4-18-16 Second Semester (1)

FINANCIAL PLANNING FOR PROFESSIONAL ATHLETES

A Report of a Senior Study

by

Connar Benson-Epstein

Major: Finance/Accounting

Minor: Economics

Maryville College

Spring, 20165

Date approved , by

Faculty Supervisor

Date approved , by

Division Chair

ABSTRACT

Out of the billions of people that are on this planet, only a select few percent have

the honor of calling themselves a professional athlete. Although most of these athletes

have high incomes, their careers are short lived due to the amount of physical stress they

put their bodies through. Due to the short career span of an athlete most of them are

forced to retire before their thirtieth birthday. Unfortunately there is no concreate plan for

these athletes to follow to ensure they sufficiently manage their money to ensure financial

security for the years beyond their playing days. Due to this lack of planning on the front

end, countless ex athletes file for bankruptcy every year. The mission behind this thesis is

to financially educate athletes, on a very basic level, in hopes to decrease the number of

athletes that go broke due to their lack of planning.

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TABLE OF CONTENTS

Page

Chapter IIntroduction to Financial Planning 1

Chapter IIWhat a Plan Should Look Like 710

Chapter IIIThe Financial Game PlanTitle of Chapter 173

Chapter IVTitle of Chapter 4

Works Cited Works Cited 315

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CHAPTER I

INTRODUCTION TO FINANCIAL PLANNING

The Financial Service Industry has been revolutionized in the past eighty years or so

from firms originally satisfying a consumers’ individual needs to now moving toward more

comprehensive, full circle, financial planning service firms. Although stock brokers,

insurance specialists, investment specialists, etc., still exist independently, firms have

realized the need for one comprehensive financial plan. The days of the Wolf on Wall Street

or The Boiler Room type scenarios of hundreds of men franticly calling people to get them

to buy financial products are not as common as they use to be due to technology. Websites

such as E*TRADE or Scottrade have made it cheaper for the average person investor to

play the markets. Firms have found more of a market for people wanting and needing

individualized and personal financial plans that fit their unique lifestyle.s that These plans

help answer questions likesuch as: am I on track for my expected retirementwhat is my

retirement going to look like? What happens if I get sick or injured? Will my family be

financially secure if I was to die? This new platform of the financial service industry is

more about educating clients and building trust than it is about getting pushing products on

people to buy.

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The gurus of this full circle planning process are agents who have taken countless

courses and achieved a number of licenses to earn the title of Certified Financial Planner

(CFP). Although not all financial advisors are certified financial planners most people feel

more comfortable entrusting someone with such designation because CFP’s are considered

to be the doctors of the financial planning world. It is said that a CFP must have the four

E’s. Education, Examination, Experience, and Ethics ("Become a CFP® Professional.").

A CFP must complete classes in General PrincipalsPrinciples of Financial Planning,

Insurance Planning, Investment Planning, Income Tax Planning, Retirement Planning,

Estate Planning, Interpersonal Communications, Personal Conducts and Fiduciary

Responsibility. Once all of these classes have been completed and the representative has

had at least three years financial planning experience they can take the final exam. Lastly

you will be asked to complete a certification application where you have the opportunity to

disclose any misconduct information and background checks will be ruan to ensure the

applicant is morally able to handle the responsibilities that come with being a CFP

("Become a CFP® Professional.").

Just as it is important to have a doctor who is trained to know about your body and

diagnose what is wrong with you, and the same way a lawyer is schooled on laws and

protecting your liberties, it is also important to have a financial advisor who is taught to

manage your finances and help you make smart financial decisions. Whether it is

something small such as how to make a budget or in depth strategic planning such as

deciding what you need to invest in to ensure comfort upon your retirement, your advisor

should be with you every step of the way to educate you as to why or why not to make a

certain decision. Having an advisor help you make a plan is important so that you can have

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a foundationally based idea of what to expect financially in the future. Just like any plan if

you stick to it and listen to the professional most of the time it will work. Not everyone

understands about how finances work finances and a large percentage of people “just wing

it” which more times than not causes problems at some point down the line.

The biggest misconception that people assume is that rich people don’t need a

financial advisor or blue collar people cannot affordare not worthy of one. In reality there

are plenty of rich people who go bankrupt because they do not know how to save their

money and there are plenty of people who don’t make a lot of money that are good savers

that just don’t know how to make their money grow properly. It could be said that nearly

everyone could use an advisor to put a plan together for their financial future. Just because

someone makes a million dollars a year does not mean that they do not need to make a

budget, make sure their assets are protected, create a backup plan, and save for retirement.

Most of the time when people generate a higher income they run into the same problems

that people with average and lower income people have but on a much larger scale. Some

can even argue that the need for a financial plan is most important for young and high

income people.

Starting your financial plan when you are young will help the offensive side of your

plan as well as the defensive side of your plan. On the offensive side you want to start as

soon as possible so that your earnings will compound for a longer period of time and you

will have nice little nest egg when it is time to retire. As far as the defensive side of the plans

go your insurance premiums get more expensive as each year passes, so the younger you

are when you get them the insurance the lower the premiumsy will be. The best example of

young people with too much money that make bad financial decisions are celebrities and

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more specifically professional athletes. This is because athlete planning is much different

than planning for your regular Joe.

Here is a comparison of a regular Joe comparted to a Pro athlete. Joe will go to

school for four years, graduate at the age of 22 and go on with his career. He will probably

spend his first few years out of college struggling to pay off school loans and doing what he

can to putting food on his family’s table. As he gets better at his job he becomes more

valuable to the company. As he adds value to his company they the company will

compensate him for that added value. As Joe gets older his income increases with his

experience until he decides to retire. It is common to find that people retire around the age

that they are able to collect social security which is currently age sixty two. Over the course

of his work life Joe has had a basic 401k through his work and his employer matched up to

a certain percentage of whatever Joe feeds into that retirement account. Joe may have had

a few other minor investments but for the most part Joe will be funding his retirement off

his 401k and his Social Security until his death.

