Association players are guaranteed revenues from their professional contracts, with the exception of violating terms explicit within the agreements.

NFL players who are injured or cut will lose the salary potential they agree to in their negotiated agreements with their teams. In lieu of guaranteed contracts, and to maximize competitiveness under the constraint of team salary caps, NFL players typically see more money upfront in the form of signing bonuses, which are guaranteed unless the player retires early, upon which the clubs will seek pro-rated compensation in return . The presence of non-guaranteed contracts and huge signing bonuses presents significant financial planning problems for the players.

With no guaranteed contract, it is difficult for players to plan earnings relative to expenses regardless of how lucrative a deal is signed. Players are at risk of being cut based on performance, financial constraints of their team, or the presence of an equally effective, less expensive player as a replacement. If injury cuts their career short, they stop earning. The signing bonus is difficult to handle for young players. Such a large lump sum payment exposes the player to the risk of overspending, with idealistic hopes of future income replacing income consumed recklessly.

NFL players, through the practice of large signing bonuses and non-guaranteed contracts, are uniquely at risk compared to their counterparts in other sports, with all other things equal, merely through form of payment. Further, it is common practice for agents, whose commissions further erode player’s earnings in their short careers, to lure players to their agencies by providing loans based on anticipated signing bonuses. “When and if players actually get the money, it can be reduced by more than half, factoring in taxes, the agent's cut and NFL Players Association dues.

All that puts some players in debt before they take the field”. Best Plans for NFL Athletes Aaron Parthemer, a certified financial planner for Citi Smith Barney, has among his roster 27 NFL Athletes among 17 teams. His worst fear, is that one of his clients will end up as a “where are they now” story. Parthemer is very upfront with his customers on the economic reality of their situation, “I like to point out to players that they need to understand they're spending a 10th or less of their life earning money to last them for two thirds of their life”.

The cornerstone principles of his financial plan for athletes are: credit scores, maximizing 401K (the NFL matches contributions to the 401K fund at a rate of 2:1), and budgeting. Parthemer argues that though his clients “may have all the money in the world, but if you come to me with a 400 credit score, you're going to start paying 18 percent on your cars and 10 to 12 percent on your houses”. He works with one recently retired athlete, who during his football career earned in excess of $50 million with nothing left to show for it (Shinkle).

Parthemer’s sentiments are echoed by Jon Peterson of Next Level Financial Group in California. Peterson works with 18 NFL athletes and 20 college athletes expected to make it to the next level. Peterson’s philosophy is “If you're going to drink it, drive it or wrap it around your neck, that's not money management”. Working with current NFL star Steve Smith, he a “frugal millionaire”, Peterson advocates a comprehensive financial plan for his clients. Monthly Allotment

To start, Peterson divides the athlete’s money into a money market fund that will cover six months expenses, and then gives his clients a monthly stipend to smooth out their income over 12 months (Lankford, 2004). Once expenses and living allowances are established the player can begin to invest. Equity Investments The first investment made by the players is maximizing the 401K plan to enjoy the matching two to one benefit provided by the NFL. After maximizing their 401K potential, Peterson has his clients invest funds into taxable accounts, mutual funds with blue chip stocks at their core.

Once $200,000 is built into this fund, Peterson moves his clients to managed funds with ownership of individual securities which they can control to take advantage of tax outcomes based on their gains and losses (Lankford, 2004). Real Estate Peterson is not an advocate of speculative real estate purchasing for his clients, outside their primary residence. Given the risk associated with their earnings, he prefers riskier investments for the latter portion of a player’s career.

He recommends a house purchase that is mortgaged, even if the player has enough to pay for it in cash, to enjoy the interest tax benefits and to diversify risk from a single asset. He opts for the purchase of tax-free bonds to generate enough revenue to pay for the monthly mortgage payments. Further, given the nomadic life endured by many players due to trades, he has his clients choose interest only mortgages with three to five year terms, and advises his clients to set aside the balance of the mortgage, should their playing career be cut short (Lankford, 2004).

Tax Implications Lump sum signing bonuses imply large tax payments. To offset the tax implications of signing bonuses, Peterson advocates permanent residence in Texas or Florida to avoid state income taxes. Charitable donations are also recommended to clients, particularly those who have legacy interests, and many, like Steve Smith, recognize how blessed they are and want to give back. Further, Peterson advises his clients to defer taxes on their investments until after their playing days are over, when their incomes and tax brackets are lower.

Annuities, a less attractive vehicle for guaranteed lifetime income for most professionals due to fees and taxes, are an excellent investment vehicle for NFL athletes. Peterson recommends the GE Retirement Answer annuity from Gentworth Financial. After a 10 year vesting period the fund will yield regular payments for a set number of years or lifetime, with a lifetime investment performance of at least 5%, which could potentially improve with the funds performance.

If you opt for lifetime payments, there is no penalty for withdrawal for those younger than 59, and part of the income is not taxed as it is considered return of principle (Lankford, 2004). Insurance Given the inherent risk factors to the loss of playing career due to injury, the potential for crippling long-term injury, and the “bull’s-eye” factor – player’s propensity for lawsuit as public figures, insurance plays a large role in the financial plan of an NFL athlete.

Players are wise to maximize their insurance coverage, and Peterson recommends term insurance over cash value insurance due to cost and independence in managing their own investments. Disability insurance, a luxury for many working class professionals, is a necessity for NFL players. Some employment contracts can provide for players under contract, but where affordable, disability insurance is being purchased even at the college level by top prospects (Lankford, 2004).

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