Financial Planning for Professional Athletes: An Inside Look

What Is the Best Financial Planning for Professional Athletes?

Financial planning is a must for professional athletes, who are famous for burning through their six-, seven-, and even eight-figure salaries. Many pro athletes earn in a single year or a few years what the average worker may not see in a lifetime, but this can give a false sense of security.

Pro athletes make the same mistakes that others often do—helping struggling friends and family members; buying too many toys, clothes, and restaurant meals; purchasing more houses than they need; and not saving for the future. Some also fall behind on their taxes, divorce, and end up with expensive alimony and child support obligations. A compounding factor is that athletes tend to be young when they suddenly find themselves with plenty of money.

Here’s an inside look at what financial planners recommend for high-earning professional athletes who want to manage their income wisely and make it last beyond their playing years.

Financial Management Strategies for Professional Athletes

Pro athletes may receive a large paycheck, but that paycheck is only large for a few years or, at best, a decade or two, depending on what sport they play, their contract terms, how well they perform, and how injuries affect their career.

Instead, Ryan Kwiatkowski recommends saving as much as possible from day one. Kwiatkowski earned a college education while playing Division I men’s volleyball and worked as a professional volleyball player for two years in Belgium after graduation. He now works as a financial advisor for the firm his parents founded and still run, Retirement Solutions in Naperville, Ill.

“If you don’t see it, you won’t spend it, and you can still have a great lifestyle on a fraction of what you earned during a season,” Kwiatkowski says. “If you jump into a lavish lifestyle as soon as you sign but get injured during your second game of the season and don’t have a guaranteed contract, what will you do?”

Kwiatkowski also notes out that athletes who are only paid during the season need a plan to make those paychecks last all year. He says that one of the worst mistakes high-earning professional athletes make is to immediately use their massive paycheck to buy a Lamborghini or a mansion. 

Tax-Minimizing Strategies for Athletes

Tax strategies can help athletes keep as much of their earnings as possible, says certified public accountant Steven Goldstein, the partner in charge of the sports and entertainment practice of Grassi & Co., a public accounting firm in New York City. Goldstein says the following tax strategies can help:

• Choosing a proper domicile. Does the team’s home state have tax advantages for high-income earners? If not, residing in a no-tax state like Florida, Texas, or Tennessee can mean significant tax savings.
• Mitigating the jock tax. This involves projecting the tax impact of playing in various states and paying tax to those states. Players have to pay withholding tax to the visiting state for road games, but they also receive a tax credit in their home state for taxes paid in other states. If their home state has a higher tax rate, players may owe more tax than they expected.
• Understanding the impact of taxes on signing bonuses. A player’s signing bonus is only allocated to their state of domicile. If that state does not levy income tax, it can mean huge tax savings.
• Allocating professional athlete tax deductions to earned wages vs. earned income from endorsements, appearance fees, and residuals. Certain deductions can be taken as itemized deductions or as business expense deductions. A certified public accountant (CPA) can help an athlete determine which method is most advantageous.

It is also important for athletes to claim all the tax deductions they are entitled to. These include business expenses such as agent’s fees, workout clothing, gym memberships, massages, nutritional supplements, athletic equipment, and more, according to Goldstein.

Tax planning for retirement is required. Retirement contribution limits to 401(k) and IRA accounts are so low relative to what many professional athletes earn each year that athletes must do the bulk of their investments for retirement in accounts that do not have the tax advantages of 401(k)s and IRAs. Choosing tax-efficient investments is essential.

Plan for the Long-Term

“What seems like a very high income may not be when it’s amortized over the time frame of a typical career,” says certified financial planner Derek Tharp, a fee-only financial advisor and founder of Conscious Capital. “This is particularly true given the high taxes experienced by individuals with income concentrated over a short time horizon.”

Paul Ferrigno, a certified financial planner with Ferrigno Financial in Washingtonville, N.Y., recommends that professional athletes prepare a goal-based financial plan. A goal-based plan encourages athletes to focus on what is important for their future life. Such a plan is a road map to ensure that early success does not lead to poor financial habits that are detrimental in the long run.

“Creating the plan and monitoring their progress will help them obtain the financial freedom they want after their playing days are done,” Ferrigno says. “A financial plan can also serve as a road map to a second career since most players will be out of work by age 30, with much lower incomes on the horizon.”

Financial planner Lauryn Williams, a four-time Olympian champion and founder of Worth Winning, a fee-only, completely virtual, comprehensive financial planning firm focused on serving millennials and professional athletes, suggests planning for two retirements. The first retirement is from pro sports, and the second retirement is from working altogether.

“Not all athletes earn at a rate that will allow them to retire forever when their sports career is over,” Williams says. One strategy Williams recommends is setting aside money to gain time to figure out what an athlete wants to do next. “The transition is extremely emotional. You don’t want to have to jump into something to make a living while trying to get closure.”

Managing Personal Relationships

“Unfortunately, one of the biggest challenges for professional athletes is managing relationships with friends and family,” Tharp says. “Many athletes feel an obligation to give back to those who have helped them achieve success.” But this should be done in a responsible manner that does not interfere with the athlete’s own financial security. Tharp recommends quickly establishing boundaries with friends and family and involving third-party professionals to handle requests for money.

If the athlete wants to assist others, it is best to do so with clear guidelines in place, such as determining a specific sum that will be deposited into the recipient’s bank account on the first of each month.

Choosing the Right Financial Advisor

Tharp says determining which professionals to work with is tricky for young athletes—not only because of the complexities of their contracts, investments, insurance, estate planning, and tax planning but because they are bombarded by slick-talking salespeople. Such influences can make identifying knowledgeable advisors with their best interests at heart difficult.

Tharp suggests looking for a fee-only professional such as a certified financial planner (CFP) who has experience working with other athletes and who always serves as a fiduciary. Tharp says pro athletes should be wary of would-be advisors who act too much like fans because these advisors will not be able to objectively consult with the athlete as a client.

Professional athletes must understand how an advisor is compensated and what their outside conflicts of interest might be, says fee-only financial advisor Carlos Dias Jr., founder and CEO of Dias Wealth LLC, dedicated to working with current and former professional athletes as well as their agents. As a cautionary tale, Dias points to the example of Ash Narayan, a financial advisor who was approved to manage assets for NFL players but has recently been accused of cheating several clients and has had his assets frozen by the Securities and Exchange Commission.

“There has to be involvement on the part of the professional athlete to make sure their earnings are invested wisely and managed correctly,” Dias says. “I always say no one is more responsible or accountable for their own money except for themselves.”

Williams also says that it is important that professional athletes stay engaged with their money. “Athletes often think it is cool to say, ‘I have people that handle that stuff for me.'” However, according to Williams, athletes should expect their financial advisor to help them understand what they have.

Special Considerations for Athletes

Professional athletes face some of the same financial challenges that the average person faces, for example, not saving and investing properly for retirement, being tempted to overspend, and wanting to help struggling friends and family. They also face the unique challenge of receiving a large percentage of their lifetime earnings over a short time frame, which requires special tax planning and wealth management strategies.

Understanding what the potential pitfalls are and knowing how to hire a trustworthy advisor can go a long way toward helping pro athletes turn a huge but short-term paycheck into a lifetime of financial stability.