The Regular Joe’s life is much different than a professional athlete’s life. Pro goes to

school and is offered a full financial package to play sports at his University. Pro finishes

school and upon graduation he is drafted to play professional sports. Although Pro has had

a few dings and bruises he is in the best shape of his life and performing well, he signs a five

million dollar contract for three years, with the team that drafted him out of college. In

three years once Pro’s contract is up he is signed to a new team with a one year, eight

hundred thousand dollar contract. Once the next season is over the team cuts Pro because

there is younger, faster, stronger athletes that will take Pro’s spot in the up and coming

season. Pro is now forced to retire at the age of twenty six. Pro now has to find a normal

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job to ensure he can fund the rest of his life. Ultimately Pro cannot find another job that

can bring him the same amount of income due to his lack of real work experience he has

and how old he now is. He is forced to sell his cars and house because he was living off the

income of someone making around eight hundred thousand a year to now if he is lucky,

making sixty thousand per year.

The life of an athlete is crazier than people may think. Most of them are up early in

the morning for workouts, then have practice, watch film, come up with a game plans to

defeat their opponents, perform rehabilitative treatments, attend press conferences, and

travel to numerous cities to play. It seems that their days never end. At the end of the day

they are paid unimaginable amounts of money to preform but do not have a lot of time to

manage this money or come up with a plan to retain it.

Professional athletes are very unique in several ways in the way that they are

compensated. First off while they are in season most athletes are compensated huge

amounts of money and once the off season comes they no longer have any cash inflow while

still having an outflow of cash. The second unique factor is that pro athletes are paid their

highest amounts while they are younger and still durable. Once they have a few injuries or

they are just not as good as the younger, newer athletes they are worth less to the industry

as a whole. This is the exact opposite of most people. An ordinary person is paid relatively

moderately and the longer they stay in an industry the more valuable they are so they are

paid higher with age experience and knowledge.

Athletes are very competitive and this competitive nature can often be carried off

the field. When one athletes see one of theirhis team mates who is established in the league,

and they are wearing a new Rolex watch, the competitive nature of the athlete can kick in.

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At this time the young athlete want to show that he makes money as well and might go out

and buy a new Omega watch that is more expensive than his team mates just to “be the

best”. In the Documentary Broke one of the athletes talks about how after the games there

are often people sales people selling new outfits in the lock rooms after the game. and Tthe

athletes can leave the locker room with a new fifty thousand dollar suit to wear in the post-

game press conference. This can often trigger this financial competition and demonstrates

how easy it is for the athletes over spend their money.spend too much money in order to say

they walked out of the locker room with the most expensive suit.

Although these athletes may live a life of luxury for now it is hard for them to come

to the realization that eventually they will need to retireill be too old to play and will no

longer be able to support their luxurious lives. What will they do when they are retired at

twenty six years old? Who How are theyis going to pay the taxes on their multimillion dollar

house and the insurance of their three hundred thousand dollar sports car? These are the

types of things that a financial advisor is supposed to help with.

When you give a young person who may not havehasn’t had much their whole life

substantial amount of money it tends to disappear very quickly. Most athletic associations

have little or weak regulation and guidance when it comes to athletes and their money,

which might be the nucleus of the problem. Just as athletes have coaches on the field

theEveryy athlete should also have a “Money Coach” off the field to help them turn their

short term riches into long term wealth.

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CHAPTER II

WHAT SHOULD THE PLAN LOOK LIKE

The first step of making a plan is to find out how much you are able to invest as well

as what is needed to protect yourself and your family from unexpected tragedies. This amount

could be found by making a simple budget and comparing income to expenses. The most

efficient and accurate way to make a budget is to find your monthly after tax income.

When you ask most people what their annual salary is and they tell you one hundred

thousand dollars, as a conservative rule of thumb you can automatically take off seventy

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thirty percent of that to amount for taxes and deductions or work costs. Once you get this

this seventy thousand ($100,000 - $100,000 X .370= $70,000) and divide it by twelve you

have found this household’s monthly income which in this case would be five thousand

eight hundred and thirty three dollars and thirty three cents ($70,000/12

months=$5,833.33). Now that we have a monthly income we can attempt to find monthly

expenses.

For the most accurate budgeting go through your bank statements, collect receipts,

and studyfind out exactly how much you spend in a month. Of course it is better to be

slightly conservative to leave room for error but at the same time be honest with yourself.

Are you eating out too much? Is your car payment more expensive than it should be? DoO

I use too many credit cards? Often times this can be a realization for many people that they

are trying to live above their financial needs means and need a change in today’s lifestyle in

order to be financially secure in their retirement years.

The table on the next page is an example of a typical household budge. If we are using

the numbers from the hHouseholdousehold below we see that in their situation is a monthly

surplus. In most cases a household should s either know exactly where theievery dollar isr one

thousand six hundred dollars surplus is going or else they have not adequately put a budget

together. One of the major budgeting dilemmas people have is not knowing how much of their

income they should be spending verse savings. Here is an easy rule of thumb: twenty, sixty,

twenty. Twenty percent of your income should gobe put towards to investing/protecting for the

future. This means a monthly amount that is only for contributing to financial products. Sixty

percent of your income should go to essential bills such as transportation and housing. The last

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twenty percent of your income twenty is dedicated to discretionary items such as eating out and

shopping ("Creating a Budget.").

