I have had the pleasure of knowing and working with several professional athletes during my career. They are a very unique group of people that have interesting financial challenges that are not unlike those in the working world except that they pack their career earnings in a very short window of time, usually 10 years or less.
Recently I have had the opportunity to connect with some soon to be professional athletes and discuss the financial opportunities that they are going to begin facing shortly after they are drafted.
This series of blog posts are going to be geared toward future athletes but I think it can be applied to a wide range of people from those dealing with sudden wealth to those that are long term high income earners.
In this first installment I will look at rookie contracts.
For full disclosure none the players discussed here are clients or are in discussions to become clients. The contract dollar amounts in these examples are available through google.
As a high achieving athlete it is every kids dream to hear their name called on the night or day of their sports draft. They work hard as a high school player, and then get the opportunity to be a student athlete in college and then the lucky few will get to be drafted and continue their career as a professional athlete. All that hard work prepares them for their day job but none of them are prepared for the financial challenges they will face.
All of the professional leagues have sliding rookie contract scales, whether it be based off of signing bonuses like the NFL and MLB or contract slots based off where you are selected in the NBA draft. The average career of an NBA player is 4.8 years, MLB is 5.6 years, and the NFL is 3.3 years (Business Insider 2013). That means that for most players they will only have one contract to create some security for them and their families.
Let’s look at the financial differences between being a lottery pick, a first round pick, and second round pick.
In the 2014 draft Noah Vonleh (9th pick overall by Charlotte), PJ Hairston (26th pick by Charlotte), and Joe Harris (33rd pick by Cleveland).
I will start with Joe Harris who signed a 3 year contract for 2,714,369. [i]
Year 1 – 888,879
Year 2 – 845,059
Year 3 – 980,431
Year 4 – 1,251,245 – team option
Harris was the rare second round player to get the first two years of his contract guaranteed. Most second round picks have to make the roster in order to get paid their contracts value. Joe had to make the roster and play (which he was able to do) in order to guarantee year 3 which means he will earn the total of 2,714,369 before taxes and fees. His agent will take a percentage of the contract ranging from 3 to 5%. At 5% his agent’s fee was $135,718 for the 3 years.
Uncle Sam is Joe’s least favorite Uncle. Between Federal and having to file state taxes in every state he plays a game (if that state has an income tax). He will end up paying a conservative 50% in taxes. So over the 3 years of his contract Harris will take home $1,289,325 or $429,775 per year after taxes and agent fees. While $429,775 is a lot of money he could get hurt or get cut and possibly never play again. He has to continue to perform in order to earn more money for his financial future.
Now let’s look at PJ Hairston [ii] who was selected just 7 spots before Joe but was a first round pick.
PJ Hairston signed a 3 year $3,604,324 guaranteed contract with a 4th and 5th year team option. All first round pick’s contracts are guaranteed for the first 3 years.
Year 1 – 1,149,720
Year 2 – 1,201,444
Year 3 – 1,253,160
Year 4 – 2,259,447 – Team Option
Year 5 – 3,334,994 – Team Option.
Agent fee 5% – 180,216
Taxes 50% – 1,802,162
Take home pay for PJ Hairston is $1,802,162 or $600,720 per year.
Hairstons’s pay is guaranteed and is 39% more than Harris’. Also the team options are a lot higher. It certainly pays to be a first round pick when it comes to improving the potential for financial independence.
Finally let’s look at a lottery picks economics.
Noah Vonleh [iii] was the 9th pick and signed a 3 year/$7,913,280 guaranteed contract.
Year 1 – 2,524,200
Year 2 – 2,637,720
Year 3 – 2,751,360
Year 4 – 3,505,233 – Team Option
Year 5 – 4,749,590 – Team Option
Agent fee 5% – $395,664
Taxes- $3,956,640
His 3 year guaranteed income is ~ $3,560,976 or $1,186,992per year.
So to sum it up lottery picks make double what a late first round pick does and 3 times as much as an early 2nd round pick. Also of consideration is the fact that 90% of fourth year team options get picked up on lottery picks.
Now let’s look at a doctor or executive that works 35 years and earns an average of $200,000 a year. Over the course of their career they will make $7,000,000. They will pay on average 35% in income taxes between state and federal per year. That would equal $2,450,000 in taxes. That would mean that they earned $4,550,000 in take home pay. While the annual average is significantly lower than a professional athlete the total take home is much higher.
The professional athlete has a unique set of circumstances that they have to deal with but the basic fundamentals of living within your means and saving as much as you can afford does not change whether you are a young doctor or an NBA star.
In the next blog I will offer up some advice to athetes on how to not end up staring in Broke 2 the 30 for 30 by ESPN.
A Thought from the Factory on Main
Best wishes
Peter Huminski, AWMA
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
The examples of individuals represented is not indicative of all client experiences. Each client has unique circumstances. Examples presented here should not be interpreted as a guarantee of future performance or success.