By Patrick Kerney
NFL Player Engagement
Because of the earning potential we have as NFL players, a lot of us are within reach of realizing a lifetime of financial security before our 30th birthdays. This is an unbelievable opportunity. But how do we know what “financial security” really means? What is “enough”? Let’s explore.
Imagine that at the start of our rookie years we took off on cross-country flights. As long as we stay on active rosters we are “flying” safely over land with plenty of fueling stations below. We often feel like we can burn as much fuel as we want because fuel is easily replaced. What happens when we retire and are out flying over the ocean with no land in sight? At this point, the answers to two questions become the most important facts in our lives:
- How fast am I burning fuel?
- How much fuel do I have in the tank?
We practice football in season because we are 100% certain we have a game to play that week. We are also 100% certain our football careers will end someday. Doesn’t it make sense to practice for this inevitable event as well?
So how does practice for retirement finance work? To use the flying metaphor again, the offseason is a time, like retirement, when we are flying out over the ocean with nowhere to refuel. The nice part for those who will make an active roster the following year is that this is a relatively short time in these dangerous conditions. This is the best time to understand how money will work for us when there is no “next season.” We need to take this time to look at how much “fuel we burn” when we’re not collecting paychecks and just how long we can last before we run out.
I contend that a lot of us make enough money in our playing days to be set for life. I don’t mean this in the way the media portrays “set for life,” but rather, in terms of providing life’s necessities for our immediate families.
One of the hardest parts of figuring out what “set for life” really means is figuring out how long we will live. Because none of us knows how long we will live, we may as well practice as if we will live forever. Our earnings as players allow us to think this way. We all have the opportunity to build some level of an income-producing nest egg that spits off enough money each year to bridge the gap between the annual income we bring in from our post-football careers and the higher expenses a lot of us grow accustomed to during our playing days.
Just like NFL football practices are built by imitating other NFL football practices, we need to practice retirement finance by imitating other people, or things, that plan to live forever. Universities, hospitals and pension plans, like the one we as NFL players receive, are good examples of this. They all have to plan as if they will live forever. So how do they do it? It’s easier than you may think.
Let’s use a college as an example. As we know, colleges build up their investment accounts by selling sports tickets, scientific discoveries, books, food, t-shirts, etc., charging tuition and by asking alumni, particularly wealthy alumni, to donate money. Harvard has done this better than anyone and, as of September 24, 2013, had a reported balance in its investment account of almost $33 billion dollars. Yes, that’s “billions”….with a “b.” Harvard also has high expenses. They give scholarships, pay salaries, buy heat and electricity, etc. Despite receiving a great deal of income every year, its expenses are even higher. To bridge this gap, they spend a small percentage of their invested savings every year. “Small” being the key word. Now the question is, how long can Harvard keep this up before it goes broke? The people who manage this and other university investment accounts have a plan, and so should we.
Assume we ended this season (Year 1) with $100 of buying power[1] in our investment account and, over many years, we expect to average a 6% return on the money we have in this account. Therefore, we can expect that removing $6 from the account every year will keep the account at $100 forever.
See the chart below:
Three things must be considered here:
- As discussed in footnote 1, due to inflation, $100 will be worth less next year and every year after than it is this year.
- Our investment account might have a bad year, such as 2008, when instead of increasing by 6%, it decreases by 37%.
- Our investment account might have a great year, such as 2013, when instead of increasing by 6%, it increases by 32%.
Let’s address the first point. When we look at the chart, we see that we “pay” inflation every year by subtracting 3% (“Inflation”) of the return. This leaves us with $103 of buying power. To make sure our accounts maintain $100 of buying power we can only spend another $3 (“How much I can spend”) before we start eating away at our account’s buying power (falling below $100).
