They earn millions, but within two years of retirement, some NFL athletes start to file for bankruptcy.
Financial literacy expert Annamaria Lusardi at the George Washington School of Business tracked all players drafted by NFL teams from 1996 to 2003.
Her research showed that nearly 2 percent of the 2,016 athletes followed were bankrupt within two years of retirement and 15 percent within 12 years.
It wasn’t for lack of earnings.
The study found that a six-year athletic career, which is the median for the NFL, provides “more earnings than an average college graduate will get in an entire lifetime.”
“Well-paid players with long professional sports careers faced as much risk of bankruptcy as those with shorter careers and lower earnings,” found Lusardi.
What that means is that going into bankruptcy is not a function of earnings. It results from making bad financial choices.
The researchers identified several key factors leading to the high NFL bankruptcy rates:
Modest NFL retirement benefits. When you’re used to making millions, it’s hard to adjust to living on less when the good times stop rolling.
What you can learn: If you haven’t done a ballpark estimate of your retirement income, it’s time to do so. If you’re accustomed to living on six-figures, it will take a lot of savings to maintain that income in retirement. Get going on your retirement planning, hire an expert if needed, and play catch up.
Low financial knowledge. You’ve heard all the stories about athletes overspending, living large and making bad investments.
What you can learn: “Most NFL players are inexperienced in dealing with money, but this is a problem that can be fixed,” says Lusardi. Get competent help by entrusting your money only to those with credentials and experience, and stay away from the real estate and entrepreneurial deals (like restaurants) that trip up so many athletes. On the budget side, don’t spend more than you make, and distinguish carefully between “needs” and “wants” so you don’t break the bank.
A failure to adequately save and invest while playing. Athletes can have wide year-to-year swings in income and shorter careers than most people. They need to compress a lifetime of saving into a shorter period of time.
What you can learn: Don’t put off saving until the end of your career. Follow a “save as you go” policy, putting aside 10-15% of your income each and every year. If, like pro athletes, your income is uneven or uncertain, keep your overhead low and have a contingency plan to make ends meet even if your income dries up.