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Mortgage/Rent $1,200

School Loans $800

Car $400

Car Insurance $200

Phone $150

Gas $190

Entertainment $450

Groceries $350

Utilities $150

Miscellaneous $300

Total Monthly Expenses $4,190

Total Monthly Income $5,833

Total Monthly Surplus $1,643

Figure 1: Basics of Making a Budget

Households either know exactly where their one thousand six hundred dollars surplus is

going or they have not adequately put a budget together. One of the major budgeting dilemmas

people have is not knowing how much of their income they should be spending verse savings.

Here is an easy rule of thumb: twenty, sixty, twenty. Twenty percent of your income should go to

investing/protecting for the future. Sixty percent of your income should go to essential bills such

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as transportation and housing. The last twenty percent of your income twenty is dedicated to

discretionary items such as eating out and shopping ("Creating a Budget.").

Life Insurance

Although we do not like to think about it, a financial advisor always needs to make

sure that the client’s family will be financially secure upon the death of the clients. Life

insurance, although isn’t fun to talk about, is a must in any financial plan. People are

reluctant to buy it because they do not think they will ever use it and it is a waste of money.

Before moving forward To answer these questions we must first look at the types of life

insurance. There are three types of life insurance that are used a majority of the time.

First, the most common type of insurance is called term insurance. It is the most

common due to how cheaply it can be obtained. A term policy is a great way to get a lot of

insurance for little money. One down side of Term is that once the term of coverage is over

the insurance is expired. Think of Term as renting a home, you make monthly payments to

live in the home but once the lease on the home is up you either have to move out, renew

the lease., or not have a home. Term is the exact same, once their term is up they client has

two options. First they can either renew the policy but the at a higher annual premiums will be

higher than your original premiums due to the fact each day alive you are one day closer to

death. T so the insurance company charges you more to make up for that riskliability of

having to pay you. The second option is to buy a brand new policy. Again due to older age the

premiums will be higher but this gives the client the option to reevaluate how much insurance

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they still need. In most cases as time goes on the need for life insurance decreases. The other

option is to go uninsured.

The next type of insurance is permanent or whole life insurance., which may also may

be referred to as whole life insurance. Permanent insurance is guaranteed protection for the

insureds entire life compared to a period of time as in the case of term insurance. Although

there is a guaranteed death benefit to having the permanent insurance the premiums are

significantly more expensive than the term insurance. Another benefit of having whole life

insurance is that you are able to borrow against your policy. So when the interest rates are high

and you are in need of a loan you can turn to your life insurance policy. If we said that having a

term policy is like renting a house then having a whole life policy is like owning a house.

You pay more on a mortgage than you would pay for rent but once the mortgage is paid off

the home is yours to own for forever. Another benefit of having whole life insurance is that you

have bought an asset. There is a cash value to permanent insurance as well. The cash value is

typically the amount that you have put into the insurance over time and acts as a savings account

that accrues interest. This savings account is a great way for high income earners to save money

in a tax friendly manner. If over a period of forty years if the owner puts in one million dollars

they can take out that one million dollars 100% tax free. Once they start taking out the interest

that the money has incurred then that interest earned is taxed as income when you pull it out.

Another perks of whole life is the ability to borrow against your policy. So when the in the case

of a financial emergency you are capable to barrowing against your life insurance policy without

the hassle of getting approved by a bank. as long as you live.

A popular third option, which is most commonly practiced, is is people using a

mixture of both term and permanent insurance. They People have the whole life so that

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they have something a product that iwas good for a lifetime and holds a useable cash value. but

Ooften they also need some term in order to be able to cover expensesliabilities in case if the

insured becomesis diseased they have protected their families for a low cost. and they cannot

afford all of that insurance to be whole lifeAs expenses are paid and they do not have as many

liabilities, people slowly decrease their term insurance until he amount of whole life will cover

all of the expenses. .

More often than not people do not know how much insurance they need. Once

people realize how much money their family would need if they were to pass it makes them

uneasy. There are three main categories that people look at to determine how much life

insurance they will need. First is debt reduction: once you pass your family will be

responsible for repaying the debt you have left behind. Next is income replacement: will

your family be able to maintain the same lifestyle they are currently living without your

income in the equation? Lastly is children’s paying for children’s education. Figure two

below will help Joe visualize at how much insurance he will need to ensure his family’s

comfort if he were to prematurely pass on.

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Debt Income Replacement Education Funding

Mortgage= $150,000 $50,000 per year X 40=

$2,000,000

Public School= $30,000 X 4

years =$120,000

School Loans= $40,000

Car Loan= $15,000

Total= $205,000 Total= $2,000,000 Total= $120,000

Figure 2: How Much Life Insurance Will You Need?

If it was Joe’s wish for his family not have to worry about money when he dies he

would need a two million three hundred and twenty five thousand dollar life insurance

policy. This would allow Joe’s family to live in their same house and pay down the

mortgage payment, pay off his school and car loans, and keep their standard of living with

his income replacement (if we say that Joe is 25 and he works until he is 65 at $50,000 per

year: $50,000 X 40 years= $2,000,000 over his lifetime). Lastly Joe would leave behind

enough money to allow his daughter to go to the local state school for four years (average

cost of tuition X 4 years: $30,000 X 4 = $120,000).

Disability Insurance

Another overlooked investment is disability insurance. When you ask the average

person what their most valuable assets are common answers are their house or vehicles.

Well what happens when you are sick or injured and unable to work for a period of time?

Then your car payments and mortgage payments cannot be made because you do not have

income. For most people the most valuable asset is sitting in their shoes, themselves. Nearly

every home and car owner pays insurance on these assets but they do not insure their most

valuable asset. Similar to life insurance people do not like talking about what will happen if

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they are disabled and not able to earn an income but statistically the average person is four

times more likely to be out of work due to injury or illness than they are to die (Protect

Your Paycheck With Disability Income Insurance). A common response that someone being

presented disability insurance may say is that they have disability insurance through work

and they might receive sixty percent of their income if they become disabled. For the most

part the average person could live off of sixty percent of their income for a period of time if

they needed to, but what they do not know is that if they are not contributing to that

insurance plan that income is taxable.