As for the second and third points, remember that we expect to average a certain return (in this case, 6%[2]). When a year like 2008 hits, we have to cut our expenses as much as we can so that we pull as little money from our investment accounts as possible. Even Harvard had to do this! When a year like 2013 comes around, we have to be extremely disciplined in our spending. If we can keep our investment account spending to 6% (including the 3% we “pay” in inflation) then when the account is up 25%, we put an extra 19% into our account to pad ourselves for the next time a year like 2008 happens. Such discipline will take the sting out of the bad years.
As we move through the chart, we see that the buying power at the end of Year 4 is the same as the buying power at the beginning of Year 1. In theory, this is how universities, hospitals, pensions, etc. expect to have financial life forever.
How can we use this information to turn the offseason into retirement finance practice? We can get a rough estimate of an amount of invested savings we need to sustain our lifestyle. Grab a calculator.
Part I:
- Track how much we spend this offseason (ATM withdrawals, credit card statements and checks written, etc.).
- Multiply it by 2 (multiply it by 1.71 if not in the playoffs).
- Take the amount of liquid assets (public stocks and bonds) we have in our investment account and divide it by the number you got with step 2.
What did you come up with?
- 50 and above: Outstanding (we need to average about 5% or less of an annual return)
- 34-49: Very strong (we need to average between a 5-6% annual return)
- 26-33: Strong (we need to average between a 6-7% annual return)
- 20-25: OK (we need to average between a 7-8% annual return)
It’s not the end of the world if our number isn’t in these ranges. That wouldn’t make us any different than Harvard. It just means that when our time in the NFL is over, we need income from another career to support annual expenses that are higher than our annual income (after taxes). That leads us to Part II of our retirement finance practice: post-NFL careers.[3]
Part II:
- Search the internet for the average starting salaries of the professions we would consider for our second careers.
- To be safe, cut these numbers in half to account for taxes.
- Take the number we get in step 2 of Part I and subtract the number we got in step 2 of this part (Part II).
- Take the amount of liquid assets (public stocks and bonds) we have in our investment account and divide it by the number we got with step 3 of this Part (II).
- 50 and above or a negative number: We’ll probably be working because we “want to” rather than “have to.” This is a great thing.
- 34-49: Barring drastic new tax laws, high inflation, a fraudulent person in your life, inability to gain employment, poorly timed recession(s) or depression(s), etc. we should be able to maintain our current lifestyle in the next phase of our lives.
- 26-33: We may want to have a talk with those closest to us about how we may have to lower expenses when our playing days are done.
- 20-25: We may want to work with ourselves and/or those closest to us to lower expenses and adjust to a simpler lifestyle.
There is one negative disclaimer to all of this: Life gets more expensive as we age. If we don’t have children, we need to ask a teammate who does about their expenses. The already large expense of diapers and formula grows rapidly into the much larger expense of clothes and college tuition.
There are, fortunately, a couple of positive disclaimers too. If we apply the same discipline and dedication we used to get to the NFL into a second career with a lot of upside, the number we got in step 4 of Part II can grow rapidly as our salaries increase. We may also be early in our NFL careers with a lot of potential to grow our investment accounts with our future NFL income.
Lastly, some math for the vast majority of us who have to lower expenses to “be Harvard” from a financial stability standpoint: If we expect to get, for example, 5% returns on our investments, every $1 dollar we cut in expenses means $20 less we need in our investment accounts. Fact. So, I challenge you to use the offseason to get competitive about how low you can keep your expenses. This will drastically ease your financial burdens in the long run.
[1] Don’t think of $100 in terms of $100, but rather what you can buy for $100 today. Remember, because of inflation, what you can buy for $100 today will probably cost between $101 and $103 a year from now. Most likely more if it is a luxury good or service.
[2] As a point of reference, Warren Buffett, the greatest investor of modern times, expects his company’s pension plan’s growth rate to average about 6.9% over the long run. This is without the excessive fees most individual investors pay their financial advisors and/or mutual funds
[3] If not for income, I believe we all need a second career for either a sense of purpose or to provide the right example for our children