December 2004  Email this  Print this
 License or reprint this article
FAMILY FINANCE
Bonus Babies
by Kimberly Lankford
At the age of 25, Steve Smith has the same financial goals that most family men have: to build a college fund for his children, move to a bigger house, save for a secure retirement and give something back to the community. But there's one big difference between Smith and most other 25-year-olds: $27.5 million. That's the size of the six-year contract extension signed last spring by Smith, a wide receiver with the Carolina Panthers. (You might remember him scoring a touchdown in last year's Super Bowl.) You'd think a windfall that large would put Smith on easy street -- and his goals within easy reach. Ditto for other players in the NFL, where first- and second-round draft picks customarily get million-dollar signing bonuses. A third-round draft pick in 2001, Smith got about $500,000, plus a first-year salary of $209,000. This year, most NFL rookies make $230,000.
But unlike most of us, who have to plan for 20 to 30 years in retirement, NFL players have to plan for more than half a century. On average, an NFL player's career lasts about three years. Although most players end up with another job, they rarely match their earnings from football.
And those earnings are in jeopardy even before they're paid out. Agents and financial "advisers" often try to lure players with loans for the full amount of their anticipated signing bonus. When and if players actually get the money, it can be reduced by more than half, after factoring in taxes, the agent's 3% cut and NFL Players Association dues, putting some players in debt before they take the field. And then there's the irresistible pressure to dole out money to family and friends and to buy a mansion and a fancy car.
"Coming out of college, I helped some family members, paid off debts and spent money on things I shouldn't have," says Smith, who went to the University of Utah. But he didn't get into the debt trap.
Now, with a multimillion-dollar contract, Smith is more determined than ever to make the most of his good fortune. He's working with Jon Peterson of Next Level Financial Group, in Sausalito, Cal., whose clients -- including 18 NFL players and about 20 college players who are expected to sign with the pros -- pay up to 1.5% of assets under management for his services. All have been carefully selected for their potential staying power in the NFL and for their willingness to buy in to Peterson's philosophy: "If you're going to drink it, drive it or wrap it around your neck, that's not money management."
Instead, Peterson's clients learn about patience and pacing -- lessons familiar to those of us who don't earn big bucks catching passes. "You have to pay yourself and save as much as possible," says Smith, the frugal millionaire. On the other hand, the rest of us can learn from Peterson's strategies to minimize Smith's tax bill, protect his assets, prepare for retirement and stretch his money as far as possible.
The monthly allotment
Despite the eye-popping numbers, only a fraction of the money from Smith's contract is guaranteed. He can count on an up-front bonus of several million dollars; the rest is spread out over a half-dozen years.
For NFL rookies, it's especially critical to preserve a lump-sum signing bonus because long-term income is far from a sure thing. Jorge Cordova, one of Peterson's clients and this year's third-round draft pick with the Jacksonville Jaguars, blew out his knee in late August before the season even started. Now on injured reserve, his first-year salary will be cut from $230,000 to $130,000.
Peterson generally takes his clients' income and parcels out the money to several pots. He sets aside enough cash in a money-market account to cover six months' worth of regular expenses. He also gives his clients a regular monthly allotment to smooth out their income over 12 months. (Players receive the bulk of their salary during the official season, which ends in January.)
Only when those bases are covered do the players begin to invest. Even then, Peterson starts by having them max out contributions to their 401(k) plan, to which the NFL kicks in a generous $2 match for every dollar the players sock away. They also invest in taxable accounts, primarily in mutual funds that hold blue-chip stocks. After they have accumulated at least $200,000 in taxable investments, Peterson switches them from mutual funds to managed accounts in which they own individual securities and can control when to take gains and losses for the best tax outcome.
Even when players receive big signing bonuses, Peterson leaves riskier investments -- such as restaurants and real estate other than players' homes -- for the future. "If you have $50 million and lose $50,000 in Mexican real estate, you just lick your wounds," says Peterson. "But if you're worth only $100,000, a loss that size is a problem."
Peterson urges his players to pay off their credit-card bills every month. And he discourages them from buying a house during their rookie year because -- as Jorge Cordova discovered -- an athlete's life can change quickly and unexpectedly.
When players are ready to buy a house, Peterson prefers that they take out a mortgage, even if they can afford to pay cash. That way they avoid having too much of their money tied up in a house, and get a tax break on their interest payments. Players can buy tax-free bonds that generate enough income to cover the mortgage payments.
Because NFL players may spend just a few years in any one city, Peterson recommends that they get a three- to five-year adjustable-rate loan or an interest-only mortgage, which holds down their monthly payments. Lest they be saddled with a huge mortgage after their career ends, he likes them to pay ahead or set aside enough money to pay off the loan if necessary.
1
2 3 NEXT  |
MAGAZINE
