Why Do so Many Professional Athletes Go Broke After Retirement?

Jay Nicholls Economics of Sports Prof. Enz 4/5/13 Why do so many professional athletes go broke after retirement? After watching ESPN’s 30 for 30, Broke, my mind starting pondering this question of why and how so many professional athletes are blowing through the millions they make while playing their specific sport? It is amazing that someone can spend that much money so quickly. What are they buying and who are they buying things for? Where are they spending it? Where do they go wrong? When did this trend start and will it continue in the future?What are the league officials doing in order to prevent this tragedy from happening? These are some of the questions I will try to answer throughout this paper. In March of 2009 Pablo S. Torre wrote an article for Sports Illustrated titled, â€Å"How (and Why) Athletes Go Broke†. He explains how many athletes, especially minority ones, come from very humble beginnings often times growing up in poverty. Some of whom are the onl y ones in their family to reach college. Then some of them even start earning money while still in college through â€Å"illicit payments from agents† (Torre).Once these players hit the big leagues and start earning millions, much of it is invested blindly by people who appear to be trying to help but often times do not. Their fortune seemingly evaporates right before their eyes. If and when these athletes look at their bank accounts their reactions are usually similar, â€Å"What the †¦? †(Torre). The most common leagues that players go broke are the three most popular in the country, NFL, NBA, and MLB. Torre reported that â€Å"By the time they [the athletes] have been retired for two years, 78% of former NFL players have gone bankrupt or are under financial stress because of joblessness or divorce. (Torre). That is an astounding number of players looking at overdue credit card bills, child support payments and much more. Athletes who do get married and then ev entually divorced, in many cases, do not sign prenuptial agreements therefore losing at least half of what they worked so hard for. Another astonishing figure reported by Torre was that 60% of former NBA players are broke within five years of retirement. They typically run into many of the same problems as NFL players. The MLB is no different.High profile Major League Baseball players like Johnny Damon and Jacoby Ellsbury reported that some of their money is tied up in an $8 billion fraud scandal due to a shady financier named Robert Allen Stanford. It is hard to believe that someone of that celebrity status could be drained of their money but it’s true. Mike Pelfrey of the New York Mets was forced to ask the team for a salary advancement of $2 million after he admitted he was broke because 99 percent of his fortune is frozen in the same scandal (Torre).These athletes not only gave much of their wealth to Stanford, but also all of their trust and he essentially took their mon ey and ran with it. Uneducated athletes or ‘dumb jocks’ are an easy target for fraud because they may not read the fine print or even care to read it. Also they may not understand the investment fully and get taken for all that they are worth. The financial crisis of 2008 had a huge impact on many players’ wealth as their trusted financial advisors lost billions in the stock market crash.Money manager Michael Seymour, founder of the company UNI Private Wealth Strategies, was quoted saying, â€Å"Athletes have a different set of challenges from, say, entertainers. There’s a far shorter peak earnings period [in sports] than in any other profession, and in many cases they lack the time and desire to understand and monitor their investments. † (Torre). Many athletes don’t have time or the education to know where their money is going and who is handling it. A grueling 162 game baseball season doesn’t leave much time for a ball player to sit down with his financial advisor and talk numbers.Many players will say here is my money, invest it without surveying the risks involved or even realizing that there are risks involved. Coming into that much money so quickly may force a player to just pay someone to handle it because it is much easier that way. Seymour also brings up a good point that is often overlooked by people on the outside or the fans; this is the length of professional sports careers. There are very few athletes in any sport that can last long enough to retire and have enough money to not worry about the rest of their lives.Athletes such as Brett Favre, Cal Ripken, Chris Chelios and Gordie Howe are the rare exceptions to this rule. Howe played professional hockey throughout five decades spanning nearly fifty years. An article from quanthockey. com stated that the average NHL player will play between five and six seasons in the league no matter what position they were. On average that accounted for roughly 238 games played for skaters but far less for goaltenders (â€Å"Average Length of an NHL Player Career†). The numbers across the other three major leagues are very similar or lower.However hockey players, for the most part, are either good with their money or good at staying out the spotlight if they do go broke. The RAM Financial Group is a company that specializes in helping professional athletes manage their wealth. They refer to themselves as financial coaches that â€Å"help guide you to success† by planning for retirement, handling taxes, insurance, and budgeting along with many other services. In an article on their website they wrote that the average NFL career is 3. 