Avoiding The ‘Broke Athlete Phenomenon’

22054991_mOn Monday I couldn’t help but listen to sports radio after the pounding the Patriots gave Indianapolis in the AFC championship game. As I was flipping between channels, I heard something really interesting. Did you know that within two years of retirement, 78 percent of NFL players are under financial stress or in bankruptcy?
Hmm. I started thinking.
How can that be? These guys make millions of dollars a year! I thought this must be a hoax, so when I got to the office I started googling around. Do you remember Wayne Newton, Mike Tyson, Stephen Baldwin and MC Hammer? They have one thing in common; they’re all bankrupt. Heck, even seven-time NFL Pro Bowler Warren Sapp is broke. Lawrence Taylor is in the process of selling his Super Bowl rings.
All of which raises the question, if these millionaires went broke so quickly—what chance do we stand? What made these guys lose all their money?
Surprisingly enough, these athletes and entertainers go broke for many of the same reasons that so many of us regular folks go broke.
First, they often find themselves suddenly and unexpectedly out of work. They may not have planned to retire when they did, but something happened that forced them into early retirement. NFL players get cut from their teams and actors fall out of favor. Whatever the reason, a sudden loss of income seems to be one of the top reasons why athletes and entertainers find themselves in financial distress.
Folks, it’s unfortunate but true, the older we get, the more likely it is that something is going to happen that is going to force us to rely on our retirement savings a bit earlier than we were hoping to, even if we don’t lose our jobs. Whether it’s an injury, an accident, or a pipe bursting in our home, planning for the unexpected is an important part of life. Regrettably, most people fail to prepare adequately and find themselves dipping into their retirement savings early—which can have catastrophic effects down the line.
Sudden market corrections can also cause many to lose substantial wealth. Nobody, no matter their fame or fortune, is immune from sudden market corrections, unless there is a strategy in place to minimize those market downturns. The stock market is often referred to as “cyclical” because it goes up and it goes down. When we’re young and we have all of our lives ahead of us we can afford to ride those waves and capture the general upward trend of the markets. However, as we get closer to retirement or as we actually enter retirement, the amount of time we have to recover from losses shrinks. Especially when you consider the compounding nature of retirement losses.
The third reason why many people find themselves with far less money in retirement than anticipated is that they are simply getting bad advice. One thing that all retirees have in common, whether they are retiring from an NFL career or from a job at the local supermarket, is that they need specialized financial planning. You only retire once (as long as you do it right), so make the effort to plan correctly. Make sure you speak to a retirement expert whose strategy is focused on capital preservation. And the advice you follow should be specific to you, and make sure that retirement planning is not just a “side” business for the person from who you seek advice.
Lastly, it is my opinion that some athletes and celebrities simply lack an understanding of money. Before I started looking into what I call the “Broke Athlete Phenomenon,” I just assumed that athletes and entertainers were wasteful with their money. However, it seems that the biggest problem they face is having no experience with their current financial situation. Many wealthy individuals do not even know how to balance their checkbook and sadly, some of the people surrounding them are looking to take advantage of their good fortune.
I tell my clients that money is one big math equation. If you make $20 million a year and spend $21 million, you are in debt. Spending, without saving, is a losing proposition regardless of how much money you have. You see, it’s not the money you make; it’s the money you keep.
Be vigilant and stay alert, because you deserve more.