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Pro athletes need financial advice before the first snap

That multimillion-dollar signing bonus is a lot smaller when the check arrives

Here’s a money lesson some pro athletes need to learn. Uncle Sam takes his cut off the top.

“Your take-home money is not what it seems,” said Los Angeles-based sports agent Leigh Steinberg.

Financial advisers and sports agents say it’s something young athletes, their friends and family often overlook. It can lead to them overestimating their wealth, overspending and ending up in financial trouble.

For example, take a $5 million signing bonus, Steinberg said. “It is treated as taxable income. Depending on your tax bracket, you could be spending as much as 38 percent of that in taxes. He [the athlete] is getting 60 percent.”

Why do so many pros go broke?

That doesn’t take into consideration state and local taxes. “In California, we have a 13 percent state tax,” Steinberg said. “That 38 percent plus 13 percent is half someone’s paycheck.”

On top of that, there are agent fees, he said, which are capped at 3 percent in football, 4 percent in basketball and 5 percent in baseball.

“If you have a $100 million contract, that’s really $50 million,” said Edward Barnett, vice president at Newbury Capital Management in Pasadena, California, and financial adviser to several current NBA players. “I have to say [to clients] this is how much you have and this is how much you can spend.

“It’s just sitting down and educating players,” he said. “Sometimes players haven’t been educated on those things. It’s rare that you take a kid and give him all that money and think he will make right moves. He has to have people who can educate him to understand what is going on with their money.”

‘You have to invest for them like they are a 55-year-old’

Underestimating taxes isn’t the only thing that can get athletes into financial trouble. It’s easy for them to overestimate the length of their careers and, thus, their professional earnings.

“An athlete making $5 million a year assumes he has $4 million to live on that year because there will be more,” Steinberg said. “The reality is that athletes will retire in their 30s, when they are young, and won’t have that income.”

Professional sports careers are very short: an average of 3.3 years in the NFL, 4.6 years in the NBA and 5.6 years in the MLB. It has been estimated that 78 percent of NFL players are either bankrupt or under financial stress within two years of retirement and 60 percent of NBA players are broke within five years of leaving the sport.

Pro leagues, players associations and even colleges now offer classes and seminars to help players understand finance and the importance of budgeting. The NFL, for example, had a four-day financial boot camp for players March 27-30. The National Basketball Players Association says financial advisers visit players on each team to talk about personal finance and investing.

Steinberg, though, said the young players complain that the topics aren’t interesting: “Financial planners aren’t the most exciting people in the world.” And some players are reluctant to listen to their advice. “We have players who didn’t want to do wills because they thought they would die. We have players who refuse to stick to a budget.

“The best thing we can do is tell them over and over is you have to listen to and follow the advice of the financial planner or the financial expert in your life,” he said. “That’s the thing standing between you and bankruptcy. That’s the thing standing between you and your opportunity to have a long and fruitful life.”

Barnett said pro athletes require a different type of planning. Most people leaving college start out at the bottom of their earnings potential and reach peak earnings as they near retirement. Pro athletes are just the opposite.

“Pro athletes, though they are chronologically young, you have to invest for them like they are a 55-year-old,” said Barnett. “When they are youngest, that’s when they reach their peak earnings potential. As they get older, their earnings potential starts to decrease. When most people are at highest, they are at the lowest.

“If they have a long career and retire at 35, the money they earn must last them 50-plus years. It’s a different set of sensibilities. The challenge is having this money last while still maintaining a lifestyle they are accustomed to.

“The [financial] plans are only as good as the people who listen to them,” Barnett said. “If the player doesn’t have ability to control his spending habit, then it’s not if you go broke, but when you go broke. It’s simple math.”

That’s not to say that most players ignore those realities. “Many are cognizant of the mistakes made by their predecessors and enter pro sports not wanting to make those mistakes,” Steinberg said. “The stereotype is the free-spending athlete. But the reality is you have some tightfisted athletes. Almost all of our clients are acutely aware that they don’t want to end up a greeter outside a Las Vegas casino.”

