I Manage Money for Pro Athletes: 6 Major Mistakes That Cause Them To Go Broke
Written by
Gabrielle Olya
Edited by
Amber Barkley
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It’s all too common to hear about a professional athlete that went from making millions of dollars to going bankrupt shortly after they retired. Many of these athletes go from having nothing to having more money than they know what to do with, so it’s not too surprising that they commonly make missteps that could lead them down a bad financial path.
Chad Willardson, president of Pacific Capital, mentors ultra-high-net-worth individuals and several major athletes, so he knows firsthand what mistakes often make professional athletes go broke. And while you may not have a multi-million-dollar contract, many of these mistakes are important for everyone to be aware of.
They Don’t Establish Financial Goals
Without setting clear goals, athletes may simply not know what to do with their money.
“Before recommending any specific financial strategy or investment options for professional athletes, I want to make sure that we understand very clearly what their long-term goals are,” Willardson said. “Their long-term goals determine the investment strategy and the investment options that are presented to them.”
They Jump on Investment Opportunities Without Properly Evaluating Them
The lack of forward financial planning can also lead athletes to make impulsive investment decisions.
“What I’ve seen many professional athletes do is they get a lot of money and make investment decisions based on the potential excitement around an investment idea or new business idea,” Willardson said. “Opportunities come their way because they’re famous, and they evaluate the investment based on a forecast and the presentation, rather than thinking about the investment and how it relates back to their financial plan — because typically, they did not create an in-depth financial [plan] to begin with.”
They also can get caught up in “get-rich-quick” types of investments.
“They hear some other athletes are putting money into it, so they decide to put money into it, and it ends up being a real bad deal,” Willardson said.
They Forget To Account for Taxes
Taxes can take a significant chunk out of a signing bonus or seven-figure-plus salary, and Willardson said that his pro athlete clients often underestimate how much they will need to set aside to cover taxes owed.
“A new NBA player was only 19 when he became our client, and he had signed his first big deal for many millions of dollars. He knew there were taxes that were going to be due, but he didn’t realize how significant that would be,” Willardson said. “He also didn’t realize that he would be paying taxes in over 20 different states, because they pay taxes in every state that they have games. When it came down to the actual number of how much money he was going to keep, it was way less than what he expected, because those taxes were nearly 50%.”
They Don’t Plan for the Worst Case Scenario
Some athletes will have to retire before they originally planned due to injury or other circumstances. A lack of planning for the “worst case scenario” can put an athlete in a bad financial situation if they are forced to retire early.
“We want to discuss the best case scenario for their professional athlete career and the worst case scenario,” Willardson said. “How can we put some safety nets in place with their newfound money to protect them against the potential of not having the ideal professional sports career that they’re hoping for?”
They Take Bad Financial Advice
Whether well-meaning or not, many people will chime in with financial advice when an athlete comes into a lot of money — and it may not be the best advice.
“They often take financial advice from the wrong people,” Willardson said. “They don’t work with an independent fiduciary who is legally bound to give objective and independent advice and put your interests first. Unfortunately, 95% of financial advisors in the U.S. are not independent fiduciaries, so most likely, they’re talking to people who are brokers, agents and salespeople who are not required legally to put their interests first. A huge contributor to professional athletes [going broke] is bad financial advice.”
They Don’t Keep Lifestyle Inflation in Check
Many people give into lifestyle creep as their income rises, but this can be particularly problematic for professional athletes.
“They often have a lot of pressure to maintain a lavish lifestyle and high spending habits,” Willardson said. “They might have to financially support family and friends, which is a significant drain on their money. If they don’t do a deep-dive financial plan, they might think they’re OK withdrawing and spending the amount they’re withdrawing and spending, and then come to find out it was way too high of a withdrawal rate.”
This is particularly problematic when you only have income coming in for a limited amount of time.
“They could have a short career, so their earnings window is really short,” Willardson said. “They’re not going to be able to add money.”
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