Joe works for ABC Company and has all of his insurance benefits taken care of

under the company’s group plan which he does not self-contribute to. Joe gets hurt on the

job and needs to put the disability insurance into use but since Joe does not self-contribute

to the insurance the money that he receives in taxable. So now if Joe is in the twenty

percent tax bracket Joe went from receiving sixty percent of his income to now forty eight

percenteight percent of his income ($100,000 X 60%=$60,000: 20% tax on the $60,000= .8 X

$60,000=$48,000 )48,000) and Joe will not need to evaluate if he will be able to sustain his

lifestyle only receiving forty eight percent of his income. If he cannot it would be advised for

Joe to get an addition policy that will insure his income to the amount that will be suitable for

Joe. He also needs to understand what an elimination period is. It is the length of time between

the beginning of an injury or illness and receiving benefit payments from an insurer ("What Is an

Elimination Period?). This is put in place by insurance companies to protect them from people

faking injuries or illnesses in order to receive the benefits. The typical elimination period is 90

days so it is important that Joe has about three months of bills in a savings account that would be

used during his elimination period. The elimination period can be shortened or lengthened. If it is

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shortened the monthly premiums usually increase. If the elimination period is lengthened then

the premiums are typically a little less each month.

Investments

Now for the sexy stuff that everyone wants to talk about, making money. Most

people think that if they hit the right investment they will never have to work again and to

some point that is true, but finding the correct timing of where and when to put your

money and when to take it out is nearly impossible. There are analysts that dedicate their

lives to finding these investments and wrongly predict on a daily basis and being wrong

with a retirement account could mean you’re going to be working until you’re dead.

It is important to understand what money to be investing. Before investing you

should establish a savings safety net for emergencies, Eliot Janeway’s book You and Your

Money says you should not be investing until you have saved what would be equal to six

months of living expenses. Although saving for hard times is never a bad idea, saving

should not be a long term growth plan. If you’re not making money you’re losing money.

Even if you put your money into an account that earns a one percent interest rate per year

over that past ten years the inflation rate has gone up on average more than two and a half

percent per year ("Current US Inflation Rates: 2005-2015."), meaning you are losing more

than one and a half percent of your money each year in an interest earning savings account

(1% gain from interest rate -– 2.53% loss for inflation = -1.52% or 1 – 2.53=1.52).

Although savings accounts are safe and can be liquidated quicklyliquidated quickly (turned

into in-hand cash) for the short term, they are not optimal for long term sources of income.

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Safe accounts are usually great for emergency funds because they tend to be rather

liquid but they do not offer a high reward because they have little risk involved. In order to

reap a higher returnbetter return on investments you must be willing to risk the possibility of

losing your investment. This philosophy is called the risk-return trade off. Investopedia

defines risk-reward trade off as “The principle that potential return rises with an increase

in risk. Low levels of uncertainty (low-risk) are associated with low potential returns,

whereas high levels of uncertainty (high-risk) are associated with high potential returns.

According to the risk-return tradeoff, invested money can render higher profits only if it is

subject to the possibility of being lost” ("Risk-Return Tradeoff Definition"). Most investors

want to find a happy medium, although they do not want a small return they do not want

to potentially lose their entire investment.

Stocks

Stocks tend to be one of the most common, high return investment on the market.

Due to the high risk of stock investors demand a higher return on their investment.potential

returns there is a high potential for loss. When you purchase a stock you are purchasing

partial ownership of that company. The more shares you buy the more of the company you

own. The risk comes in when it comes to the performance of the company. If the company

is doing well then the stock price will rise but if the company does poorly then the stock will

plummet along with your investment. There are two ways to earn money on stocks. One is

capital gains. If you buy a stock for ten dollars on sell it in a month for twenty dollars your

capital gain is ten dollars that your earned. Another way to earn money in stock is through

dividends. A dividend is a company’s way of redistributing profits. At the end of the year if

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there is money left over after all of the bills have been handled a company may distribute

dividends from the money they have not spent. Not all companies offer dividends, usually

only well-established older companies that have paid down most of their fixed costs. New

companies that have a lot of upfront cost to take care of will usually use the money that

they would offer their shareholders to either invest in the future via new technology and

equipment or by paying down current debts.

Bonds

Another popular investment tool is bonds. Bonds are typically considered a safer

investment than stocks. This is because instead of purchasing the ownership of a company like

you do in stocks, with bonds you are loaning your money to the company with expectation that

you will receive your initial investment back as well as interest over a period of time. These

investments are safer because the company is obligated legally to follow through with this

transaction no matter the financial health of the company. This being said because the company

is obligated to pay you there is still a risk of losing your investment. If a company goes

completely bankrupt or they do not have any cash you will not receive you investment back or

the interest you were hoping to get. A down fall of the bond is that in a basic bond transaction

your money is locked into the investment for a specific time period. There is however a

complicated secondary market where bonds can be bought prematurely at a lesser value for

people who wish for them to liquidated.

Diversifying

Diversification is a popular and effective way to limit risk. Diversifying is investing in

multiple things at once. This is done to help offset any losses that may occur in your portfolio.

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For example if you invest one hundred dollars in oil and oil takes a fifty percent loss then you

would have lost fifty dollars. On the other hand if you could have invested fifty dollars in oil and

the other fifty in gold, when oil takes a fifty percent loss you would only lose twenty five dollars.

By investing in multiple investments you limit your risk but it is hard to earn a substantial gain.

Mutual Funds

Mutual funds are a great way for the average person to be involved in big time

investing. Mutual funds pool together people’s money in order to have more money to

adequately reach an investing goal from both performance and diversity. A mutual fund

may invest in different stocks, bonks, markets, or a mix of all three.

