Professional baseball players face many of the same financial hurdles that we all do such as curbing our spending, increasing our savings, and financially preparing for the future. However, they face the unique challenge of earning a high-income for a short period of time early on in their lives, making long-term financial planning seem less pertinent. This unusual earning structure, combined with limited experience handling money, is most often why professional athletes are notorious for blowing through a lifetime of income with a lot of life left to live. With so much focus on perfecting their athletic abilities, financial planning often falls by the wayside.
Here’s a closer look at some of the top financial hazards professional baseball players encounter in their lifetime and how they can handle them for a healthy financial future long after they’ve left the field.
Overestimating How Long Their Money Will Last
In traditional careers, individuals typically work to increase their income over time, whether that is by moving up the corporate ladder or improving the client base of their own business. As such, the majority of individuals will end their career at their highest earning potential, giving them ample time to learn how to manage their money.
The opposite is true of professional baseball players. These athletes certainly earn a great deal of income, but it is earned very quickly and at a very young age. In these cases, as is often the case with lottery winners and inheritors of large lump sums, this sudden influx of money can provide a false sense of security, promoting both overspending in the near-term and underpreparing for the long-term.
It’s not always easy for a young, ambitious athlete to put future goals in perspective when the large paychecks start showing up on their doorstep. They often fail to recognize that yes, while their income is more than some people will ever make, it isn’t quite as substantial when it is spread out over a lifetime.
Furthermore, the things that seem to matter now, may not mean as much in the future. The money spent on a few luxury vehicles in youth could potentially replace years of income in retirement when invested and given time to compound.
It’s important for young athletes to sit down and think about what they imagine their lives looking like after they retire from sports. Do they have a next career in mind? Or will they save enough to take a few years off before re-evaluating? With younger and younger athletes entering Major and Minor League Baseball, some athletes will “retire” from their professional baseball career before they hit age 30! If they live into their eighties, that’s fifty plus years of life left to fund.
Financial planning gives them options. We see so many professional athletes retire from sports and have to jump right into a less than desirable career role only to barely keep up with the lavish lifestyle they built earlier on. This can make the transition from professional sports to “regular life” pretty rough, resulting in depression, marital issues, and more.
Higher income means higher taxes, and many professional athletes fail to recognize this until cumbersome tax bills devour large portions of their income. Devising a tax planning strategy early on will help to keep the most money in the athlete’s bank (and not the IRS’s).
As with other high-income earners, professional baseball players will benefit either from (1) living in a state with tax-advantages for high-income earners or (2) choosing a no-tax state like Florida, Texas, or Tennessee to call home. Domicile choice can potentially lead to hundred of thousands of dollars in tax savings.
Unique to professional athletes is the Jock Tax, which is the side-effect of playing in and earning money in various different states. While players will have to pay withholding tax to states they visit and play in for non-home games, they will receive a credit in their home state for taxes paid elsewhere.
However, some home states have a higher tax rate, which means players may owe more than they originally anticipate. For example, if the Red Sox visit Florida to play the Miami Marlins, their checks for that game will be higher than they would at home since Florida is a no-tax state; however, they may need to make up the difference on their state and federal taxes later on.
The Jock Tax can make tax preparation quite complicated, especially for a player with other income sources such as endorsements, signing bonuses, and public appearances. It’s best to consult with a professional to help sort through the various regulations and prepare for the tax bill ahead.
Choose a Professional You Trust and Stay Involved
Tax planning, retirement planning, contract negotiation, money management, investment management, gifting, estate planning, and planning for life after professional sports can be overwhelming, and life-changing. The way an athlete financially plans for his or her future outside of sports will drastically change the type of life that individual will be able to enjoy once those high-income checks stop rolling in.
But, with a fan-based career, professional athletes can find it difficult to locate someone trustworthy enough to help them manage their money and protect their income. The key is to find an advisor who will always be open and involved and that communicates with you on a regular basis. While you may prefer a more hands-off approach once you’re comfortable with your arrangement, it’s important to always be aware of what your money is doing for you. Life is tricky and ever changing. Circumstances can turn at a moment’s notice and very little is guaranteed. But, with a solid financial framework in place, you’ll be better positioned to weather life’s changes and enjoy what the future has to offer.
If you are a working or retired professional athlete and are looking to put a financial plan in place, we’d love to sit down and chat with you about your current situation, future goals, and see if Harbor West might be a good fit for your needs. Our goal is to help you use your income to provide a comfortable life both in your professional baseball career and afterward.
This information is provided for general purposes and is subject to change without notice. Every effort has been made to compile this material from reliable sources; however, no warranty can be made as to its accuracy or completeness. Before acting on any of the information, please consult your Financial Advisor for individual financial advice based on your personal circumstances. Neither Harbor West nor Geneos Wealth Management, Inc. provide tax or legal advice. Harbor West is a division of NorthEast Community Bank. Securities and advisory Services offered through Geneos Wealth Management, Inc. FINRA/SIPC Investment Advisory and Financial Planning Services offered through Geneos Wealth Management, Inc. Investments are not FDIC Insured. Investments are not deposits of the financial institution and are not guaranteed by the financial institution. Investments are subject to risks including loss of principal.