The culture of Professional sports is in so many ways glamorous. In fact, more often than not, among the first thoughts one has when thinking of professional athletes is their lifestyle and levels of income. We often marvel at some of the current day contracts and wallow in thoughts of how much those paychecks can be. However, while the paychecks may be enormous, do too many of us, including these athletes, make the error of not discriminating between the size of a paycheck, and the amount of career earnings?
Would it surprise you to learn that the average physician in America earns significantly more during their career than the average NFL player? However, we are in awe of the NFL players not because of their career earnings, but because of how big their contracts are perceived to be. And yet, each and every year, retired players are running out of money and declaring bankruptcy. How can that be?
Well, consider this:
The average professional football player earns $2.3 million in a very short period of time, about 2.2 years. After taxes and agent commissions, the average player is left with approximately $1.15 Million. That’s right, about half is gone. That remaining money needs to last some 60 years given today’s average life expectancy. Without considering the effects of inflation, $1.15 million spread over 60 years is equivalent to a little more than $19,000 per year! For simplicity sake, we will ignore the effects of inflation and investment growth. If a player spends only half of their "contract" value during their playing years, they will have nothing left after their playing days have ended; thus running out of money extremely quickly.
In contrast, the average physician makes about twice what the average NFL player makes—about $5.8 million. However, because their income is inherently spread over a 30-year career, their "contract" in any given year is not nearly as impressive. In addition, very infrequently does a physician worry about seeing a patient and thereupon sustaining a massive concussion, torn ligaments, or worse, a career-ending injury. Are pro athletes paid too much, or are they compensated for a violent and extremely short professional career?
Let's step it up a few notches. Let us consider the average professional baseball player who makes $18 million over an average career length of about 5.6 years. Despite the almost inconceivable amount of money this may seem to be, the average MLB player still must make this income last the same 60 years. After taxes and agent commissions, this average player is left with about $8.1 million or about $145,000 per year. And while $145,000 is a tremendous amount of money for the average American, this seems much more reasonable than considering $18 million.
Here are a few problems with this misconception. First of all, due to a lack of financial education, a tremendous portion of pro players literally run out of money during their post-playing years (and sometimes even during their playing days). The major sports leagues attempt to provide a sense of understanding for rookies; unfortunately, this system is somewhat broken and the knowledge is not permeating the pro player culture. While many people have little sympathy for this issue, let us examine this monetary problem from a different point of view.
Professional athletes contribute significant amounts of money to charitable causes, which is a wonderful thing. Unfortunately, without proper financial education, the mathematical error in planning made by far too many of these players is causing bankruptcy to become far too common. When a player runs out of money, the beneficiaries of these philanthropic organizations also lose out. In a world of deteriorating ethics and morality, this philanthropy is more important than ever.
Speaking of ethics, another problem with mistaking cash flow for career earnings is that many players become extremely interested in get-rich-quick business ideas in order to stay afloat after their playing days have ended. In today's world, whom can you trust? The next installment of this series will discuss fraud and the ocean of scam artists who specifically target wealthy individuals not savvy in the realm of finance. Marry these two issues and the result is massive fraud in the world of professional sports.
The third basic problem is what we see at home and watch on TV. The United States as well as the rest of the world recently endured the deepest recession in the past 80 years. During this time period, we saw horrific job loss, stress in the workplace, stress on the home front, frustration with government, frustration with big business; the list is never ending. Yet every Sunday, our troubles seem to disappear as we dive into the escape and entertainment of pro sports with our friends and families, sons and daughters, mothers and fathers, and even rivalries on occasion, to watch our teams battle it out on the field or on the court. We laugh, we scream, and cheer and boo, all the while enjoying time spent NOT thinking about our daily stressors. Yet every year, more of the professionals who bring us this entertainment are running out of money simply because of the misconception between career-earning and paycheck size.
Given these issues, in conjunction with an independent research firm, our team, The KR Group at Morgan Stanley Smith Barney, has commissioned a study titled "5 Biggest Challenges Facing Professional Athletes." If we can educate and help alleviate these problems, many of these players will continue to serve their communities and carry on their charitable endeavors.
Welcome to the column "Something to Think About." Thank you for reading.
Scott Kaminsky, Vice President, The KR Group at Morgan Stanley Smith Barney, co-edited this article.