The figure three abovebelow shows some of the main investments and how they

performed from the years between 2000 to 2014 If you put all of your money in real estate (the

highest preforming investment for the year) in the year two thousand and six you would be

highly disappointed in two thousand and eight because it was the worst preforming investment.

Bonds

Another popular investment tool is bonds. Bonds are typically considered a safer

investment than stocks. This is because instead of purchasing the ownership of a company like

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you do in stocks, with bonds you are loaning your money to the company with expectation that

you will receive your initial investment back as well as interest over a period of time. These

investments are safer because the company is obligated legally to follow through with this

transaction no matter the financial health of the company. This being said because the company

is obligated to pay you there is still a risk of losing your investment. If a company goes

completely bankrupt or they do not have any cash you will not receive you investment back or

the interest you were hoping to get. A down fall of the bond is that in a basic bond transaction

your money is locked into the investment for a specific time period. There is however a

complicated secondary market where bonds can be bought prematurely at a lesser value for

people who wish for them to liquidated.

Diversifying

Diversification is a popular and effective way to limit risk. Diversifying is investing in

multiple things at once. This is done to help offset any losses that may occur in your portfolio.

For example if you invest one hundred dollars in oil and oil takes a fifty percent loss then you

would have lost fifty dollars. On the other hand if you could have invested fifty dollars in oil and

the other fifty in gold, when oil takes a fifty percent loss you would only lose twenty five dollars.

By investing in multiple investments you limit your risk but it is hard to earn a substantial gain.

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Figure 3: Diversification Quilt

The figure three above shows some of the main investments and how they performed from the

years between 2000 to 2014 If you put all of your money in real estate (the highest preforming

investment for the year) in the year two thousand and six you would be highly disappointed in

two thousand and eight because it was the worst preforming investment.

The above information discusses what some of the components inside of a financial

plan may look like. On the most basic level, there is an offensive approach to earn money

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for later on, and a defensive approach in order to protect the money you already have.

Financial plans can get very in depth especially when discussing estate planning or business

planning. In the case of what is absolutely imperative to athletes this thesis will focus on the

offensive and defensive portions of the plan because we want to ensure the athletes live

comfortable in retirement and once we get to that life stage we can begin to look at what a

plan would look like for a business owner and who would receive their estate that we have

helped them build upon their death.

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CHAPTER III

THE FINANCIAL GAME PLAN

Chapter 2

Chapter one two discussed the basic instruments that go inside of the average

person’s financial plan. Chapter two three will go more in depth on what an athlete’s

financial plan should looks like and the specific modifications that will have to be made to

properly suit athletes. For the ease of explanation we will be focusing on the American big

4 which are the National Football League (NFL), Men’s Major League Baseball (MLB),

National Basketball Association (NBA) and lastly the National Hockey League (NHL). It

should be noted that there is not one financial plan that will work for every athlete, in

every sport. Everyone needs the same basic pieces of planning that consist offensive and

defensive planning as discussed in chapter onetwo.

For the remainder of this thesis we will break up the athletes of each of these sports

into three categories based on their income. First will be the level one incomerookie income.

This is the athlete that makes two million dollars and under. Next between the two and five

million dollar income would be classified as a seasoned level two income. Finally the ten

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million dollar and up income would be considered a level threen all-pro income. Again this

is strictly based on income level and not on seniority. For example an athlete in the first

year of his career that just signed a ten million contract would be in the level three income

all pro financial category and the same goes for an athlete that has been a practice player

for seven years making one million dollars a year would be in the rookie level one income

category. We make this distinction because if an athlete that makes an income of two

hundred and fifty thousand a year and has low predicted longevity his plan is going to be

focused more on the accumulation of his wealth to live off of in retirement. This compared

to a level threen all pro income athlete who signed a five year contact to make six million a

year we would focus ourf efforts on protecting the income he has generated as well as trying

to maximize the wealth he has recently accumulated.

First we want to evaluate what is currently in place for these big 4 athletes. The

NFL offers their players, Medical, Dental, Vision, Health Care, Long Term Disability,

Basic Life Insurance, Accidental Death Insurance, Voluntary Dependent Life Insurance,

401(K), and Pension ("Benefits."). Athletes can only collect a pension if they can last three

years or more. At that point they get a $470 monthly credit for each year they played but

only once they reach age 55 (Mont). The 401(K) that is offered will be matched by the NFL

by up to two hundred percent. (Subject to change).

Throughout the Big 4 baseball is known for having the best retirement program. If

you play in the MLB for 43 days you have earned a minimum pension of thirty four

thousand per year (Mont). A Single day in the Majors earns you health care for life. The

MLB has not always been so generous. The main reason for the current benefits is because

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in 2002 three former players filed a lawsuit against the MLB demanding in increase in

benefits ("Major League Baseball Pension and Healthcare Benefits.").

Hockey is the next on the list by playing one hundred and sixty games an NHL

player has earned their pension. The NHL pension will grantee you forty five thousand

dollars per year (Mont). The NHL is having a hard time putting an in depth plan that will

benefit all players due to the fact that seven teams in the NHL are in Canada (Baert). This

is a problem because Canada has a different tax policy then the US. Currently the league is

trying to bring in consultants to help with this dilemma for the players who live in one

country but earn their income in another. The challenge for these experts is to come up

with a fair benefit plan that will benefit citizens of both countries equally. The problem

with having one country more tax favorable than the other is that the country is tax

favorable will attract the better quality athletes and have unfair advantage within the same

league. Alex Dagg of the union’s operations director is predicting a Taft-Harley program

where multiple firms within the same industry all contribute of the same pension plan

(Baert).