5 years; the average NBA career is 4. years and the MLB had the longest career length of any of the four major sports leagues at 5. 6 years (â€Å"Athlete Services†). These three figures make sense too; that as the sports get less physical the career length gets longer. The baseball statistic did not include pitchers however, who are far more prone to injury and typically have much shorter careers than position players. Those figures are also the averages, meaning half of the players fall below that career length. Those players only lasting a season or two in most cases are not star players and are not earning large signing bonuses or special incentives.Chances are they are late round draft picks and sign for the league minimum. RAM Financial Group says that athletes must plan for nearly 50 years of retirement after sports. Since many athletes did not go to, or did not finish college, they do not have a degree to rely for help in the job search after their career has ended. There are only a select few athletes that can maintain a job in the sports world, such as a television announcer or analyst, coach, or scout et cetera; it requires a certain personality and intelligence.The article by Torre profiles a football player by the name of Raghib (Rocket) Ismail who was a sta r wide receiver for Notre Dame and was a potential number one draft pick for the NFL, but instead chose to sign an $18. 2 million contract over four years with the Canadian Football League’s Toronto Argonauts. Why he chose the CFL over the NFL I will never know. He goes on to say that he started with a base salary of $4 million and he was so focused on football that by the time his first year was over his bank account was just about empty.Ed Butowsky was listening to Ismail speak and nodded his head as if to say, ‘I could have seen that coming’. Butowsky is a managing partner at Chapwood Investments which is a wealth management firm. He is used to managing very wealthy people’s fortunes in the business world but, not many professional athletes. Butowsky realized that broke athletes was a reoccurring theme throughout major league sports and he felt the need to do something about it. In 2005 Butowsky began inviting many prominent athletes to his so called fi nancial â€Å"boot camps†.Some of these athletes were well off and others were not. He taught them things about money from the very basics of what is a bond, to some more complicated topics such as insurance and retirement. These sessions were free of charge and the goal was to educate these young men so that they did not fall into financial ruin like so many athletes before them (Torre). An athlete’s wealth is† supposed to outlive their career† according to Bill Duffy, a veteran agent who manages players like Steve Nash and Carmelo Anthony. So where do most of them go wrong?The feature of Torre’s article, Rocket Ismail, talked about his investment portfolio over the years. It included lots of â€Å"dubious inventions and risky investments† (Torre). He mentioned pouring money into a religious movie that saw no return. He earned a reported $18 to $20 million over his career from salary alone in the CFL, and went broke through what he calls â₠¬Å"‘total ignorance’†. He was luckier than most broke athletes however, because he never filed for bankruptcy, had legal trouble or got divorced, and most importantly he had his degree from Notre Dame.But his lack of ‘luck’ with investments caused him to nearly lose it all (Torre). One of his worst investments came when he sank $300,000 into a theme restaurant called the Rock N’ Roll Cafe. It was similar to the idea of the Hard Rock Cafe. Ismail said the man who pitched him this idea talked about it as â€Å"fail-proof, with no downsides† (Torre). Ismail was never paid back anything at all and doesn’t even know if the restaurant ever existed. His lack of interest in the investment led him to lose a considerable amount of his money by writing a single check.If I were about to invest that much money I would want to see building plans, permits, other investors, revenue, and much more before I decided to invest anything at all. Whethe r he didn’t care or didn’t know, he is still at fault. One would think Ismail learned his lesson, but the opposite is true. He continually pumped thousands of dollars into sketchy investments that never took off. He was too trustworthy and easily persuaded by smooth talkers and promising business plans such as a music label, a cosmetics line, tourist shops, and a phone card dispensary company.All of which failed miserably and he saw no return on his investments. Some may call it bad luck but Butowsky sees it differently. According to the article, â€Å"Industry experts estimate that only one in 30 of the highest-caliber private investment deals works out as advertised† (Torre). I would not be willing to risk much money on a thirty three percent chance of making money. He also states, â€Å"Chronic overallocation into real estate and bad private equity is the Number 1 problem [for athletes] in terms of a financial meltdown† (Torre).The lure of tangible ite ms is so much greater than buying something intangible like a stock. Most athletes love the spotlight, and by saying so and so owns a bar or restaurant is a lot sexier and more intriguing than being a shareholder in a Fortune 500 company, even though it may be a safer investment. Risk-averse investors suggest allocating most of their investments to a mix of public securities which to