Financial planning is a must for professional athletes, who are famous for burning through their six-, seven- and even eight-figure salaries and ending up broke. Many pro athletes earn in a single year or a few years what the average worker may not see in a lifetime, yet they make the same mistakes the rest of us do – trying to help 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, get divorced and end up with expensive alimony and child-support obligations. It probably doesn't help that athletes tend to be very young when they suddenly come into all that money.

Here’s an inside look at what financial planners recommend for high-earning professional athletes who want to manage their income wisely and make it last beyond their playing years.

Pro Athletes: Pay Yourself First

The same advice that applies to all of us is especially important for pro athletes who get a large paycheck that they will only receive for a few years or, at best, a decade or two, depending on what sport they play, their contract terms, how well they do and how injuries affect their career.

Ryan Kwiatkowski earned a college education while playing Division I men’s volleyball and worked as a professional volleyball player for two years in Belgium after graduation. He now works as a financial advisor for the firm his parents founded and still run, Retirement Solutions in Naperville, Ill. He says that one of the worst mistakes high-earning professional athletes make is to immediately use their massive paycheck to buy a Lamborghini or a mansion.

Instead, he recommends putting away as much money as possible from day one. If you don’t see it, you won’t spend it, and you can still have a great lifestyle on a fraction of what you earned during a season, Kwiatkowski says. If you jump into a lavish lifestyle as soon as you sign but get injured during your second game of the season and don’t have a guaranteed contract, what will you do?

Kwiatkowski also points out that athletes who are only paid during the season need a plan to make those paychecks last all year.

An Inside Look at Minimizing Taxes

Tax strategies to help athletes keep as much of their earnings as possible are key, says certified public accountant Steven Goldstein, the partner in charge of the sports and entertainment practice of Grassi & Co., a public accounting firm in New York City. He 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. (Related reading: Overall Tax Burden by State.)
  • 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 get 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. (See The Most Outrageous Taxes.)
  • Understanding the impact of taxes on signing bonuses. A player’s signing bonus is only allocated to his state of domicile, so if that state doesn’t levy income tax, it can mean huge tax savings. (See also Can moving to a higher tax bracket cause me to have a lower net income?)
  • 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 figure out which method is most advantageous.

It’s also important for athletes to claim all the tax deductions they’re entitled to. These include business expenses such as agent’s fees, workout clothing, gym memberships, massages, nutritional supplements, athletic equipment and more, according to Goldstein.

Tax planning for retirement is important, too. Retirement contribution limits to 401(k) and IRA accounts are so low relative to what many professional athletes earn each year that they’ll have to do the bulk of their investing for retirement in accounts that don’t have the tax advantages of 401(k)s and IRAs. Choosing tax-efficient investments is essential. (See A Beginner’s Guide to Tax-Efficient Investing.)

Think Long-Term

“What seems like a very high income may not be when it’s amortized over the time frame of a typical career,” says certified financial planner Derek Tharp, a fee-only financial advisor and founder of Conscious Capital. “This is particularly true given the high taxes experienced by individuals with income concentrated over a short time horizon.”

Paul Ferrigno, a certified financial planner with Ferrigno Financial in Washingtonville, N.Y., recommends that professional athletes prepare a goal-based financial plan. A goal-based plan helps them focus on what’s important for their future life and provides a road map to get there so that early success doesn’t lead to poor financial habits that hurt them in the long run. “Creating the plan and monitoring their progress will help them obtain the financial freedom they want after their playing days are done,” Ferrigno says. “A financial plan can also serve as a road map to a second career since most players will be out of work by age 30, with much lower incomes on the horizon.” (See Why the Prices of Sports Tickets Vary So Much and 8 Money-Saving Tips for Sports Fans.)

Financial planner Lauryn Williams, a four-time Olympian and founder of Worth Winning, a fee-only, completely virtual, comprehensive financial planning firm focused on serving Millennials and professional athletes, suggests planning for two retirements – the first from pro sports and the second from working altogether. “Not all athletes earn at a rate that will allow them to retire forever when their sports career is over,” she says. One strategy she recommends is setting aside money to give yourself time to figure out what you want to do next. “The transition is extremely emotional. You don’t want to have to jump into something to make a living while trying to get closure.”

Manage Relationships with Financial Advisors and Others Wisely

“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 doesn’t 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 assist others, it’s best to do so with clear guidelines in place, such as determining a specific 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 also because they are bombarded by slick-talking salespeople who make it hard to identify knowledgeable advisors with their best interests at heart. He 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. He says pro athletes should be wary 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. (You may also want to read The Pros and Cons of Sports Investing.)

Professional athletes need to understand how an advisor is compensated and what his or her outside conflicts of interest might be, says fee-only financial advisor Carlos Dias Jr., a founder and managing partner at MVP Wealth Management Group, which works with NFL, NBA, MLB, NHL and MLS athletes and their agents. But athletes should not rely on advisors to handle everything, he says. As a cautionary tale, Dias points to the example of Ash Narayan, a financial advisor who was approved to manage assets for NFL players but has recently been accused of cheating several clients and has had his assets frozen by the Securities and Exchange Commission. (Learn more in our Online Investing Scams tutorial.)

“There has to be involvement on the part of the professional athlete to make sure their earnings are invested wisely and managed correctly,” Dias says. “I always say no one is more responsible or accountable for their own money except for themselves.”

Williams, too, says it’s important for professional athletes to stay engaged with their money. “Athletes often think it is cool to say, ‘I have people that handle that stuff for me.’ They feel overwhelmed when someone in a suit throws a lot of financial jargon at them and say, ‘This guy sounds really smart. I will just let him take care of everything,’” she says. But you owe it to yourself to have the person you pay to manage your money help you understand what you have. (See How to Find a Financial Advisor You Can Trust.)

The Bottom Line

Professional athletes face some of the same financial challenges that the rest of us do, such as 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.

Understanding what the potential pitfalls are and knowing how to hire a trustworthy advisor can go a long way toward helping pro athletes turn a huge but short-term paycheck into a lifetime of financial stability. (For further reading, check out Major League Baseball’s Business Model and Strategy.)

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