by
Beth Buckley Morgan
Family Business Wealth
Wait. What?!! Shouldn’t it be the other way around? Didn’t he just hit jackpot? While most families appreciate and respect the fact that this money was earned by their athlete, there may be others in his life who have a different perspective on his newfound wealth.
You were his first fan. Early morning practices, long days, late nights with piles of homework, endless laundry. Through school, he sacrificed for the sport that he loves. You did too. The cost of training, team fees, travel by car, boat, rail & plane, hotels, eating out, new equipment, missed work, injuries… the financial aspects of moving your athlete from t-ball to the big stage are substantial.
Now that he is gaining national recognition, he is receiving offers that include signing bonuses and salaries with many zeroes. As this whirlwind begins, it is important to cheer for and support your athlete in new ways, financial being one of be most important. As a trusted adult in his life, your presence through this process, both on the field and in business encounters, at least initially, may be helpful.
- Educate yourself. As a young adult, your athlete may not have had much experience managing money. According to a study published by the US Council for Economic Education (referenced in a Jan 2016 CNBC article), schools in the US are making progress in offering personal financial management in some areas, but are still falling short in other ways. Perhaps money has not been discussed much at home. Maybe you don’t feel completely comfortable with the subject yourself. That’s ok. This is the perfect time to start learning the language of money and raise your level of confidence in this area. When substantial amounts of money are suddenly available, it may be tempting to spend and is very easy to make costly mistakes. There are far too many stories of famous athletes, actors and lottery winners who had it all then lost it. Don’t follow their lead.
- Hiring a wise financial team is smart. Your financial team should be able to help you see the future based on sound financial discipline. Topics to discuss should include personal goals, financial education, income needs, tax implications, budgeting, asset allocation, growth scenarios. Your financial team needs to be approachable. They need to return your calls in a timely manner and respectfully answer questions that you may feel are ‘stupid.’. Know that there are no stupid questions. You are learning a new language. Take your time. Ask those questions, more than once if necessary.
- These may be his peak earning years – Making money like this may continue through the years. Statistically, though, planning as if income at this level may not continue is the better course of wisdom.
- Bank 75% and live on the rest – this percentage is not hard and fast but sets the precedent for living modestly and putting these assets to work in a way that can create a substantial nest egg. Compounding interest, tax deferred/tax free growth, particularly at his age, can yield meaningful results. Let’s say that your athlete receives a $1 million signing bonus. Using this formula, $750,000 is set aside for the future leaving $250,000 for current needs. 10% of this amount is designated for fun and 10% for giving. The remaining $200,000 would be available for living. In this example, these funds were invested at age 21 with a targeted retirement age of 65. Let’s say that this athlete was able to save an additional $2,000 per year towards retirement. The $750,000 plus the $88,000 retirement contributions growing a 7% annually would result in savings at retirement before tax of $15,290,843. Assuming an inflationary rate of 2.9%, this asset may produce an after tax monthly income of $17,487 (in today’s dollars) (bankrate.com retirement income calculator)
- But set money aside for fun – having money can open many doors. There will likely be countless opportunities to spend it. Your athlete should splurge a little. Much time and effort went into earning it. Encourage him to choose wisely, though, and to be smart.
- And for giving – your athlete’s new opportunity has likely made the news and, giving whether explicitly or assumed as to the amount, hands will reach out. Giving is wonderful and provides the ability to do much good. Designating funds to give places limits so that giving does not get out of control. When this amount has been given, know that there are many other ways for him to give back, like with his time.
- Don’t rush. There may be time sensitive items that must be addressed, like taxes; beyond this, though, encourage him to enjoy knowing that there is cash in the bank for a period of time while he gets his bearings, learns and considers his opportunities. With the help of his financial team, create a plan and make sure that he – and you – understand it.
Enjoy this new season in the life of your athlete. Stay informed, but give him space. He is an adult, after all. That said, being that trusted presence, a sounding board, his biggest fan, should give him the confidence to focus on the sport than he loves.
You can contact Beth Morgan at: [email protected]
‘He’ is the pronoun used throughout for ease of discussion
Securities offered through LPL Financial
Member FINRA/SIPC
The hypothetical example above is not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. Investing involves risk including loss of principal.