most athletes are invisible and boring. The thrill of inventions and nightclubs are for more appealing but riskier.Disreputable people see athletes’ money as very easy to get a hold of according to NFL agent Steven Baker, who represents 20 NFL players (Torre). People seek to take advantage of them and as history shows it they have been extremely successful. Drew Bledsoe and a crew of other NFL retirees invested â€Å"at least $100,000 apiece in a †¦ Pay By Touch †¦ technology that would help replace credit cards with fingerprints† (Torre). Even though this company was dealing wit h several lawsuits from players and others, they still invested.The stories of athletes buying real estate to sell and rent are very common and their results are all too similar. The financial crisis put a huge damper on the housing market and caused many of the properties to be foreclosed on putting these athletes further into debt. Many properties are up for sale on EBay, far below their original asking prices and market values. Former major league infielder Junior Spivey is one of the many suffering from owning too many real estate properties that aren’t seeing a return on investment.He declares, â€Å"It’s very tough, especially for someone like me who’s not playing† (Torre). Young, rich athletes are similar to a lottery winner who comes into millions without knowing how to handle it. Some of them probably haven’t heard or learned of the basics of budgeting or keeping receipts for tax purposes according to Leigh Steinberg an NFL agent (Torre). Many athletes will admit they know nothing about the business and financial world after the fact they have made very costly investments without knowing all the details about where their money is actually going.Magic Johnson weighed in on this discussion, â€Å"by admitting he knew nothing about business† (Torre). He was a lucky one getting a trustworthy adviser. He went on to say that many athletes hire family and friends because it is a favor to them but these people are often times in over their heads when dealing with this much money. They can make risky and uneducated investments that may not be profitable. Johnson gets calls from stars all the time who ask him about hiring friends and he immediately says no because he knows they will more than likely fail.Many athletes will hire their friends because they simply do not know how to say no to them. Friends of rich athletes often expect financial help or jobs. The infamous Ron Artest had to dismiss six of his friends involv ed in his record label in 2007. They were doing odd jobs for him and living in a house he was paying for. His ‘entourage’ was less helpful than they were worth and Artest had to make that tough decision (Torre). Jerry Richardson, owner of the Carolina Panthers stated the most dangerous thing that could happen to an athlete financially is divorce.A lot of athletes get married young and by the time they retire realize they made a mistake. In Torre’s article, he refers to a survey put out a financial services firm by the name of Rothstein Kass. In the survey they polled 178 athletes – each with a minimum net worth of $5 million and most were under the age of thirty. It was reported that, â€Å"more than 80% of the 178 athletes polled†¦ [were] concerned about being involved in unjust lawsuits and/or divorce proceedings† (Torre). Athletes and agents’ common estimates today, show that the divorce rate for professional athletes is anywhere from sixty to eighty percent.Husbands routinely lose half of their net worth in these cases and most splits happen after the peak earnings period of their careers, or in retirement. This timing is no accident. Former NBA center Mark West commented, â€Å"There’s this huge lifestyle change†¦ you and your wife are suddenly always at home, bugging each other. Before you’d say ‘I gotta go to practice. ’ Now you don’t have practice† (Torre). If you don’t want to spend time with your wife clearly you aren’t ready to get married or you picked the wrong woman to spend the rest of your life with.I can see how many retired athletes would want to relax at home after their career is over. Some women are just gold diggers as well, just using the men’s money to go shopping and such. Other problems such as infidelity may arise as well. Celebrity status sometimes seems to bring out the worst in people and not many marriages can survive a cheating scandal. With all the pressures riding on a high profile marriage with an athlete, the prenuptial agreement is one security blanket to protect an athletes’ net worth.This is recommended by agent David Falk who represented Michael Jordan, but Jordan did not have one. The percentage of athletes who sign one is considerably lower than regular people of the same economic stature. Often times an athlete will marry his hometown sweetheart and they are so blinded by ‘love’ that they could not ever imagine a ruinous divorce in their future, but people change especially when there is lots of money at stake. Dikembe Mutombo set a great example for athletes when called off his marriage in 1994 after his fiance refused to sign a prenuptial agreement.It reportedly â€Å"cost him $250,000† to cancel the wedding ceremony but it could have been millions had they gone through with the marriage and gotten divorced later on (Torre); smart move by the big man. Chil dren are a large factor in a divorce settlement as well. They tend to make the decisions far more complicated. NBA player Travis Henry, who has nine children with nine different women, is