Some success stories

  • Chicago Bulls point guard Michael Carter-Williams put his earnings in a trust and decided to live off endorsement earnings when he was signed by the Philadelphia 76ers. Many of the news stories credited his mother, but she gives the credit to Carter-Williams.

“I didn’t really do it for him,” said Mandy Carter-Zegarowski. “We sat down and talked about different ideas about how to manage the money with him coming straight out of college. We brought up the idea of a trust. At the time, he was 21. He was old enough to manage the trust. It’s in his name.

“Michael bought into the idea of saving and creating a budget that would allow for him to save,” she said. “So it was my idea, but it was Michael who decided that was something he wanted to do.”

  • Former Detroit Lions wide receiver Ryan Broyles was in the news a few years back when stories emerged about him and his wife, Mary Beth, and their decision to live on $60,000 a year even though he had signed a three-year, $3.6 million contract with the Lions. Both were still driving the same cars they drove in college.

The first purchase some athletes make after their first pro contract is a luxury car or a big house. But the big purchase for Broyles and his wife was an $8,000 Tempur-Pedic bed.

“I always knew the value of money and the value of work,” said Broyles, who now lives in Norman, Oklahoma, where he and his wife are entrepreneurs who buy, renovate and sell homes. “I knew if I did have the opportunity to go to the NFL, I would budget it well. I didn’t want to be the guy working his whole life for minimum wage.”

  • Baltimore Ravens long snapper Morgan Cox said he made it a point to ask his teammates in the locker room whom they had hired as financial advisers. That’s how he ended up with his current adviser. He also was influenced by his parents — his father is a banker and his mother is a former banker who has always handled the family’s finances.

“From an early age, I understood what it meant to budget,” he said. “When I turned 12, I wanted to open a savings account. I probably had $100 at any given time. But I understood from an early age. That’s how I was, and still am to this day.”

Cox said that even though he was a finance major in college, he wasn’t comfortable managing his own portfolio. “I talked to guys around locker room,” he said. “I got some consistent references.” He said he resisted overtures from his friends right out of college who were just starting out in the financial industry. “I heard from a few friends, but I knew what I wanted to do was get a guy that other NFL guys had used and were comfortable with versus going with a guy, a friend working for someone.”

His advice: “I would say the most important thing for them to do is surround themselves with good people who serve [your] best interest and not their own interests. I’ve seen guys get in trouble who surround themselves with people who think this is their ticket to get into parties and things like that. I have a good core group of friends who care about me and know me. And, get a financial adviser who will help you make decisions.”

“The player who doesn’t have good parental help and does not have university help may be at the mercy of whoever he signs with,” Steinberg said. “The pressure is higher for a higher-drafted basketball or football player than it is for baseball. In baseball, a good chunk of players go into the minors and then a system where a team can force them to play for the minimum, then salary arbitration. The big contract may be five or six years into his career.

“Rookie football players taken in the first and second rounds get big signing bonuses,” he said. “Their challenges are immediate. Basketball players have high first-year salaries that are guaranteed. Be prepared. Understand that you need to set up a financial life with bank accounts, checking accounts, credit cards, a financial plan for how much money it is reasonable to spend and tax planning. While you may not be able to do all those things as a young man, you want to understand how to use experts.

“You would like to have a financial planner in place prior to the draft,” Steinberg said. “There may be a question on how the money should be paid or taken.”

Barnett said he starts retirement planning on day one for his NBA clients.

“It’s a young man’s sport, and no one is guaranteed,” he said. “We ask what is the second phase [in your career]? Is it going back to school to get a college education? We ask what they have a passion for and put them with people who can mentor them, whether it’s real estate, franchising, whatever they have interest in. It’s getting people while they are playing.”

Broyles’ advice: “Simply live below your means so you can invest. Think about tomorrow. A saying that one of my mentors says to me is: ‘Do things today that your future self will thank you for.’ Self-education is the most important thing. That, and finding a good mentor.”

Rodney Brooks is a retirement and personal finance writer/author. He has written a retirement a column for USA TODAY and the Washington Post. He is passionate about financial literacy and music. And has more than 12,000 songs on his iPod.