NBA players are vested after playing three seasons and, upon reaching the age of 62,

are eligible to collect, at a minimum, nearly $57,000 a year. After playing 11 seasons, the

benefit caps out at $1,965,000. Players who take part in a 401(k) plan earn matching

contributions of up to 140% (Mont). During their career they can enjoy the benefits of

medical care (health, vision, dental). Players also have access the Employee Assistance

Program (EAP) which is a free program that helps counsel players through all of the

struggles that come with life such as divorce counseling, financial counseling, dependent

care counseling. Another perk of the NBA is paid time off including sick days, holidays,

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and vacation days. Lastly the NBA offers basic life and disability insurance (“Benefits

Overview”).

Although not in the big 4 the PGA (Professional Golf Association) has a very unique

way of helping players during their retirement years. What separates golfers from other

athletes is that their compensation is fully based on their performance. Golfers do not have

big long term contracts with signing bonuses (excluding endorsements), rather golfers win

prize money that varies depending on the events that they enter. If a young top tier golfer

makes his cuts he could end his career with over one hundred million dollars in his tour

retirement account (Rude & , Mudry). Many critics are saying that these projected

numbers are skewed due to the fact that anything can happen in this sport. The analysts

have been accused of over predicting the expected return and also do not consider what

would happen if a player has a bad year or two and how that will affect his pension.

Another thing that separates golfers from other athletes is that golfers unlike other athletes

can play the game well into their fifties and even play in the senior tour once they reach the

qualifications.

Chart 2a summarSummarization ofizes The Big Four BenefitsPlans.

Time Until

Eligibility

PaymentsPension

NFL 3 Years $5,700 for each year

in the league?

MLB 1 Year $34,000

NHL 2 Years (In Progress)

NBA 3 Years $56,000 after age 60

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Chart: 2a

Although these packages do seem rather extravagant for a few years of work, they do not

do the justice of keeping up with the style of living these athletes got use to back when they

were earning millions of dollars a year. All in all with these current retirement plans the

athletes will be lucky to pay their taxes if they do not properly invest and live substantially

below their current needsincome. Keep in mind that once the big money stops coming the

big bills are still there to haunt the athletes.

These leagues are doing the best that they can for these athletes to live comfortably

after their time they have put into programs but at some point the athletes need to take

responsibly for themselves. Most the problems that are being faced today with athletes

being taken advantage of is due to a lack of financial education. As people who are in the

sports world here hear these people are “Student athletes” and student comes first but more

often than not the athlete portion of the phrase student athlete comes first. NCAA sports is

a business and these students are getting their tuition paid for not to get good grades and

be educated but rather to perform. More times than not athletes have ridiculous majors

such as community service where they will never be taught the proper way to handle

money on any sort of level. Furthermore, the leagues will accept students in their junior

year season to come play professional ball and give up the chance to obtain a degree to fall

back on when playing is over or if they happen to get hurt. So even if these students do

study a subject that focuses on money such as finance orf accounting or even economics

their degrees have been cut short and they have learned enough to think they know what

they are doing with their money but they have not taken the advanced courses to really

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iron out what to do in specific and unique situations like they are about to be in. For

example in their freshmen year they might have taken business management and learned

the theories that are used to manage a business, but because they left in the middle of their

junior year they never took strategic management to learn how to put those theories to

practice.

Due to the fact that these athletes are too often occupied but other obligations that

“rightfully” occupy a student athletes. As a generalization athletes are almost bred to not

have to take full responsibility for anything other than their sport. Anyone who has played

NCAA sports understands this statement and does not take offense to it because they

understand the time and effort that is demanded of these athletes.

Just like the athletes may have had tutors to help them with their work the athletes

now need to have a world class team of financial tutors. They will need to first and

foremost be well armed from people trying to scam them of get rich quick promises. This

team at a minimum should consist of your agent, accountant, financial advisor and lawyer.

Typically you want all of these team members to be from different firms and unrelated to

one another. This is so that there areis checks and balances within your team. Meaning if

your Lawyer is trying to present a business deal that doesn’t make sense then your other

team members can tell you what is wrong with this business deal and protect you from a

fraudulent business deal. By having an accountant on their team scandals like the one

Berny Madoff was running would be prevented. If an athlete was to bring a proposal like

Madoff’s the advisor would be suspicious of the abnormal returns that Madoff is

producing. The advisor could then send the proposal to the accountant. An accountant

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would look at Madoff’s proposal and see that his balance sheets did not match and

automatically know that his is was not a legitimate business deal. Once the Accountant sees

that the proposal is flawed the accountant would sent the proposal to the lawyer and have

the scandals like Madoff’s would be taken down even faster.

It could be possible to have a counsel that is run by all of the leagues that uses

checks and balances for the athletes and essentially audits the investments for the athletes

in case the athlete does not completely trust his team.

In order for any of this to worth the athlete needs to be educated on what type of

team they need to assemble. They need to know what kind of questions to ask, what kind of

investments they are investing in and how overall markets work. The athlete themselves

need to make sure they are not getting scammed and their team needs to be there for

reassurance.

Where to put your money

Due to the amount of income that most of these athletes take in per year they are

unable to contribute to normal retirement funding like IRA’s S which is a tax shelter that

individuals can contribute to in order to allow people to have more money in their account

when they retire. They simply make too much money for the government to give them such

tax breaks. If an athlete is out of the range where they can contribute to traditional

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retirement funding they will have to invest their money elsewhere which makes things

much more complicated.

First when investing it is important for your investment team to know your investor

risk profile. If you are willing to earn lots of money at the expense of possibly loosing lots of

money you would have high risk and want to earn large but risky profits. If you are not

willing to lose any money you would have a low risk tolerance and you would want to earn

small safe profits. Most investors have a safe balanced mix of both but every so often some

investors are on one end of the spectrum. It is very important for your investment team to

know where you stand so they know what investments to present to you and how you want

your money to grow.