a prime example of this. His fortune was demolished by child support payments in the â€Å"tens of thousands† (Torre).When athletes cannot afford to pay these ridiculous amounts of money they get treated no differently than regular citizens and are put in prison. Another factor leading to the demise of an athletes’ wealth is the notion that they want to impress the veterans on the team and get on their good side. Some rookies think that in order to do this they must buy a Lamborghini, a yacht or splurge on a million dollar house. You cannot live outside your means for too long. Soon enough the bills will come in and they will realize that swiping a credit card doesn’t mean you can keep that item forever. Young layers will look up to guys that have been in the league for many ye ars, and who have accumulated plenty of money. They try to emulate them and fail miserably. For example a rookie on say, Shaquille O’Neal’s team, might look at his many cars, clothes and large and say, ‘I want that’. However Shaq has money coming from not only his NBA salary, which was amongst the highest in the league, but also from numerous endorsement deals off the court. Professional athletes’ going broke has been an ongoing trend for many years and it will continue until education becomes an important part of turning pro.Fox news did a short story on this epidemic and in it Kathryn Buschman Vasel reported that, â€Å"The reasons for financial hardships vary, from lack of planning, over indulgence, bad investments and poor financial guidance. Or all of the above† (Vasel). These four mishaps have ruined lives of once millionaire athletes for so many years. With so many star athletes going broke and embarrassing not only themselves but the leagues they represent, what are the owners, general managers, and league officials doing to help prevent this trend from continuing?USA Today posted an article on this topic last year citing the Sports Illustrated article among others. Russ Wiles wrote, â€Å"The NFL conducts workshops for rookies covering topics such as substance abuse, sex education, gambling, domestic violence and personal finance† (Wiles). However their effectiveness remains in question. Many of the rookies will disregard these efforts to help them and wind up in the same situation as their counterparts before them. They hear the stories and statistics but think this could never happen to me I am going to be a millionaire, there’s no way I could blow that much money.Ignorance is not bliss in this situation. Many athletes â€Å"assume the money will keep flowing in for years, but that’s usually not the case† (Wiles). Contracts that teams offer are usually merit based with only a small percentage guaranteed no matter what. Many players don’t realize this or may not even know that. As an athlete myself I never think that maybe I will get hurt this year or what will happen if I do. Professional athletes have the same mentality. Even worse what if a rookie never pans out to be more than a backup?Bench players don’t make nearly as much as starters or star players. And as soon as a player gets cut or put on waivers their contract dwindles down to nothing. When the paychecks stop coming, the lavish lifestyles of athletes can no longer be sustained. Paychecks will stop eventually for everyone but bills never do. The banks and credit card companies don’t care if you get hurt playing a professional sport, they still want their money and will stop at nothing until they get all of it; whether that means foreclosing your home, car and yacht or seizing all other assets as collateral.Players can’t grasp the concept that their peak earnings period wi ll be short lived and their lifestyles must be planned accordingly. Unlike a corporate office job or a doctor where the potential salaries keep increasing based on good performance or experience in the field in which they work, Athletes make all or most of their income in a few short years. According to Wiles, â€Å"Even athletes who play professionally for many years will eventually need to downsize their finances†¦That makes them different from most workers† (Wiles). Colleges and universities are not off the hook either.These institutions that have high profile teams with the potential for their athletes to play professional sports should offer more courses on money and finance to their students. It should be a requirement for students not just student athletes to be financial literate so that nobody finds themselves in the red later on in life. Even if you are a history major or a science major, it is imperative to know how keep your head above water when it comes to personal finances. The only way these professional athletes will be able to lead successful lives after their playing days are over is through education.People above them need to stress the importance of saving, planning, and common sense because once you owe more money than you are able to pay back it may be impossible to get out of debt. Bibliography 1. â€Å"Athlete Services. † RAM Financial Group. RAM Financial Group, n. d. Web. 2 Apr 2013. . 2. â€Å"Average Length of an NHL Player Career. † Quanthockey. com. N. p. , n. d. Web. 2 Apr 2013. . 3. Torre, Pablo S.. â€Å"How (and Why) Athletes Go Broke. SI Vault. Sports Illustrated, 3 Mar 2009. Web. 1 Apr 2013. . 4. Vasel, Kathryn Buschman. â€Å"Why Athletes Go Broke. † Fox Business. Fox News, 01 FEBRU 2013. Web. 4 Apr 2013. . 5. Wiles, Russ. â€Å"Pro athletes aften fumble the financial ball. † USA TODAY Sports. USA TODAY, 22 APRIL 2012. Web. 4 Apr 2013. .