A few weeks ago, I wrote about the crazy financial situation of Alyssa Milano, the actress who has apparently lost all of the millions she made on TV and is in a lawsuit with her former accountant. I wrote that it surprises me how many celebrities, athletes, and musicians seem to waste the great fortunes that they have been able to earn through poor management or profligate spending.
Then a friend posted a story about Bobby Bonilla – the former star outfielder for the New York Mets – and it started me thinking that perhaps celebrities are no different than the rest of us. Some make good financial decisions, and others not so much. Bonilla is turning a great contract (worth $6 million) into an incredible fortune ($30 million) through his financial savvy.
This article from CNBC details his success, but the basic approach he took was to slowly defer his contract earnings beyond his playing career. Instead of taking $6M in 2000, he gets paid about $1M every year through 2035. This helped the Mets with their salary cap back in 2000, and it ensured that Bonilla would have annual pay days decades after he left the baseball diamond. Despite not playing, Bonilla was the Mets highest paid outfielder just a few years ago.
(I will note that someone wrote an article claiming he was losing money under the deal as a consequence of the time value of money – assuming a 8% return rate – but they failed to acknowledge that this is a guaranteed payment. It comes with virtually no investment risk over a 35 year horizon. I cannot think of an investment with this little risk that carries close to an 8% return).
Deferred earnings aren’t just for ball players though. Similarly, when I was working, I had some opportunities to defer earnings beyond my own ‘playing career’: IRAs, the MegaCorp 401k, and stock options are all ways that we were able to take pay from our working days and move it (often in tax advantaged ways) into our retirement. All of these are helping us continue to ‘get paid’ now that we are not working.
Unfortunately, I read recently that 95% of people fail to max out their retirement accounts each year. Hopefully, these folks will look at either of these stories in the news recently – Milano and Bonilla – and draw an important lesson.
How are you ‘deferring your income’ beyond your playing career?
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