Perhaps major league sports would do well to help train their athletes in the basics of financial management in order to help avoid this situation.
Debt also puts people into compromised positions. Having worked around defense stuffs, that's an exploitable position. And people will exploit it. It's not just for government secrets either. Working on a corporate X project to make the latest and greatest self driving car? Have 6- or 7-figure debt? Someone may slide up to you in a bar and buddy up, take advantage of the desperation and get you to compromise your employer's secrets. For athletes, this means getting asked to throw games and underperform.
Nobody is going to have their best interests at heart but themselves. If you want to have money, you have to learn to manage it yourself. There's not really a choice about it.
Also, hire a properly licensed CPA. Make sure to listen to his advice on taxes. Don't give him a financial incentive to benefit if you follow his advice.
If you've got more than $250K, I'd split it up into multiple accounts at different banks.
I think you're mistaken about the first part of your statement:
The FDIC says, "All single accounts owned by the same person at the same bank are added together and insured up to $250,000." (see https://www.fdic.gov/deposit/covered/categories.html )
But you are correct that it can be doubled, tripled, quadrupled, or even greater by opening different account types such as a Retirement Account, a Joint Account, a Revocable Trust Account, etc., at the same bank since each account type seems to get separate treatment (according to the same FDIC link).
Doesn’t sound safe. Index fund would probably be safer. Or savings account.
I wholeheartedly agree that major league sports should provide financial management skills, however the same should also be provided at large corporations.
With Vanguard/Fidelity/Schuab you can make only 45k/yr over your whole career, put the $5500 into an IRA in VFIAX/VOO starting at age 22, and have an retirement income of $58k/yr (not including social security) when you retire. This approximately 1.1-1.5 million in retirement is enough savings IMO, and allows you to pursue whatever career you want, e.g. nonprofit/teaching/part-time with much less anxiety than a traditional pension or more active investment like a restaurant.
Maxing out an IRA is only a 12.2% pre-tax savings rate for someone with a $45k/yr income. This is not difficult at all, however it is important that it starts in the early 20s.
A million bucks will make the rest of your life easier as long as you don't 1) spend it all and 2) don't make yourself unemployable (injury, bad PR, etc)
Perhaps you are forgetting that an investment still grows while you are withdrawing from it?
Here is a calculator that helps you compute how much you can actually pull from it: https://www.money-zine.com/calculators/retirement-calculator...
If you set the initial variables to:
- Retirement age 40 - Life expectancy 83 - Annual Return 7% (typical of stocks) - zero out everything else (no pension, no social security)
You get about ~$74K a year.
Even if you started retiring at age 25, you'd still be pulling ~$71K a year.
$25,000 is likely a little too low but $70,000 is way, way too high.
Most people who've done research agree that something like $25,000 to $35,000 a year from $1,000,000 is reasonable for someone retiring extremely young.
As people point out the thing to remember is that your costs change too, your health care costs go up but if your family moves out and you pay off your house your outlays go down. "Downsizing" or reducing the owning of expensive things (especially ones that require maintenance) can really help your burn rate.
An athlete might be 30 years old at retirement and needs to think about a 65-year retirement timespan.
First, start with the 25 number. We're talking about athletes here, they aren't losing their income potential at 40, they're losing it a lot earlier than that. There are 40 year old athletes, but we talk about them all the time because they're unusual, not because they're the norm.
Next, cut the rate of return. Like by half. Nobody with new money is that successful with their finances. That's why we're discussing this.
Now, I wasn't thinking about this too hard when I did the math in my head, but I do tend to round down pretty heavily when doing math for myself for a very particular reason: adjust down for inflation. Way, way down. The biggest fuckup people make when rationalizing their rate of savings or how great an investment their house is: by the time you get to use this money thirty years from now it won't be worth half of what it's worth right now. Present day you thinks 25k a year will pay your rent. 70 year old you will have to move to the middle of nowhere to say that. You won't want to do that. So double your withdrawal rate by 60 and almost again by the time you die.
If anything it could help with their recruiting efforts: Show a list of athletes that got screwed by shady advisors; show how they'll connect you with real advisors (at established and more trusted institutions) and education to discern what options are good and what aren't.
Won't make a difference when tyring to get that top QB, but it may for all those guys who're only making $150k-300k.
In my experience in the Bay area with people who suddenly have more wealth than their friends and family ever did, there are two ways that people seem to split. Either they start splendiforus spending because they are "rich" or the start calculating what sort of 'burn rate' they can support drawing down at a rate of anywhere between 2% and 10% of their net worth. Using the 4% number (which used to be the standard before the great recession knocked it back to 2% for more conservative savers).
One of the things that people usually don't think about deeply is that money in the bank pays you, things that you own cost you. A car needs gas, a jet needs maintenance, a home needs gardening. And when you scale up the 'thing' you scale up the cost. As a result if you live what you perceive to be a 'rich' life you may find its sucking your wealth away. There are lots of studies on lottery winners which show this effect.
Wow that's depressing as hell. I've seen the spending side of things, but for a long time out of college I was making more money than anyone I knew and also spending towards the bottom of the distribution. I think I was 25 when my average return started covering my cost of living.
My family didn't have much money growing up (due to medical reasons) and my parents don't really know much about managing money, probably because they both come from upper-class backgrounds where family money just seemed "taken care of". So I have to confess I'm not really sure where the financial irresponsibility of the sorts discussed in this post comes from. I'm tempted to say that it's a simply matter of high time preference, but that's a really self-serving explanation, so I'm not quite satisfied.
Nobody tries to keep their costs below their income? If I was suddenly wealthy, I'd try hard to make sure lifestyle spending was covered by growth in my wealth, not by drawing it down.