The Verus Team

Learning from the Earnings Life of an Athlete

Written by: Derek Majkowski. Any opinions are those of Derek Majkowski and not necessarily those of RJFS or Raymond James.

The average Major League Baseball player will play in the pros 5-6 years. The minimum annual salary is approximately $550K and the average annual salary is $4 to $5 million a year.

In the NBA, and average player plays 4-5 years and on average earns $5.5 to $6.5 million in annual salary. The NBA minimum annual salary runs approximately $543K.

NHL players average an annual salary of $2.5 to $3 million a year with a minimum that is approximately $575K. The average time in the league is 5-6 years.

An NFL player averages a career that lasts 3-4 years with an average annual salary of $2 to $2.5 million. The minimum salary is approximately $450K a year.

All of the above information is based on 2016 and 2017 figures and are approximates to provide some indication on where the general income number are for illustration purposes. If you consider the averages, here is how the average gross earnings look for each over a professional male athlete’s playing career:

  • MLB professional averages gross income of $20-$30 million

  • NBA player averages gross income of $22.5-$32.5 million

  • NHL player - $12-$18 million gross income

  • NFL player - $6-$8 million gross income

Those are obviously the averages, and based solely on the salaries earned for playing the actual sport and does not consider any other potential sources of income. In addition, there are certainly athletes that earn far more than the averages listed above, and others far less.

In reviewing those average numbers, they can indeed appear lofty. However, athletes like all income earners, are subject to the typical federal and state income taxes. Currently, the highest federal tax rate (the bracket where the average earning athletes reside) is 37%. State tax rates can range from 0% to 13% depending on the state the athlete lives. This does not address athletes that may reside in Canada and their tax rates.

In addition to the above, a professional athlete is also often subject to a “jock tax”. This is where professional athletes can also be taxed on a portion of their salary based on the amount of time they play games in a particular state or city. Depending on the sport, an athlete could be subject to an additional 10 to 20 different tax jurisdictions whereby they may owe additional income tax.

Other primary fixed costs and expenses that face athletes that a typical income earner may not face include union fees and agent costs. These additional costs could be another 2% to 5% of a professional athlete’s salary.

Based on all of the above, if we make some general assumptions that an average earning athlete pays federal income tax of 37% (2019 tables), an average income state tax around 5%, and additional taxes and athlete related costs that run 4% of their salary (this assumes 1% toward a “jock tax” and 3% for agents and unions). Then an average athlete gives away 46% of their gross salary income.

If you apply that rate to the mean of each gross income number, the approximate average career net income numbers of a respective male pro athlete look as follows:

  • MLB - $13.5 million

  • NBA - $14.85 million

  • NHL - $8.1 million

  • NFL - $3.78 million

Aside from the obvious point that NFL players on average earn much lower figures over their careers compared to the other sports, another key point to highlight in this exercise is that the typical athlete’s playing career starts and ends in their twenties. The numbers above, while impressive as standalone figures, need to be put into perspective when considering someone’s life expectancy and future earnings ability, as well as the time in one’s life when they come into large sums of wealth.

Given this last point, any person coming into large sums of wealth when they are not necessarily prepared (let alone in their twenties) can potentially create bad habits (mostly with spending), and often times overlook potential risks that can happen over a longer period of time. There are countless stories of professional athletes who had successful careers, but fail financially shortly after their playing career ends.

While it may seem unlikely that someone who earns those levels of income could fail financially, athletes are faced with the same challenges in managing their affairs as everyone else. Because a professional athlete’s income is significantly frontloaded in their life, believe it or not, managing their affairs could actually be harder than someone who earns on a more traditional and sustained path.

Think about it. Regardless of the amount of money we are considering, a typical earner reaches their peak earning years in their late thirties into their forties and fifties. This will happen after 15+ years in the workforce.

It occurs at a time when experience with life and money has evolved. We are more mature with many facets of our lives, and more prepared to handle the greater responsibilities over life and our finances. Saving, investing, and financial planning is a process learned and practiced over many years and they grow and enhance incrementally as wealth and income grows as well.

With the average athlete, the money is relatively plentiful during an athlete’s prime. This occurs at a time that typically coincides with just exiting school (college or high school), after years of working hard and focusing on the craft that got them to achieve athletic success. That window of work on average is often intense, short, and the ending often abrupt. There is usually little time to place much attention elsewhere, let alone how to properly manage and handle all of the new found wealth.

We try to tell anyone who will listen, the earlier you begin thinking about longer term financial planning, the better you are – regardless of how much money you have. Athletes typically don’t get to do that while their wealth builds over time. It all happens fast, and it can go fast too without proper planning.

That’s a good lesson for everyone.

 

*This is a hypothetical example for illustration purposes only.  Actual investor results will vary*