Most people have 40 or more working years in which to gradually save enough to fund a retirement that will likely last about 20-30 years. Professional athletes, on the other hand, if they’re fortunate, may be able to play into their early to mid-thirties. That means over an 8-to-10-year career, you’re going to have to try to put aside enough money to fund (or at least supplement your reduced income) a retirement that could last 60 years or longer.
Monumental task? You bet. Impossible? Not with a little planning, some fiscal restraint and the help of a trusted financial advisor.
We’ve all heard the often quoted and frightening statistics that 78% of NFL players are under financial stress within two years of retirement, and that 60% of NBA players go bankrupt within five years after leaving their sport. That data, however, is drawn from a decade-old Sports Illustrated article titled "How (and Why) Athletes Go Broke," published in March of 2009.
In recent years, most professional leagues have taken major steps to adjust their retirement benefits to help minimize post-career financial challenges. The NFL in particular has done a really good job of compressing retirement benefits into a shorter number of years. Nowadays, a player with only 3-4 years in the league can enjoy pretty impactful and lasting benefits. The MLB also has terrific benefits that are scaled in order of magnitude commensurate with the number of years in the league.
Pro Sport Retirement Plans At-a-Glance
NFL— You receive pension credits for each season you play. The longer you play, the higher the benefit (in 2018, the average annual pension benefit for retired players was $43,000). The league also has a 401(k) program that offers a 2-for-1 matching contribution (up to a maximum match of $28,000). And after four credited seasons, you receive contributions ($95,000 annually) to the Player Annuity Program.1
MLB— Players need just 43 days of service to qualify for a partial pension benefit—becoming fully vested (a $68,000 annual benefit) after 10 years of service. You can start collecting at age 45 or defer the benefit for a larger payout later. For example, waiting until age 62 would increase your annual benefit to $220,000. 1
NBA— You’re vested in the pension plan after three years of service, with a maximum benefit ($195,000) achieved after 10 years of service. The NBA also offers a 401(k) plan with a generous 140% employee match along with an annuity that provides you with a monthly income (until age 50) following your retirement from the league. 1
NHL— You only need to play in a single NHL game to qualify for a pension. For every 20 credited games you play, you earn a quarter of a year’s service, with 10 years of service qualifying you for the maximum pension benefit ($255,000 annually). 1
Needless to say, given the relative shortness of most athletic careers, it’s vital to take advantage of every opportunity to maximize your retirement savings starting from day one. That means foregoing at least enough of those luxury purchases to ensure you contribute the maximum allowable in your league’s 401(k) plan (if one is available) and to put away additional savings in either a traditional tax-deferred IRA or a tax-free Roth IRA.2
Roth IRAs can be particularly advantageous for athletes who are just beginning their professional careers. “I recently sat down with a client who’s a first round MLB draft pick,” explains SunTrust Sports & Entertainment Specialty Group advisor Todd LaRocca. “Since the team is spreading his signing bonus over two years (after which there’s a strong likelihood that he’ll still be in the minor leagues in a much lower tax bracket), we’ll work with him to fully fund a traditional IRA the first two high income years and then convert those assets into a tax-free Roth IRA in year three.”
Similarly, when you retire you will probably have accumulated a large amount of money in your 401(k) plan. Some of that money will be pre-tax savings and some of it will be after-tax dollars. Make sure that you and your advisor sit down with the league’s plan administrator to understand the breakdown of your savings. Often, it is recommended to roll those assets into two separate IRAs, moving your pre-tax dollars into a traditional IRA to continue the tax-deferral and moving your after-tax dollars into a tax-free Roth IRA.
If you’re lucky to generate significant off-field marketing income (endorsements, advertising, appearances, etc.) you also may want to consider setting up a separate corporation. This would allow you to fund a SEP IRA for small business owners—putting away up to an additional $56,000 each year tax-deferred for your retirement.
Planning for two retirements
One final strategy that may prove very beneficial for addressing the unique challenges that professional athletes face is to plan for TWO retirements—one that can help supplement your income during the post-playing years when you’re pursuing a second career, as well as a second more “traditional” retirement that will be used to generate enough lifetime income to augment your pension and Social Security. Also, don’t make the mistake of waiting until you “hang them up” to begin thinking about life after sports. Make time while you’re playing to think about the next phase of your life, the things you’re interested and passionate about, and how to possibly leverage those things into a new career.
Remember that the sooner you begin maxing out every available retirement vehicle, the longer you’ll have the power of tax-deferred compounding working on your behalf to grow your savings. As a professional athlete, you can’t escape the math. When you retire in your 30s, given that on average people are living longer than ever before, you’re going to need a plan for funding a 50 or 60-year retirement. So, make sure that you and your advisor keep your eyes on doing everything possible to prepare for that future.