Why Athletes Go Broke

Investing News

Pro athletes often come under fire for making too much money. Yet a surprising number are far from the top of their game when it comes to managing their wealth.

A 2009 Sports Illustrated report estimated that 78% of National Football League (NFL) players file for bankruptcy or are experiencing financial stress only two years after retiring, and 60% of National Basketball Association (NBA) players suffer the same fate after five years of retirement. The National Bureau of Economic Research found in a 2015 study that close to 16% of NFL players filed for bankruptcy within just 12 years of retirement.

Why have so many pro athletes who were once wealthy later found themselves broke? More importantly, what can we learn from their financial stumbles?

Key Takeaways

  • Despite the fortunes that top pro athletes earn, a surprising number end up going broke not long after they retire and sometimes before then.
  • Pro athletes have relatively short careers, and their earnings must sustain them over a lifetime.
  • Overspending as well as a lack of financial knowledge and planning are how some of the most iconic athletes have ended up broke.

Famous Athletes Who Went Broke

Here are just a few of the high-profile pro athletes who have gone broke.

  • Former heavyweight boxing champion Mike Tyson, who was once worth up to about $400 million, spent most of that fortune and declared bankruptcy in 2003 even before he retired.
  • Olympic and World Championship figure skater Dorothy Hamill turned pro soon after her 1976 gold medal win. She earned millions skating in professional shows like the Ice Capades, and eventually purchased the show. Yet by 1996, “America’s sweetheart” had declared bankruptcy.
  • Basketball superstar Allen Iverson earned over $150 million in the NBA, and even more through sponsorship deals. But in 2012, Iverson’s financial straits were revealed when a judge ordered him to pay a jeweler $860,000, and he said he couldn’t pay.

Reasons Athletes Go Broke

Pro athletes who get into financial trouble have a few things in common when it comes to how they lost their fortunes, including having a small earnings window, a lack of financial knowledge, and overspending.

Small Earnings Window

Pro athletes have the challenge of a very short career. Though more traditional careers may allow a person to work for 30 to 50 years, a professional athlete will work only a fraction of that time—often fewer than five years. This leaves the retired athlete with the job of managing what they have earned to last for the rest of their life.

Two of the authors of the National Bureau of Economic Research study, Annamaria Lusardi and Colin Camerer, suggest that ideally, there should be a compensation system that offers players the option of a series of payments over a long period of time, providing a stable standard of living. Some players wisely set up their own systems to manage their earnings spike over the long term. Take Detroit Lions player Glover Quin, who earned some $33 million over his 10-year NFL career. He decided early on that he and his family would live on 30% of his take-home pay, saving and investing the remaining 70%, mainly in well-known publicly traded companies.

Most of us don’t have such a small earnings window (or large paycheck), but the lesson to learn here is that our income is never guaranteed. The pandemic unexpectedly disrupted many financial lives. And a 2018 data analysis by ProPublica and the Urban Institute found that more than half of older U.S. workers were pushed out of previously stable longtime jobs before they choose to retire. Setting aside an emergency fund and planning for the unexpected is always a wise idea.

Lack of Financial Knowledge

Young athletes who are drafted onto a pro team are suddenly wealthy at a very young age. It’s a rare 20-something who’s prepared for that. They often lack the financial knowledge to manage the large sums of money they’re earning, according to Sports Illustrated. And they’re mostly focused on getting on the field and scoring points. Contrast that with someone who inherits family wealth or builds a business over decades. They have time to learn about managing that money and a network of long-standing, trusted, and knowledgeable connections to help them.

Tyson and Iverson are among many athletes who didn’t plan ahead and budget for the funds they would need later in life but instead lived a lifestyle based on their peak earnings. Iverson is now waiting to cash in on a $32 million rainy-day trust fund sponsored by Reebok as part of a previous deal he made with the brand. But he can’t access the trust fund until 2030.

Comprehensive money-management training programs for players could offer them information that goes beyond simple recommendations for investments or rookie camp workshops, according to Lusardi and Camerer. Their suggestions for players—figuring out how far into the future their money can last and how to build a budget that allows them to achieve their objectives—are good advice for anyone, though.

