A financial game plan: Wealth strategies for athletes

It’s no secret that professional sports present massive financial opportunities for athletes. It’s also well documented that huge paydays can cut both ways.
 
When diligently managed, wealth from multiyear contracts and endorsement deals can provide financial stability for current and future generations. On the other hand, extravagant spending and poor fiscal habits have the potential to leave highly paid athletes scrambling to make ends meet after their playing days. 

Where you end up on the spectrum of financial health heavily depends on your strategy and follow-through. Some of the best outcomes can be achieved by defining your purpose and developing an effective wealth plan. Foresight, action and persistence may allow you to maintain a desirable lifestyle and can help your heirs do the same. 

Successful wealth planning

Professional athletes are faced with a variety of challenges each day, and it can get complicated. You’ll benefit from building a team of professionals that can partner with you to navigate while you perfect your craft to compete at the highest of levels.

Right now, post career opportunities or retirement may not be on your mind, but you should develop a long-term outlook on what you want your life to look like in the future. There will be a day when you walk away from a fruitful career in competitive sports. The key to making a successful wealth management strategy work is putting together a sound financial plan from the onset of your career. Here are five key strategies to manage your wealth:

1.  Prepare for tax season 

At its core, tax planning can help ease your tax burden, but there’s a fair amount to think about.

Athletes may have to contend with living in more than one place and certainly playing in multiple locales. Retaining and tracking tax implications across states can be cumbersome. In addition, you may allocate capital to private investments, which typically issue tax documentation after April filing deadlines, requiring you to file tax extensions. 

Deductions should also be factored in. It’s critical to track any league dues, agent and marketing fees, and out-of-pocket expenses incurred while conducting business. Understanding the amount and sources of your income can help reduce income and tax liabilities as well.

With so many moving parts, consider hiring a seasoned certified public accountant (CPA). This professional helps ensure all tax documents are collected, including compensation for items such as endorsements and appearances, and withholdings or quarterly estimated payments are made.

Remember, tax planning is dynamic. In other words, don’t expect your income and tax liabilities to remain the same year after year.  Depending on the amount and sources of your income, you’ll likely need to pay estimated taxes each quarter before a final annual bill is due in April or thereafter. 

2. Give to charity

If you are charitably inclined, remember it’s not always about money. Sometimes giving your time and talent to an organization can have a positive impact. In fact, this may be a very rewarding way to benefit others early in your career until you can make financial donations that align with your wealth plan. 

When dedicating financial resources to charity, tax planning blended with philanthropy can do a lot of good with one broad stroke. Finding worthy causes can be as satisfying as any achievement realized in your sport. 

There are many charitable strategies you can pursue to reduce your tax liability. To minimize potential capital gains on certain investments, some athletes choose to donate securities rather than cash. Others establish a donor advised fund or private foundation, which allows more control over investment selection and which charities will benefit from your generosity. There are pros and cons of each so engage your team to identify what may be best for you and your family. 

Ultimately it behooves you to have a purpose as you give your time and financial resources. Outline the causes that are important to you and where you want to make an impact on others.

3.  Where you live can cost you 

Each state has varying income tax rates and laws. For example, in California, athletes filing as single and earning more than $667,276 per year can pay up to 13.3% in state income tax.¹That same person would have no state income tax obligation in Texas.² Thus, projected tax bills should play right along with climate, entertainment options and safety when establishing residence and protecting your bottom line. You also should consider estate planning rules and regulations, which may differ from state to state.

All these variables necessitate frequent communication and close coordination with your team, especially your CPA and attorney. If relocating to another state, you’ll need to measure the financial impact of where your primary residence will be, assess potential costs or savings, as well as understand any legacy planning implications.

4. Plan to invest

Growing your assets involves some tried-and-true methods that a savvy wealth manager can help you formulate. It’s important to develop an investment strategy early and enhance it as your wealth, career and objectives evolve.

Understanding and maximizing your league benefits from the onset is a good first step. There may be generous matching contributions when you invest in certain accounts, such as a 401(k) plan—a long-term, tax-advantaged account that helps you save for your retirement (think age 60 or older)—or a pension that may create a future income stream. Many athletes also establish Simplified Employee Pension (SEP) IRAs, traditional IRAs and Roth IRAs to strategically maximize contribution limits.

Regardless of your chosen vehicles or investment approach, perform frequent reviews with your wealth manager to assure the strategy and holdings align with your established investment objectives and goals. As the markets evolve, periodically assess your investment allocations and strategy to make sure you are optimizing returns, managing risks, making opportunistic changes, and aligning your portfolio with your personal risk tolerance.

5. Manage your risk 

While growing your wealth is crucial, protecting it is key. An insurance plan can help ensure your property, including homes, cars and personal property, and any potential liability are covered. Developing an insurance plan also can help replace income for your family members and provide liquidity for income or estate taxes. Understand your investment risks by developing simple strategies around diversification or limiting allocations to certain types of areas.

Proper risk management is a key element to financial success. Protect your wealth so that you and future generations can benefit along the way.

It all starts now 

A winning financial plan bears your personal stamp and begins by defining your purpose and goals. It’s rooted in carefully understanding and monitoring spending, prudently managing debt and investing wisely. Each of these focus areas are driven by a lot of individual considerations and personal objectives. But, carrying out the plan without professional advice can be daunting.

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¹NerdWallet “California State Income Tax: Rates and Who Pays in 2022-2023,” February 27, 2023.
² NerdWallet “State Income Tax Rates: What They Are, How They Work,” January 3,2023.