Professional athletes earn millions and millions of dollars, and they often need help managing this money to stay out of the all too common trap of going broke once they retire. And while they’re dealing with more money than most of us ever will, many of the financial management lessons that are true for them also hold true for the rest of us.
GOBankingRates spoke to Wes Hedrick, CFP and private wealth advisor at Westwood Wealth Management, who has worked as a wealth advisor for professional athletes for years, to get his top tips for financial management — both for athletes and for anyone else who wants to live well and retire rich.
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1. Live Within Your Means and Invest Early
Although this rule of thumb holds true for everyone, it’s even more vital for athletes.
“The average person works until they’re 65 to 70 years old before retiring. IRS mortality tables tell us that the average man lives to about age 86, and the average woman lives to about age 89. Therefore, on average, retirement assets have to last at least 15 to 20 years,” Hedrick said. “For most professional athletes, their retirement is the opposite — they peak in earnings in their 30s and 40s, and generally are retired by age 45. That’s at least 20 years sooner than the normal retirement age. This fact alone puts a lot more emphasis on living within your means and investing [early].”
To ensure you’re living within your means, create a budget that accounts for your monthly income and expenses. Consider investing any of the leftover funds each month into a retirement or brokerage account — the earlier you invest, the more time your money has to grow thanks to compounding interest.
2. Diversify Your Investments
“Diversity is key — you can’t put all of your eggs in one basket,” Hedrick said. “An athlete shouldn’t depend on any one investment to beat inflation and last a lifetime.”
The same goes for non-athletes — be sure to diversify your portfolio with a mix of investments.
“Like all investors, you should spread your assets around different asset classes, within reason,” Hedrick said.
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3. Find a Trusted Advisor
“A trusted advisor can help assess investments worth your time and money, and how much you should allocate to the stock market versus private investments, real estate and other alternative investments,” Hedrick said.
But as with athletes, you shouldn’t trust your money to just anybody. Be sure to do your research to ensure that the advisor you choose is qualified and will keep your best interests in mind when making any decisions.
“It is important that an advisor be held to a fiduciary standard, which means that the advisor will act in the athlete’s [or your] best interest and not only do what is ‘suitable,'” Hedrick said. “Seeking an advisor who has an education and credentials — for example, CFP, CFA or PFS — is also worthwhile.”
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4. Establish an Estate Plan
“An estate plan is important because if you have worked hard enough to earn generational wealth, you should ensure that it passes to the next generation — or however you want it to pass — seamlessly,” Hedrick said. “With no estate plan in place, athletes often have estates that subject them to the 40% estate tax.”
To ensure your future generations don’t get hit with these high taxes, start making plans now.
“Having a solid estate plan can help minimize the amount of taxes paid to the IRS upon your death,” Hedrick said.
5. Build Credit
Even if you are able to pay for everything in cash, it’s important to build credit ASAP. This is a lesson Hedrick often has to teach his professional athlete clients.
“As a young high earner, it can seem best to pay for everything in cash. Too often, I am helping a retired high earner establish a credit history because they have always been able to pay in cash,” he said. “Establishing credit is important — especially in retirement. Small things like leasing a vehicle that you might not keep long term or getting a mortgage instead of buying a home outright, might prove valuable later in life.”
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