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It is a well-known fact that many professional athletes rake in a significantly higher income compared to other careers. Knowing this, it is still alarming how many of these professional athletes end up declaring bankruptcy after their illustrious careers. According to one source, as many as 78% of NFL players, 60% of NBA players and a significant number of MLB players file bankruptcy five years after retirement. These staggering statistics leave us wondering what on earth happened. How can someone go from making millions to declaring bankruptcy in as little as five years? The truth is that without proper financial planning, this is a probable end to a professional athlete's financial success. For this reason, every professional athlete should take steps to secure his or her financial future early by having a clear and realistic financial plan.
One of the top reasons for bankruptcy is the lack of control when it comes to spending. How can professional athletes take advantage of financial planning? The first step is by accepting that financial planning is an essential part of wealth management. A thorough financial plan should address cash-flow with income, expenses, taxes and asset protection.
Given the fact that the career of a professional athlete is relatively short, it is important that a financial plan be implemented to ensure that funds are accessible during the athlete’s non-productive years. It is highly recommended that athletes work with wealth management specialists who are able to guide them in the prudent management of their financial resources.
Income
The average salary for a professional athlete varies depending on which sport they are involved in. The average professional's salary can range between $308,969 to upwards of $6.2 million per season. Even though the salaries vary so widely, the wealth management approach for each should be similar. It should involve the creation of a realistic budget as well as cash flow considerations. Since the earning period of an athlete is shorter than that of most other careers, cash flow plans should be carefully devised. The plan should ensure that there is a positive cash flow throughout their career and into retirement.
Expenses
One of the biggest mistakes that professional athletes make is spending lavishly without considering how it affects their long term financial situation. Every athlete’s expenses should include an allocation to savings and investments. These investments should be able to generate sufficient income for the athlete to cover projected expenses throughout their career and during their retirement years. Their dependents should also be adequately accounted for in these plans. A qualified wealth manager should be able to help with the creation of an investment portfolio tailored to meet the needs of the athlete.
Taxes and Asset Protection
Taxes can eat into a sizeable chunk of an athlete’s earnings. In fact, athletes can lose 45% or more of their income to taxes. The good news is that there are several ways that someone can reduce their taxes legally. Athletes should speak with their accountants to determine the most effective way they can reduce their tax liability and protect their assets against creditors. By structuring their assets strategically, an athlete’s tax liability can be significantly reduced.
The way a professional athlete’s estate is structured determines whether their assets are protected from creditors or not. It is vital that athletes take steps to carefully structure their estates so that their interests are protected. A carefully drafted wealth management plan for professional athletes is the first step towards financial security for a professional athlete and his dependents.