Imagine you’re a 19 year-old athlete. You get called up to the majors and earn a salary of millions. What are you going to do with all that money? Be conservative and cautious? Invest wisely? Well, probably not. If you’re like Jack Clark, the infamous San Francisco Giants power hitter who spent his way through 18 luxury cars including a $700,000 Ferrari and right into bankruptcy, you might make some bad decisions—and trust the wrong people.
Unfortunately, Clark is far from the only sports star to find himself with money troubles. Vince Young recently leveled a lawsuit against Ronnie T. Peoples and Major Adams II, his former financial adviser and agent, respectively. The lawsuit accuses them of misappropriating over $5.5 million of Young’s money. Then there’s WNBA great Sheryl Swoopes, who blamed her bankruptcy on agents and lawyers; NFL quarterback Mark Brunell, who went broke on bad real estate advice; and MLB star Lenny Dykstra, who invested in ill-fated car washes and a stock trading website before finding himself up on embezzlement charges.
According to an estimate from Sports Illustrated, 78% of NFL players go bankrupt or nearly broke two years into retirement, and 60% of NBA vets face the same fate five years after retiring. Why does this keep happening? Most sports stars are young and inexperienced when they become overnight multi-millionaires. They have none of the skills, time, or desire to manage their new wealth. This provides an opportunity for unscrupulous agents, accountants, lawyers, and financial advisers to make a quick buck (or five million) off a young athlete’s newfound fortune. Many of these professionals say they’re eager to help, but aren’t interested in their clients’ long-term financial security. Often their advice leaves out a very important part of sound investing: risk management. For the new millionaire there are also complicated tax laws and high penalties for missteps with the IRS. On top of it all, athletes often feel their incomes are never-ending, leading to bad personal decisions, such as extravagant spending on cars, homes, and jewelry; gambling or drug habits; and millions in divorce settlements or child support. Unfortunately, the average career of an athlete is very short, and soon they find that the money does, in fact, stop.
Take a lesson from the athletes who’ve lost their fortune and protect yourself and your hard-earned money. You don’t have to be a multi-millionaire be cautious about who you trust with your investments. Wealth managers, financial advisers, lawyers, and accountants are great resources, but be sure to educate yourself as much as possible. Poor retirement planning, IRS issues, and extravagant spending are the main causes of money trouble for pro athletes—and the rest of us.
Want to avoid going broke like a sports star? Although your retirement might not be as sudden as a pro’s, make sure you plan for it early and well. Build up your 401K and focus on risk management for your long-term investments. When the money stops rolling in, you can sleep soundly knowing you’ve had the foresight to prepare for it—unlike some of your favorite athletes. Additionally, consult a trusted lawyer about issues such as living trusts and prenuptial agreements. Avoid tax mistakes and penalties by consulting a CPA and always paying on time. Finally, don’t spend thoughtlessly or lavishly: save your money for any big purchase, whether it’s a $700,000 Ferrari or a $400 Schwinn. That fancy car took Jack Clark straight to the poor house; you can ride your modest purchase all the way to the bank.