Regardless of your net worth, you have to play an active role in the management of your financial affairs. Even the best money manager won’t care about your money as much as you do and, for that reason, you have to be the final and most important decision maker. And those decisions have to be made based on your financial knowledge.

If you know very little about managing money, it’s not too late to change that. Financial literacy and money management education will help you understand everything from the rewards of compound interest to how financial markets work and develop healthy financial habits.  

In June 2021, the U.S. Supreme Court ruled that the National Collegiate Athletic Association (NCAA) can’t limit education-related benefits—such as paid internships and postgraduate scholarships—for athlete recruits. There has been a long-standing controversy over the sizable revenue generated by college sports. The players, who actually create the income, see none at all. The NCAA maintains not compensating athletes preserves amateurism in college sports.

Overspending

Many of the athletes who find themselves broke are big spenders. They make the mistake of matching their spending level to what their peak earnings allow (or beyond). When those earnings end, the payments due on houses, cars, and a lavish lifestyle continue—and the athletes fall off a financial cliff.

Good, long-term money management is contrary to the accumulation of “stuff.” Billionaire Warren Buffett may be as famous for his modest lifestyle as he is for his wealth. NFL player Glover Quin drove the same SUV for years. “I never had a Bentley. I never had a Maserati,” he told NBCSports. “My wife and I lived well. We just didn’t live extravagantly.”

Athletes’ spending isn’t all on material luxuries. It’s also easy for players to become cash machines for family and friends who need support or are hopeful entrepreneurs. “There’s a pressure that comes with being the African-American success story,” wealth manager Humble Lukanga told The Washington Post. (Lukanga manages some $500 million for mostly Black clients in sports and entertainment.) “You are some community’s pride and joy. And that community has protected you. That community has given you free haircuts when you couldn’t afford it. That community has sponsored your football teams, your basketball team.” Even a multimillion-dollar salary only goes so far, though. Armed with sound financial knowledge, young athletes can budget for being generous with their community without putting themselves at financial risk.

Regardless of your level of income, live a lifestyle that doesn’t stretch your budget. Not only will it set you up for financial freedom, but it’s far easier to sleep at night when you’re not worried about the next paycheck.

Are There Famous Athletes Who Are Role Models for How Not to Go Broke?

Yes, there are great examples of iconic athletes who’ve achieved enduring financial success. The richest athlete of all time is basketball superstar Michael Jordan, whose $2.1 billion fortune was built from his NBA income, sponsorships, and investments, including a majority stake in the Charlotte Hornets. NBA player Earvin “Magic” Johnson formed Magic Johnson Enterprises years before he stopped playing and has built it into a $1 billion conglomerate. Serena Williams won more tennis Grand Slams (23) than any other player and four Olympic gold medals. Her career prize money made her the second highest-paid woman athlete, and she’s put that—and income from almost 20 corporate sponsorships—to good use in diverse business interests and her own venture capital firm, Serena Ventures.

How Can Pro Athletes Avoid Going Broke?

Financial literacy education before any contracts are signed, ongoing money management training beyond rookie camp workshops, and compensation structures that pay out over time would be helpful. The key for young pros is to manage a short spike of high income so that it lasts a lifetime.

Why Is Retirement Planning So Challenging for Pro Athletes?

Compared to most people, pro athletes have very short careers. And if a contract isn’t renewed or a player gets injured, a career can be cut short unexpectedly. So at a young age, players must do the sophisticated financial planning and investing needed to make those early earnings sustain them for a lifetime.

The Bottom Line

Take a cue from the many athletes who have found themselves broke later in life. Spending so much that you can’t save anything or invest for a secure future is a losing proposition regardless of how much money you have. If you don’t consider yourself a good money manager, ask for help.

Articles You May Like

7 Retirement Stocks to Buy in July
3 Undervalued Blue-Chip Stocks to Buy in July 2022
Unemployment Rates: The Highest & Lowest Worldwide
6 Low-Tech Stocks With Good Yields and Buybacks
4 Best 5G Stocks to Buy Now