If you are on the safer side of the spectrum you want to have investments in your

portfolio that are not likely to default but earn small amounts of money. The most common

safe investment is bonds and more specifically government bonds due to the fact that it is

rare that a government will fail. Bonds work by an investor giving a lump sum of money

(usually $1,000) and over a set amount of years the investor will earn interest on that

money and once that term is over the investor will receive their initial investment back.

The most common type of investment is an investment in the stock markets. The

stock market is known for having lots of risk but also having lots of profit. When you buy

stock you are buying a portion of ownership of a company. When you own stock you are

referred to a shareholder. If the company you bought is doing well then your stock will

increase in value. There are two ways to earn money in stocks. First you can earn a capital

gain. For example if you bought a stock for fifty dollars and the next yearn you could sell it

for seventy five dollars you have earned twenty five dollars. This is also where you can lose

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your investment. If you buy a stock for fifty dollars and next year you sell the stock for

twenty five dollars you have lost twenty five dollars. The second way you can earn money

from stock is receiving a dividend from the company you have invested in. When you buy a

stock and if at the end of the year they have extra money left over the company might give

the shareholders some of that money back to show appreciation for the stock holders and

keep them invested. You could earn lot of money on Monday and by Friday have nothing.

Most of the time when you are dealing in the stock market the companies that are being

traded are highly regulated and it’s hard to pull off scams. Although there is heavy

regulation amongst these companies’ people do get busted for fraudulent activity. Enron is

a great example of such things happening. Enron was one of the top rated companies in the

world but they were selling securities that did not actually exist. They got away with this

scam for years because the company auditing them was getting paid off to say they are

doing things correctly and that the securities they were selling were legitimate. For years

both companies got away with this and made billions of dollars. Once the secret was out

both Enron and their auditor (AuthorArthur Anderson) were forced to liquidate and

eventually shut down. The people that were running this scam were put in jail but a large

portion of the money was never recovered. Unfortunately it doesn’t matter if you have the

greatest investment team in the world situations like this are unavoidable when investing.

That is why it is important to diversify and never have all of your eggs in one basket, as

discussed in chapter onetwo.

Now that we have reviewed basic investments from chapter one two we will go into

more depth about what options are available for high income earners that may not be

doable for your Average Joe. For example the average person would not be able to up and

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start a restaurant or bar as a secondary income. Not that he or she is not capable of it but

they simply may not have the extra income to provide the capital to create such entity.

Great examples of this are Peyton Manning. He owns a portion of Papa Johns’ and is now

the face of the company. He has had great success with this investment. A less popular

former pro athlete who is now a successful business man is Than Merrill who is created his

own company teaching people how to make money in real estate. Than was educated at

Yale so was very intelligent and found a great market for his business. Today, Than has a

house flipping empire that is so big that it has its own TV show called “Flip This House”.

These are two individuals who were very smart but had a great financial team behind them

guiding through their decisions. Owning a restaurant or any business for that matter

means that you need to add another professional to your investment team. Having a right

hand man or woman that manages and oversees the company you ownrun is essential to the

success of the company especially if this is secondary income and you are not able to be

directly involved in the day to day operations of the business. This manager should be local

so that they understand the culture of the community that you are investing in and

understands what the competition is and what has made past businesses successful. The

manager needs to be in constant contact with the other team member’s such as the

accountant so that they can accurately do your taxes because such an investment will

significantly change how your taxes will be handled. The lawyer needs to make sure there

are no lawsuits against the company and can help with the license and permits that are

associated with getting the company started up. Our finical financial advisor will review

how such an investment changes your income both (now and in the future,?) and can then

adapt your financial plan to those changes.

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One of the more advanced investments that high earners such as athletes could

benefit from is real estate. Real estate can be very complicated and so a trusted real estate

agent should be added to your investment team. When investing in real estate there are two

common ways to earn money. The first way to earn money in real estate would be from

income earning properties. This means that the investor would buy the property and rent it

out to people who would like to use it. The properties can either be residential homes that

are rented to those who cannot or will not buy a home. The second form of rental

properties is commercial properties where business can rent the space that the investor has

purchases. It is often advised that when renting the properties to also hire a property

management company. A property management company is a company that will take care

of the essentials of managing the properties and conducting transactions from with the

renters. This use of the housing market is meant to accumulate long term wealth by

accumulating the rental income. Sometimes the rental income needs to be used to repair

the home when parts of the home are warn worn or damaged. The other way to earn money

is to flip the homes. The term flipping refers to and investor who has bought an old or beat

up home for cheap and fixes up the property and sells it for more than they put into the

property. This use of the housing market is more for quick cash. Someone could flip a

home in less than a month and make a quick few thousand dollars.

Another option for athletes that have large sums of money would be a hedge fund.

Hedge funds are very risky but very often return huge profits. Hedge funds are groups of

investors that invest in many different investments such as different businesses or various

securities. What most people do not like about hedge funds is that there are fewis little

regulations for hedge funds. By having little regulation it is easy for money to be stolen or

33

miss used. The infamous Bernie Madoff had stolen over seven hundred billion dollars over

thirty years by claiming he was investing but was really just moving money from investor

to investor and keeping some for himself. This shifting of money is called a Ponzi scheme.

The first known artist of such scam is Charles Ponzi who was a clerk out of Boston ("Ponzi

Scheme Definition"). The hedge se conglomerations of investments helps diversify the fund

while still being able to make risky investments. Most hedge funds require a minimal entry

free. The entry fee can sometimes be upwards of one million dollars depending on who is

managing the fund. One of the wealthiest men in country, Warrenant Buffet, had his hedge

fund invested in medicine and he made billions off of that decision. If the medicine had not

worked and the company had failed then Mr. Buffett would have lost his investment.

