Dear Noah and Josephus,
Congratulations on your accomplishments and your recent declaration of going professional. I’m a resident of the City of Alexandria and volunteer at TC Williams High School as part of the Academy of Finance program.
I’m big fan of track and field as well as a big fan of the two of you. I felt compelled to write to you (and your Momager) this open letter because of a sad trend in the world of professional athletes.
Many professional athletes go completely 100% broke between three to five years after they are finished with their athletic careers. Of those that went broke, I’m guessing that NONE of them ever believed it could happen to them. I do not want you to ever be a member of the broke retired professionals athletes club.
The most common reason people end up with disappointing financial results is poor cash flow management decisions. The athletes that go broke typically take on more LIFETIME costs than LIFETIME earned income. The word LIFETIME is capitalized to emphasize an economic concept that can help you stay financially strong for your entire lives.
Human Life Value is an economic term that refers to the net-present value of a human beings future cash flows (income). Human Life Value is used in the insurance industry to determine the maximum amount of life insurance a company may offer an individual. The rough guidelines are as follows:
30x income for individuals in their 20s
20x income for individuals in their 30s
15x income for individuals in their 40s
10x income for individuals in their 50s
For example: the Human Life Value of a 30-year old that earns a salary of $100,000/year is 20 x $100,000 or $2,000,000. The $2,000,000 lump sum is roughly equivalent to the individuals’ cumulative career income backing out inflation and taxes.
My recommendation to both of you is to consider applying these guidelines in reverse to the guaranteed portions of your contracts. This calculation will provide a rough idea of the equivalent annual income for a ‘normal’ career that ends at age 67.
For example: a hypothetical 20-year old athlete signs a contract that guarantees $10,000,000 over 10-years. The athlete may continue on, but for right now that is not a certainty. The only thing that is certain right now is the money that is guaranteed in present $10,000,000 contract.
Applying the Human Life Value concept in reverse, divide $10,000,000 by 30, which results in an estimated $333,333/year (pre-tax) spending rate or 'annual salary'.
The base of assets (the $10,000,000) will likely be invested in a diversified portfolio of equities and fixed income and the athlete will draw $333,333/year with modest inflation adjustments to spend on their lifestyle as the base of assets grows. In this application, the athlete is in a good position where the funds will likely take care of them and their family for three to four decades. If the athlete spends beyond the $333,333/year, then the longevity of the money becomes less and less certain.
If you treat your current contract like that, then the next contract you sign can be treated the same way and layered on top of the $333,333/year.
In summary: A $10,000,000 contract that pays over 10-years is the rough equivalent of a $333,333/year salary for 30+ years.
Please consider approaching your contract value with LIFETIME cash flow at the core of the investment and big spending decisions you make.
By being strong on the track, you’ve given yourselves career choices and options. The same is true with finances. Commit to being strong financially and you’ll give yourself choices and options as you move through your careers.
Have fun. Run fast. We are cheering for you!
Best wishes,
John