The ULTIMATE argument for the need of such a program as The Playbook

The question posed in the The Playbook© commentary earlier today is applicable here. Mr. Professional Athlete, What is Your Game Plan....OFF-the-field? Because one is needed. Don't get distracted by today's hype and initial financial reward for playing hard in college. As a rookie, you need to get your personal team together and create a solid plan for both your financial and physical future.

This article is truly the ultimate point to why programs like The Playbook© are needed and long overdue.

A rookie’s security depends on more than draft-day decisions

Street & Smith's Sports and Business Journal

By Jason Cole

Published April 21, 2008 : Page 17

The 2008 NFL draft will launch a new class of athletes who may very well focus on living a higher lifestyle than they can afford without considering the financial challenges awaiting them.

The financial decisions that players make even before they sign their contract affect the quality of their lives for years beyond their playing careers.

First-round draft picks will sign contracts with large salaries and bonuses. Most rookies, however, will not.

In 2008, the minimum salary for rookies is $295,000, for second-year players it is $370,000 and for thirdyear players it is $445,000. These salaries apply to all but the first 31 players drafted (although round-one draft picks can choose to take these minimum salaries if it makes the most sense in their total contract package).

No guarantees
Unlike MLB and NBA contracts, they are not guaranteed. Signing and roster bonuses are the only real guarantees in what are traditionally four-year NFL rookie contracts.

The NFL Players Association estimates that at least 78 NFL players were defrauded of more than $42 million between 1999 and 2002 alone. Fraud and poor financial decisions have caused many NFL players to go broke.

Dale Carter, a first-round draft pick who played in the NFL for 13 years, filed for bankruptcy in 2002 claiming debts of $5 million.

Financial decisions NFL rookies make even before they are drafted or sign their first contract can affect their lives long after their playing careers end.

Fred Taylor lost his entire $3 million signing bonus in the William “Tank” Black fraud scheme. Black, a sports agent, was sentenced in 2001 to nearly seven years in prison on a money-laundering charge.

Assistant U.S. Attorney Jerry Sanford said during trial that Black abused his clients’ trust and stole between $12 million and $14 million from them. NFL players testified that Black used his position as their agent to steal millions from them through bogus investments.

Getting drafted does not guarantee employment in the NFL. From 2000 to 2007, according to Colin Lindsay of GBN Report, an online NFL draft site, an average of 37 draft picks annually, or 15 percent of those players drafted, were released prior to opening-day rosters.

Being prudent in the early years is crucial to achieving ultimate off-the-field success. Rather than spending, athletes need to save.

It makes sense to keep a portion of one’s earnings invested in safe short-term cash and cash equivalents if for nothing else but to have some liquidity and a safety net. I recommend that these rookies seek more financial training.

NFL education
In an effort to help their players handle their money responsibly, the NFLPA has stepped up its programs to educate young players about important financial issues.

All rookies are required to attend a symposium covering lessons about finances (among other topics). The NFL also provides a background-check service to screen any business opportunities players may encounter.

A rookie who receives a $1 million signing bonus and a starting salary of $295,000 will net about $1.2 million (before any spending and after fees taken by a business manager, agent, taxes, social security and union dues) over the average NFL career of 3.3 years.

If the player earned 7 percent on investment savings while spending $100,000 after taxes per year during his 3.3-year career, he’d accumulate $1 million at retirement. This will create an annual income stream of $40,000 (with annual cost-of-living increase) if he wants his money to last for the rest of his life.

If he continued to spend $100,000 after taxes and had no other earned income, he would run out of money after only nine years.

In most cases, rookies have poor or zero credit once they leave college. To establish good credit, they must pay their bills on time and avoid accumulating too much debt.

Rookies who are concerned about poor spending habits and lack a handle on their cash flow should hire a business manager to hold them to a fixed monthly budget. I recommend paying oneself back in the form of forced savings to start building a nest egg for retirement.

One way to address this is through the NFL Player Second Career Savings Plan, which is a 401(k) plan. A player’s NFL team matches the player’s pre-tax contributions 2 to 1 up to $20,000.
Thus, a player who elects to defer a maximum of $15,500 pre-tax from his paycheck will receive a $20,000 tax-deferred matched contribution from his NFL team.

Due to players getting only 17 paychecks during the season and then receiving no paychecks during the off season, planning for one’s spending and savings has to occur well in advance of the off season.

Establish residence
Many athletes do not realize that the state where they reside when they receive their signing bonus determines its taxation. In California, this means paying 10.3 percent, including a millionaire’s tax of 1 percent. To save or avoid state income taxes, look to establish residency in states such as Texas or Florida before contract signing.

I often advise rookies to set up an LLC for all marketing, endorsement and trading-card income streams.

With an LLC, a player can elect to make an additional retirement contribution (up to 25 percent of net LLC income), as well as deduct certain travel, agent, financial adviser and business management expenses against income. In all of the excitement and anticipation of this year’s draft, let’s not forget the reality of short careers and poor money decisions that these players will experience.

Jason Cole (Jason@abacuswealth.com) is a certified financial planner and managing director of Abacus Wealth Partners.