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On today’s episode of Alternative Investments, we will take a different approach and discuss how alternative investments can play a vital role for professional athletes, not only in building wealth but, more importantly, in maintaining wealth after their careers.
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While this concept can apply to all professional athletes, we will use data related to NFL players in our analysis.
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Most of us have heard or read about the high percentage of athletes whose earnings and savings dry up after their careers end. While no single study has been conclusive, the reality is sobering, a significant percentage of NFL players face financial stress or bankruptcy within a few years of retirement.
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By properly allocating large salaries and bonuses, NFL players can begin their investment journey early in their careers to protect their earnings and create the lifestyle they have worked so hard to achieve.
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Here are a few statistics we pulled regarding NFL rookies who entered the league through the 2022 NFL Draft.
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Rookies earned a minimum contract of $775,000, which represented a $45,000 increase over 2021. This reflects a broader trend agreed to by the league, where the minimum rookie contract value will continue to rise through 2030.
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While rookie base salaries are increasing, they are far from the ceiling. In fact, all 32 first-round picks from the 2022 NFL Draft agreed to four-year contracts worth more than $10 million.
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This was headlined by number one overall draft pick Travon Walker, whose deal with the Jacksonville Jaguars was valued at approximately $37.3 million.
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These lucrative contracts can provide significant earning potential starting in a player’s rookie season. However, shorter-than-anticipated careers can quickly deplete savings, even for highly drafted players.
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Statistics show that the average NFL career lasts just three years, and median career earnings for an NFL player are roughly $3 million.
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So what type of planning can improve outcomes for athletes and help prepare their finances for post-career life?
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One approach we recommend is incorporating various alternative investments into their financial plans.
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After establishing an appropriate annual budget with the athlete, a major portion of remaining contract earnings could be invested in alternatives with staggered lock-up periods of three years or more.
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A portion of earnings not allocated to alternatives could be invested in income-producing investments to help cover potential spending gaps and serve as an emergency fund.
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Remaining earnings each year could then be invested in traditional equities and fixed income to balance liquidity needs with the long-term, illiquid growth opportunities offered by alternatives.
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Growth-focused alternatives might include:
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Private equity
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Structured notes
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Commodities
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Real estate
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Income-focused alternatives might include:
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Private credit
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Infrastructure
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Structured notes
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The NFL has recognised some of the financial challenges faced by retired players.
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The latest collective bargaining agreement introduced major changes to the pension system, including reducing the minimum credited seasons for eligibility from four to three.
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The agreement also increased annual pension payments to approximately $46,000, up from $30,000.
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While there is no one-size-fits-all solution for professional athletes, there are solid planning and investment strategies that can help them build and maintain wealth throughout their post-career years.
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If you have further questions, please reach out via our website at KAGglobal.com.
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Until our next episode, please keep searching for ways to enhance your wealth.
