Make your fortune last
By Gene Walden
From the Minneapolis StarTribune
In 1966, Harmon Killebrew crushed 39 home runs for the Minnesota Twins—second highest in the American League. The next year, the Twins rewarded their star slugger with a $65,000 salary.
That may be chump change by today’s standards, but at a time when most Americans were pulling down $8,000 to $12,000 a year, it seemed like a king’s ransom. Unfortunately for Killebrew, his fortune later turned to debt and he was forced into bankruptcy.
Kareem Abdul-Jabbar, the leading scorer in the history of the NBA, was compelled to lace up his sneakers and play ball well into his 40s because he lost his fortune to bad decisions and ill-advised investments. And Tony Dorsett, one of the greatest running backs in NFL history, also ran into financial problems for similar reasons.
But you don’t need to be a star athlete to lose a fortune. A long list of lottery winners have also seen their millions come and go. Evelyn Adams, in fact, won the New Jersey lottery not once but twice, and still lost it all. She currently resides in a trailer.
Countless others have blown their inheritance, their sales bonuses, or the proceeds from the sale of their businesses thanks to poor planning, poor choices or unwise investments.
Roy Smalley knows a little something about the easy-come-easy-go style of professional athletes. Smalley, a former All-star shortstop with the Twins and the New York Yankees, now advises professional athletes and others on how to keep their fortunes in tact. He works at Dain Rauscher in a small advisory group that also includes Dan Brooks, son of the late hockey coaching legend Herb Brooks, and Bill Kohn, a former hockey team captain for the Minnesota Gophers.
“We all tend to live a lifestyle that is commensurate with our earnings,” says Smalley. “You may wonder why anyone would need to live on more than $300,000 a year, but if they’ve got it, they just do. It’s human nature. When the money bumps up, the lifestyle bumps up—and that’s not just for athletes, it’s for everyone.”
In fact, even the most unlikely individuals get caught up in the money trap. “When I was with the Yankees,” recalls Smalley, “one of my teammates landed a big contract and I heard his wife say that ‘he’s not going to change; he’ll be the same guy; it’s not like we’re going to go out tomorrow and buy a Mercedes.’ Well, the next week, he went out and bought a Mercedes.”
Professional athletes are in a unique situation because they tend to earn huge sums of money in a very short amount of time at a very young age. But they must find a way to make that money last for several more decades after their careers end. The extravagant lifestyle—fancy cars, fur coats, jewelry, country clubs, resorts, and all the trimmings—can be addicting. It’s Smalley’s job to try to help his clients get control of their spending so they can save enough to maintain a prosperous lifestyle after their sports careers end.
Although the great players may last for 10 to 15 years, on average, professional athletes have only about four to five years of prime playing and paying time. The challenge is to make that four or five years of pay last for the next 50 years.
“I think the athletes are doing a better job now of saving and investing their money,” says Smalley. “We do the best we can at advising them, and they do the best they can at saving some of their money. Players have gotten smarter. When guys first started making good money, you would see a lot of them get taken by their agents or their advisors.”
In fact, even the advisors who were trustworthy weren’t always competent, which meant that players could still see their investments disappear. But Smalley says that doesn’t happen as much nowadays, although he still sees some cases from time to time.
The key to making your fortune last—whether it’s gained through sports, business or inheritance—is to decide how much you want to spend each year for the rest of your life and set aside enough of your windfall to make it happen.
Smalley suggests that after retirement you can withdraw about 4 percent of your savings per year and still make your nest egg last a lifetime. For example, if you have a nest egg of $2 million, you can withdraw about $80,000 a year. In Smalley’s system, inflation is figured into the equation so that your annual pay-out would rise over time.
For a professional athlete, the stakes are much higher. “If you want to live on half a million dollars a year (after taxes), that means you have to save at least $15 million.”
That may entail some serious penny-pinching for pro athletes during their playing and paying days. Instead of spending a couple of million a year they may have to cut back to a few hundred thousand. Tough sacrifice, but those with the discipline to do it—and not all of them have it—will avoid the financial nightmare that stars like Killebrew, Abdul-Jabbar and Dorsett faced when they saw their sports fortunes come and go.