Can a professional athlete (or anyone) work for a few years and retire with a six figure income for life?
They can if they follow the thin blue line*. Not just follow, but calculate, track, and almost obsess over the blue line. Further, it’s not just athletes than can create lifetime income and better their finances. Anyone who focuses on this line can do the same thing. More on the thin blue line a bit later. Let’s first focus on our athlete.
The mission is to take a professional athlete with a limited career and help him make more money after he retires each year than what he lived on when he was playing. For many, especially athletes themselves, this sounds more like mission impossible.
We all know about sudden wealth problems and how easy it is to lose vast amounts of money just as quickly as they were earned, but it’s not just possible for an athlete to ensure lifetime income after a short career, but easy to accomplish.
Let’s look at the median professional athlete. He’s a 22 year-old rookie who gets drafted in the middle of the 4th round by the NFL and signs a four-year contract. Assuming he makes the opening day roster that year, his average career length becomes about five years.
Income/Assets
The player drafted in this middle position of the 2014 draft received a four year contract that was worth a reported $2,665,000. Couple this with the minimum reported 2015 salary cap growth of 7.5% and this year’s “median rookie” should gross $3,186,311 in his first four seasons. Assuming this growth rate continues for the overall NFL median salary, his fifth and final season would gross him another $1,406,977 for a total gross of a little less than $4.6 million.
After subtracting agent commissions and taxes (assume 50% total), the player is left with approximately $2.3 million.
But NFL athletes earn more than just a salary. Our median rookie player who accumulates five credited seasons will also have a 401(k) with a 2:1 match on their first $13,000 contribution, a tax-favored deferred compensation plan, a pension, severance, a health reimbursement plan, and five years of health insurance.
Patrick Kerney, former NFL defensive end and now VP of NFL Player Benefits, was an invaluable resource in describing and calculating the many benefits the league offers. Kerney is a guy who talks the talk and can “discuss the topic of athlete’s and finances ad nauseum.” Kerney also walks the walk by educating other athletes and helping them make smart financial decisions.
Net Salary: $2.3 million
NFL Play Second Career Savings Plan / 401(k): $106,000 (sorry, no matching contribution for rookies but a 2:1 match on the first $14,000 in 2019)
Annuity Plan = $190,000
Health Reimbursement Plan = $125,000
Severance = $107,500
Total: Approximately $2.8 million
So far so good, but our player has expenses, and this is where those who experience financial trouble often go wrong. But since I’ve already provided the blow-by-blow details of how easy it can be to lose $20 million in a year, we can assume our athlete wants to make good financial decisions.
Instead of making the common money mistakes that hurt some athletes and sudden wealth recipients, our athlete focuses on the blue line...
What is the Thin Blue Line?
The thin blue line is the amount of money your money makes. The blue line shows you visually how much you can safely withdraw from your investments each year without running out of money.
While some investors are obsessed over calculating their net worth, I think there is no more important number than what the blue line represents.
Assets are important, but cash-flow is more important. It’s possible to have a $10 million net worth, but be completely broke. Invest in dead assets that are both illiquid and produce no income and you are asset rich but cash poor.
By calculating and tracking what you could withdraw from your portfolio and live on, you will know when the income from your investments could replace the income from your job. In the case of professional athletes and sudden wealth recipients, this is critical to know.
If our athlete took every dollar he made and didn’t spend a dime, he would have about $2.8 million net worth at the end of his NFL career. Using a 4% withdrawal rate, he could safely pull $113,000 from his portfolio each year to live on for the rest of his life.
But, of course, our athlete will have some expenses. He won’t be able to save 100% of what he makes over those five years. If the goal is to create a lifetime income stream that will equal or exceed his living expenses while playing, it would look like this:
$2.8 million net investments at end of 5 years assuming no expenses
$65,000 annual living expenses for 5 years = $325,000
To many hopeful professional athletes or those currently playing, the idea of living on $65,000 a year is laughable. However, this should be viewed as a starting point. The goal is to ensure the athlete is creating lasting wealth. If they continue to play ball and continue to sign new contracts, this number can go up, and in some cases, go up dramatically. The purpose of financial planning and being conservative with an athlete’s spending in the early years is to ensure that no matter what happens they have created lifetime income. Here is how it would look:
$2.8 million - $325,000 million of living expenses = $2.5 million in the athlete’s investment portfolio at retirement
4% withdrawal rate from this investment portfolio each year = $100,000 income for the rest of their life
Do you see what this athlete has achieved? While he was playing in the NFL he could spend $65,000/year for living expenses. When he moves to his next career just five years later, he has an investment portfolio large enough to allow him to withdraw six figures -- $100,000 -- for the rest of his life.
If the player continues to stick to his $65,000 a year budget even after he retires in five years from the NFL, the reinvestment of the extra $35,000 above his lifestyle costs should more than make up for the effects of inflation. If you add in a significant other who works outside of the home, a decent job upon the end of his playing experience, as well as the $109,944 annual pension payments he can receive starting at age 65, this player, according to Mr. Kerney, “Is on the path to do business with trust and estate attorneys as opposed to bankruptcy attorneys.”
Veteran sports agent and Chair of The Sports Entertainment Group at Kelley Drye & Warren LLP, Adisa Bakari, is a fan of this approach. He comments, "Robert’s ‘blue-line’ concept is absolutely spot on. Too many athletes fall into the false reality that the millions they’re earning while in the NFL will continue even after retirement. Because of this flawed thinking, athletes tend to spend as if that financial faucet will never turn off. But, of course, it will, and, oftentimes much sooner than the athlete expects. The ‘blue-line’ financial model forces the athlete to remain connected to the principal that one’s NFL earnings should last his entire lifetime. If the athlete remains disciplined, this model will ensure that the athlete remains financially secure for decades beyond his playing career.”
Again, many professional athletes who sign a $5+ million contract with the NFL will balk at being only able to spend “only” $65,000 a year, but since NFL careers are often shorter than they think and most of the money is not guaranteed, it is wise to spend little during those first few years while they build their portfolio so that if worse comes to worst, they can retire with a lifetime of income ahead of them.
Kerney recommends athletes stay grounded. “Keep a tether to reality,” he suggests. “Find a classmate in the working world who will confide in you his or her income, expenses and work/life balance. This will most likely give you a greater appreciation of the NFL opportunity, enhance your professionalism and make it far more difficult for salespeople, investment scams, ‘leeches.’ etc. to part you from your hard-earned money.”
Whether you are an athlete or not, focus on your thin blue line. Calculate how much your portfolio can pay you each year by taking the balance and multiplying it by 4%. If you have rental properties or other sources of passive income, add these amounts to the total income. Track this total income over time and it becomes your blue line. Once the blue line crosses your earned income from work, your passive and portfolio income could replace your earned income. That’s the goal athletes and non-athletes alike should strive for.
Being smart about your money takes discipline. Tracking your portfolio and blue line will take some time. If that’s too much trouble, though, you can always follow Kerney’s advice. “If you like money, read books about investments, the investment industry and successful long-term investors. If money is a burden you don’t want, ignore this advice and the problem will probably take care of itself.”
* It’s called the thin blue line simply because I reached for a blue marker once when explaining the concept during a presentation to a group of NFL players and the name stuck.
Robert’s latest book is The Sudden Wealth Solution: 12 Principles to Transform Sudden Wealth Into Lasting Wealth.
Connect with me on Twitter @rpagliarini, my financial planning blog, or email me. This discussion is not intended as financial, legal or tax advice, and cannot be relied upon for any purpose without the services of a qualified professional.
