Oran Hall | Athletes and financial planning
ADVISORY COLUMN: PERSONAL FINANCIAL ADVISER
Professional sportsmen and sportswomen can earn substantial income – and some do.
The successful ones differ from most of us because they tend to make high earnings in a short time and generally have short careers. If any group needs good financial planning, athletes do.
Although so much happens for them in a short time, athletes can expect to live for a long time and must focus on the long term. They, like other people, retire, sometimes twice: from sports and from the careers many pursue after sports. But they risk being sent into early retirement by injury – and loss of form – and this can be very costly.
The relationship between risk and return applies in a very real way to athletes so the management of risk and the preservation of capital must be important parts of any strategy to manage their financial resources.
Pay yourself first applies to athletes in a significant way; savings establish a foundation for sustained financial soundness and long-term financial independence. It is prudent to save a fixed portion of earnings, which may pose a challenge considering the temptation to acquire expensive personal assets, but firm arrangements to send a portion of income to financial institutions without it first passing through the hands of the athlete can help.
One means of ensuring that funds are saved is a budget. It is best to make savings the first item on the expenditure side of the budget and care should be taken to provide for periods in which there is no income from the months when there is income. Setting up a system of accountability with a trusted person to help manage the budget should help.
There are many cases of athletes who lose substantial portions of their wealth. One reason for this is poor decision-making due to inexperience and a limited knowledge of finance and investments. Additionally, trusting others too much and paying too little attention to their affairs often opens them up to being exploited.
Professional athletes would do well to secure financial education. It would help them to make more informed financial decisions on their own, but it would also help them to relate more effectively to the people they select – after careful vetting – to manage their financial affairs.
Many athletes who are inclined to help others – family, friends, causes dear to them – need to set limits to their giving, which does not mean they cannot be generous. It matters that they know their limits and that they have an organised way to be helpful to others.
Personal assets have their place and can boost net worth, but a good balance should be struck between investment assets and personal assets. The former, if diversified effectively and managed well can contribute significantly to the sustainable growth of net worth.
Injury and ill-health are hostile to the livelihood of athletes as they have the potential to cause careers to crash without notice. Insurance is a good counter to them – health insurance to help defray the cost of medical care and disability insurance to provide income in the event of disability, so athletes should capitalise on the offer of government or sporting bodies to provide coverage.
Life insurance is also important. Considering that athletes also have dependants, life insurance is important to ensure that dependants are provided for in the event of early death. But it is also an important means of providing funds for the high expenses associated with settling an estate.
It is important to be able to replace assets – especially if they are pricey – in the event of loss by fire, for example, so it is useful to have adequate property and content insurance coverage.
Estate planning has to have an important place in the financial plan. A will is needed to ensure that the assets of an athlete who has died is distributed according to the wishes of the testator. The use of trusts, joint ownership and inter vivos transfers are useful tools for sharing assets with loved ones.
Sportsmen and women need good legal advice regarding how they organise their business affairs, particularly with regard to how best to reduce their effective tax rate without violating the law.
I was so pleased to see one of our former track athletes on the television recently. Academically, he has done well, having attained a doctoral degree. That should enhance his ability to provide for a good retirement. Other sportsmen and women should emulate Dr Gregory Haughton, not necessarily by attaining a doctoral degree but by equipping themselves with the means to earn after sports.
Beyond that, athletes should so mange the income from sports and the add-ons that flow from it that it can help to give them a comfortable and stress-free retirement. Taking a disciplined approach to investing and building a diversified portfolio can go a far way in realising that objective.
Successful athletes can earn substantial income in a short time, but it does not have to be spent or lost in a similar time frame. The key is a structured financial plan with clearly defined realistic goals wisely managed with the help of a team of capable professionals.
Oran A. Hall, the principal author of ‘The Handbook of Personal Financial Planning’, offers personal financial planning advice and counsel.