You have heard it said before, you are different than the average individual when it comes to wealth but exactly how? There is the obvious financial difference that your salary as an athlete is far greater than the average individual but that is only the beginning. As an athlete, you face a myriad of financial and legal challenges that the average individual will never encounter. These include but are not limited to multi-state taxation, significant asset protection concerns arising from your high liability as a public figure, complex estate tax planning, and investment concerns. Your net worth is not the only determining factor of your affluence, it’s your complexity.
Understanding Your Affluence
The first difference between you and the average individual is income level. In 2015, the average American family earned $53,657 according to the U.S. Census Bureau. In 2015, the average MLB player salary was $3,386,212 and the league minimum was $507,500.
How Do Athletes Measure Up Amongst America’s Wealthy?
- 4% of Americans have a net worth of $1 million or more
- 5% of Americans have a net worth of $5 million or more
- .05% of Americans have a net worth of $25 million or more
Source: CNN Money
As an MLB player, there is a 75% likelihood that you will earn $10 million in your career. There is a 53% likelihood you will earn $25 million. And finally, there is a 38% probability you will earn $50 million or more in your career. This does not take into account the fact that salaries continue to rise.
The significance of this comparison is fairly easy to understand. The average individual is earning just enough to pay the bills and there are very few individuals who share your same wealth level.
In addition to the vast difference in the level of income is when you will earn your income throughout your lifetime.
The average individual…
- will work 35 to 45 years
- will enjoy peak earnings during the 5 years prior to retirement
The average professional athlete…
- The average career of a MLB pitcher is 4.8 years and a position player is 5.6 years
- will enjoy peak earnings before age 40. In fact, you will likely earn 70% to 90% of your lifetime earnings before age 40.
Athletes and Taxes
The second and arguably the most important difference is taxation. Starting with federal income tax only 5% of the population will earn enough to be subject to the highest marginal federal income tax bracket.
While the average individual only pays taxes in their resident state, you as an athlete file taxes not only in your home state but also in every state—and some cities—in which you play. Reciprocity agreements can save you thousands if your tax professional knows what to look for. Because players come from all over and move around so much teams will often times report income and withhold taxes in every state you play, regardless of whether a reciprocity agreement with your home state is in place.
In other words, average individuals pay a small percentage of their income to taxes. Due to the lower tax rates and the sources of income described next, income tax planning is not a significant concern for the average individual.
Sources of Income
Another tax consideration to take into account are the different sources of income you as an athlete receive. Typically, the average individual only receives “W-2 wages.” Taxes are typically withheld from their paychecks automatically. While this is convenient it also means there is little opportunity for significant tax planning.
As an athlete, in addition to your W-2 wages from your team, you have the ability to earn off-the-field income that is considered 1099 miscellaneous income. Taxes are not automatically withheld which provides opportunities to utilized advanced tax planning strategies.
The third major difference is the impact your tax situation will have on your investment returns. As stated above, only 5% of individuals are subject to the highest tax rates. Therefore, the majority of investment options and strategies do not consider taxes. As an affluent athlete, after-tax returns are the only returns that matter for taxable accounts because dividend and realized capital gains distributions are subject to state, local, and federal taxation. Yet most individual investors remain focused on pre-tax results. Ignoring the impact of taxes on your investment returns is one of the biggest mistakes you can make.
In addition to estate tax planning, asset protection is a consideration that isonly a concern for professional athletes, celebrities and the wealthy. Asset protection – the practice of shielding wealth from potential lawsuits, creditors, or other claims – is plainly not of interest to Average American for two reasons:
- They do not have significant assets to protect
- They do not face significant liability as a public figure or through their investments
Estate Tax Planning
Under today’s laws, the estate and gift tax exemption is $11.18 million per individual. That means an individual can leave $11,180,000 million to heirs and pay no federal estate or gift tax. A married couple will be able to shield $22 million from federal estate and gift taxes. As a result, the importance of reducing estate tax liabilities is not likely to be a major concern of the average individual.
Embracing Your Uniqueness
As we have demonstrated above, as an athlete you are very different from the average individual in so many ways. As a professional athlete, you face certain “issues” that affect how you and your family approach life, your career, and outside ventures, which create unique possibilities that require specialized expertise and an intimate understanding of your respective world in order to achieve optimal results.
Unfortunately, the majority of information on personal finance and investing is created for the average individual earning between $35,000 and $75,000 per year not a professional athlete. Think Dave Ramsey, Suzie Orman and Jim Cramer. The same advice that is widely accepted and beneficial for the average person is often detrimental for a person in your position.
There is practically an infinite amount of places one can look for financial advice. However, you must understand who the advice is for. Take a look at the following list of news sources and who heir media kit states is their target audience.
- Fox News ($70,929 median household income)
- CNN ($76,419 median household income)
- MSNBC ($75,588 median household income)
- The Wall Street Journal ($253,100 average household income)
- Forbes ($146,263 mean household income)
The point we are making is that virtually all of the personal finance sources listed, have an average audience household income of less than $250,000. Why is this important? It is almost impossible for professional athletes to find useful and appropriate financial information.
If you want to successfully achieve or maintain financial success, you must be comfortable with your different circumstances and be comfortable doing things differently. A key to achieving this success is understanding that having very different financial challenges requires different types of advisors and strategies than the average individual.