How Not to Spend Your Retirement Money Like a NFL Player

Tom Szczerbowski/Getty Images

Tom Szczerbowski/Getty Images

Nobody spends their paycheck quite like a professional athlete. Blessed with talent, opportunity, and multi-million-dollar contracts, pros can live the good life at an extraordinary young age. Spectators may feel envy, but important money lessons can be learned from these pros, especially when it comes to spending habits and retirement planning.

Four researchers recently conducted a study to test one of the central predictions of the life cycle hypothesis that individuals smooth consumption over their economic life cycle, meaning people save when income is high to compensate for when income is likely to be low, such as in retirement. In order to focus on an extreme example, the researchers decided to study players in the National Football League (NFL) — whose income typically spikes for only a few years. Data was collected on all players drafted by NFL teams from 1996 to 2003. The results are sobering.

Mansions, luxury cars, and a posse big enough to fill a stretch Hummer with its own wet bar all come at a cost. Despite a median level of earnings totaling about $3.2 million, one in six players (15.7%) had filed for bankruptcy by the 12th year of retirement. Some bankruptcies even occurred by the second year of retirement. Adding insult to injury, a longer playing career or higher career earnings did little to lower the bankruptcy rate.

“Our findings are different from what the life-cycle model predicts,” said Kyle Carlson, Joshua Kim, Annamaria Lusardi, and Colin F. Camerer, in a working paper published by the National Bureau of Economics. “First, players declare bankruptcy relatively soon after retirement. After only two years post-retirement many players have gone into bankruptcy. Second, annual bankruptcy (‘hazard’) rates are not affected by a player’s total earnings or career length. Having played for a long time and having been a successful and well-paid player does not provide much protection against the risk of going bankrupt.”

The researchers believe NFL players may not save enough during their primetime years because of optimism about career length, poor financial decisions, or social pressures to spend. This makes sense considering that higher earnings fail to significantly lower bankruptcy risk, and that the median length of a player’s NFL career was only six years in the study. It’s also a valuable lesson on how much money you actually keep is more important than how much you make.

Entering retirement with a low net worth is like celebrating before reaching the end zone — you’re asking for trouble. You can avoid spending your money like a pro athlete by recognizing the difference between wants and needs well before retirement age. You may want a shiny new car, which now costs an average of $33,560, but you only truly need reliable transportation. You may want a McMansion that’s suitable for a magazine cover, but you only truly need shelter in a safe location.

To take that philosophy one step further, calculate how much your so-called want will cost you in labor hours and see if you still want it. For example, a worker making $25 per hour would need to work about 1,342 hours to afford that shiny new car, not including other expenses like payroll taxes, sales taxes, and property taxes. In comparison, a reliable used car costing $10,000 would only cost 400 hours in the same scenario. This is just one example, but it can be applied to anything you buy. More importantly, it forces you to reconsider your purchases and may even help you avoid spending money on things you can’t truly afford.

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