Another reason why this was risky is because if years from now the people who used the

medicine had unexpected side effects that become detrimental to the users the users would

sue the company and they could lose all of their investment depending on the lawsuit.

Another reason why people do not like hedge funds is that there is speculation that they

can control markets. Hedge funds can have billions of dollars that they are managing and

when they either buy or sell an investment it can dramatically change the price of that

investment. For example if a hedge fund owns twenty percent of a company and decides to

sell their stock the price of the stock would decrease. Other investors would worry that the

stock company is not doing well because such a large investor left the company and decide

to also remove their money. This would substantially decrease the price of the stock. When

the stock has reached its low point the hedge fund could rebuy stock in that company at a

lower price than what they just sold it for.

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These are the most common investments for high earners to make. Either buying or

creating a business, investing in different securities, real estate and lastly hedge funds are

all options to accumulate wealth for retirement. Again it should be stated that no matter

what investments the athletes are looking for they should have a diverse investment team

that is looking out their best interests. Athletes are venerablevulnerable due to the lack of

time they have to prepare for things like this and often times due to their lack of education

on the topics. This is why having a trusted team of accountants, financial advisors and

lawyers is the best way to avoid being taken advantage of.

Conclusion

What we have learned in the process of this thesis is that there needs to be more

regulation/education in three areas. First the athletes need to be educated on how these things

work. Second the leagues themselves need to be taking more action and responsibility for this

lack of education. Lastly the financial industry needs to be working hand in hand with the

leagues and monitor who is working with the athletes and what they are invested in. This

becomes the debate that many politicians have with American in general. Should we be more

hands on with individual’s decisions or should we let them fail on their own and learn from the

mistakes they have made? At the end of the day the simple compromise is to let people decide if

they want or need the help or not but at the same time have a minimum requirement so that they

do not severely regret the decisions they make today, in the future.

The stated problem here is that athletes are not properly saving their incomes. They are paid very generously during the season but often time are on their last dime by the time the end of the off season come around. If these athletes are struggling to manage their money for a few months of the off season it is almost impossible for them to save for the remainder of their life. One way to help athletes save for the long run would be to make them opt out of a retirement plan. Meaning that part of the athlete’s contract part of their check goes right into the league

35

401K. This would benefit the athletes because they are already saving and contributing to their 401K’s and do not have to make the choice to do so. If the money never touches their account they are less likely to miss that money and when they are ready to retire they will be thankful for the League 401K and grateful the league has taken this action for them. Some leagues may do this but it is a very minimal or only one percent or so.

One of the biggest problems athletes have is that due to their high profiles it makes them

a target for scam artists. Most of these scammers are trusted, well liked and often deal with

multiple athletes. Because of this the athletes should be provided with auditors by the leagues.

This means that if the athlete requested to do so, every decision that was made by the athlete’s

financial team was audited so that it was ensured that the transactions actually happened and that

these are smart moves that help the athletes and not just going to benefit the financial team. This

does not mean that this should be required by every league but the athletes should have access to

nonbiased opinions. Ideally this would be a sub team of professional that worked exclusively for

the leagues. This would help in situations like the one 2013 where more than fifty athletes were

caught in a Ponzi scheme and lost a total of eighteen million dollars.

One of the fastest ways to get something like this into action is through the players

association. When you have ex-players that have lived the experience that the athletes do and

they step up and say something needs to be done, that has a huge impact on whether or not this

will be implemented. The players associations act like a union and bring up topics such as things.

With the help of the players associations this could be implemented very easily.

Next the individuals athletes themselves need to take reasonability for their own actions.

They need to not be driving around in new sports cars and living in mansions in the first year of

their career. The athletes need to be reasonable and know that the money they are making will

not last forever. Most of the time the athletes will have to transition to another job. They need to

36

start focusing on what they need and what to do in their post athletic careers and what skills they

have learned why they were playing sports and how they can put those skills to good use in the

work force. What most of them do not realize is that no matter what role you had in the

professional sports industry these athletes worked for and contributed to multi-billion dollar

companies. Being able to put that on a resume is going to benefit them. These athletes are leaders

in their community and they have influence on their peers and that will always be what

companies are looking for. So if the athletes can withhold from splurging on things they don’t

need and focus on putting together a great financial team and think about who they are going to

be in their post athlete life, they can’t help but succeed.

Lastly the finance industry also needs to recognize that many of the professionals in this

industry are the ones that are taking advantage of the athletes. It would be possible for the

industry to team up with the leagues to ensure the athletes are in the best possible situations. At

the end of the day both the sports industry and finance industry could make a lot of money off

one another but there has to be undoubtable trust between the two. It seems that right now there

are too many scam artists and the finance industry needs to do a better job regulating. Regions

Banks is a great example of the industry recognizing this problem and attempting to fix it.

Regions is the official bank of the South Eastern Conference (SEC) on the collegiate level of

sports. What they have decided to do is to have financial education workshops with college

athletes on campuses throughout the SEC. Athletes are rotated from station to station and

educated on different topics of financial planning such as budgeting or investing. The athletes

use their actual allowance money that the school provides them and they then have to determine,

for example, what housing they are going to live in based on this amount of money. In some

stations the athletes roll play different situations such as driving down the road and your car

37

breaks down, how are you going to come up with the money to fix it? Ole Miss was one of the

first school to participate and they are now joined with other schools such as University of

Tennessee and Vanderbilt. This is now a symbiotic relationship because the students have a

financial institution they feel like they can trust because the institution has educated them on

what they are going to need to financially sustain college. In return Regions hopes the students

would want to start a checking or savings account and hopefully as they make more money as

their careers progress the relationship is in place to use a Regions Financial Advisor.

38

39

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