Last week, a story broke sharing the unfortunate details of Jack Johnson’s financial situation. Often, it’s easy for people to perceive athletes as invincible and when something like this happens there are often a variety of opinions ranging from great empathy to malaise to condemnation. In an effort to take a deeper look at the financial risks that professional athletes face, we spoke to a local fee-only financial planner. This planner has no direct knowledge of Jack Johnson’s situation but has worked with professional athletes from a variety of sports. As a fee-only planner, this individual has focused their practice on providing objective advice on all aspects of a client’s financial health including income planning, net worth planning, investment planning, business planning, insurance, retirement, dependent planning and estate planning. This planner is not associated with any financial institution and does not sell any products or receive commissions.
The team at Union Blue submitted a list of questions that hopefully will share deeper insight on not only the Jack Johnson situation but also on the challenges that all athletes who come into great amounts of money face.
***Please note that this content represents one adviser’s opinion. This article in no way presumes to know the specifics of Jack Johnson’s situation or play of action and should not be considered as such. The content herein is NOT financial advice and should not be construed as such***
1. How common is it for athletes to find themselves in a situation where someone is trying to take advantage of them financially?
Unfortunately it is very common. Their contracts are very public information and that makes them an immediate target, as there are plenty of people out willing to sell them a bad deal to make a quick buck for themselves.
2. How common is it for someone who is related to the athlete to try to take advantage of the athlete financially?
This is another common occurrence. There are so many emotions involved when a person receives a large sum of money, whether it’s a professional athlete, lottery winner, or a family inheritance. When this occurs, close friends or relatives may expect to be compensated for “all the years”. The windfall recipient (in this case, the athlete) may also feel obligated to help out, sometimes out of guilt.
3. In your opinion, what kind of advisers does an athlete need?
They should have an agent, attorney, accountant and financial planner. None of these advisers should work together, or for the same firm. They should always be evaluating the other’s work, on behalf of their client. This adds a level of protection where they are all looking over each other’s shoulder. An understanding how each is compensated should also be known, where there are no conflicts of interest.
4. $15MM (the amount Johnson reported lost) *sounds* like a lot of money – how much is it really to an athlete who will not have those kind of earnings for his entire life?
Every situation is different, so I will have to list generalities. If the dollar amount named is pre-tax (as in the reports the $15 MM seems to be), you have to account for taxes and agent fees first being drawn against that gross amount. That would be close to 40%-50% of each paycheck. After those calculations, let’s assume $9MM remains (40% tax and agent fees). For purposes of this discussion, let’s assume an athlete purchases a $1MM house (or other such similar transaction). Even if (s)he pays cash the cost of ownership of an asset of that price is approximately $5,000/month ($60k-$75k/year) with taxes, utilities, upkeep. Let’s also assume an athlete chooses to have a family. Kids born in 2014 can cost as much as $500k for 18 years (or $2,315/month), particularly if the kids live the same flamboyant life style as they may see their parents live, with expenses at a country club, a college education, and a wedding. With that kind of thinking in place, one is already looking at costs for a home and ONE child of ~$7500 per month before paying for food, and other day to day costs. When an athlete makes assumptions of expensive cars, travel, clothing, they often plan for a lifestyle based on earning their contract all the way until age 65. Unfortunately, most athletes retire around age 35.
The general rule of thumb is you can live on 4% of your savings and have those investments maintain their level. The lifestyle listed above easily can cost $300,000 – $400,000 per year, which would require close to $10MM earned (in their portfolio) to compensate for the shortened earning lifespan.
5. Are there common financial mistakes you see athletes make?
Most go after all the “things” they coveted as a kid, such as a sports car, or an expensive house. Often we see them open a business as a perceived “investment”, such as a restaurant, or car dealership. It’s as simple as they throw around their money because, at the moment, there is plenty of it.
6. What is a power of attorney, and what should one consider before signing one?
A Power of Attorney is a document that appoints an agent to act on his, or her, own behalf. One is giving another person the power to act in conducting the signer’s business, including signing papers, checks, title documents, contracts, handling bank accounts and other activities in the name of the person granting the power. There are different levels of Power of Attorney, as they can be limited. Before signing a Power of Attorney one must be certain there is a clear understanding of what authority is being allowed.
7. Obviously we don’t know the details of the case, but are there any things you can see that Jack can do to protect himself right now or going forward?
At this point Jack needs to “reset” and start over. We still don’t know the details on how much of his future contract was monetized, or if the bankruptcy voided those transactions. A bankruptcy attorney is better suited to answer those questions. Unfortunately, this was a costly lesson for Jack. Moving forward he should keep it simple and avoid elaborate investments. He should also look for transparency, where he understands how and where his money is being invested.
8. What can the non-millionaire learn from this experience and apply to their own finances?
First and foremost, always keep control of your finances. For any investment product, ask the questions “how much control am I giving up?” and “How easily can I get out of the investment and get my money back?” There are many common products out there, such as annuities, where you ultimately are giving up control of your money in exchange for a future promise. It is essential to understand exactly what risk comes with whatever promised reward.
9. Is there typically a correlation between how ‘hands-on’ an athlete is with their money versus their long term success? Basically if they leave it to a pro and don’t touch it, does that tend to pay off long term?
Without a doubt, there is a direct correlation. My Grandfather once told me the more you have, the harder it is to manage it. Those who invest their own time into their personal financial plan are destined to be more successful, no different than a diet, or exercise routine where results are based on time invested to achieve the goal.
10. Any Other comments…
Most people will look at a professional athlete and scoff at them, when they go through financial difficulties. Finances are all relative as it’s often emotion that drives our financial decisions. We all have needs, wants and wishes and think we need to filter them accordingly. Unfortunately our culture is based on wanting to spend and live in excess (remember this on Black Friday). Our “wishes” become wants and “wants” become needs, such as the latest technology, or toy. The next time you receive the big bonus, or cash windfall look at what was actually saved. Its not what you make, its what you save that will ultimately determine your financial success long term.
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