Pre- and Post-Draft Planning for Young NBA Prospects

When you’re in your early 20s, it’s natural to feel somewhat invincible. Life’s just begun, and the road ahead seems full of limitless possibilities—especially when you’re a young athlete on the verge of a tremendous payday as you turn pro. It’s the exact same feeling that so many have had before you—athletes for whom the sky was the limit, right up until the day they fell victim to a career-ending injury either on or off the court.

Of course, these types of incidents are the exception rather than the rule. But they do occur, and the accompanying financial impact can be devastating. That’s why it’s important to protect both yourself and your future; and that starts with the people whose guidance you rely on.

Surround yourself with trusted advisors

Whatever team of close family members, trusted financial advisors, attorneys and accountants you choose to work with, make sure you surround yourself with people who truly have your best interest at heart rather than their own. “It’s important to understand how an advisor is being compensated,” explains Truist Wealth Sports & Entertainment Group advisor Bobby Schuckmann, CFP®. “That way you can strive to better align your financial goals with their incentives.”

Instilling financial confidence is at the core of the Truist Wealth approach. The professional athletes we work with have benefited from this depth of coordinated, specialized expertise. It all starts with a stable financial plan that serves as a road map for your future—minimizing the potential risks and accommodating the lifestyle you want to live today, while always keeping one eye focused on getting financially ready for life after your playing days. Along with expert, comprehensive financial planning, make sure you also have easy access to sophisticated banking solutions.

If you want to identify advisors who have both exceptional planning skills and who adhere to rigorous ethical standards, seek out an advisor who holds industry designations and relevant experience.

Pro Tip #1

Our collaborative online planning platform lets you and your advisor work together to build, monitor and refine your personal wealth plan—whenever and wherever time permits. According to Schuckmann, “it’s an incredibly powerful tool to simplify and consolidate your financial life (especially for someone constantly on the road) allowing you and your advisor to collaborate proactively as challenges arise.”

Insure against the unexpected

Many college athletes who have the ability to turn professional choose to take out a permanent total disability (PTD) insurance policy to protect themselves financially from a career-ending injury. Some also choose to add a loss of value (LOV) rider to these policies to provide gap coverage against an injury that significantly impacts their draft position (and thus their compensation).

Yes, the NCAA does allow players to borrow against their future earnings for both PTD and LOV premiums. But just because an insurance agent tells you that they can get you $20 million in coverage, is that really what you want or need?

How much coverage is enough?

Essentially, there are two very different strategies for young athletes to insure themselves:

1. Seek a policy that will replace any current and projected future income.
2. Obtain enough coverage to support a comfortable life and facilitate a worry-free transition to the next phase.

Because both coverage and cost can be excessive in the first approach, we encourage clients to focus on the latter insurance approach as part of a comprehensive financial plan that maps out exactly what kind of income and lifestyle spending you’ll need to achieve your financial goals and future expectations. There’s simply no ‘one-size-fits-all’ solution. Your coverage needs will be unique to your situation.

Pro Tip #2

Keep in mind that disability proceeds are generally federal income tax free. That means you probably only need $6 million in PTD insurance to cover a $12 million contract value after taxes and agent fees.

Even after the draft, you may want to maintain PTD coverage for a while. While league-provided short- and long-term disability coverage is good, it often pales in comparison to your future earnings potential. Given that annual premiums on these PTD policies average around $8,000 for every $1 million in coverage, how’s an unpaid college athlete (albeit one with tremendous future earnings potential) supposed to come up with the nearly $25,000 needed to buy a relatively modest $3 million policy? That’s something that Truist can help with as part of our comprehensive wealth management, financial planning and banking services.

Pro Tip #3

Although first round draft picks receive a four-year contract, only the first two years are guaranteed. Therefore, it may make sense to carry insurance coverage into your professional career.

Why is integrated banking so important?

Budgeting and lending needs early in your career—from financing a home or other large purchase to helping you manage short-term cash needs—can be particularly challenging. You need a trusted relationship with a private banker who can help support and facilitate these needs. “Integrating a dedicated service team with a comprehensive financial planning approach has proven to be a successful platform to meet our clients’ complex wealth management needs,” adds Schuckmann.

Don’t get blindsided: the money you receive in your first few paychecks may be nowhere near what you were expecting. Unlike football or baseball where they can count on a large signing bonus, NBA players don’t receive their first paycheck until November 15^th (nearly four months after the draft). Withheld from that check will be:

• Taxes (expect federal, state and city withholding of around 40%)
• NBA escrow (10% of your gross salary)
• Any advance on future pay you received from the team
• Your 401(k) deduction (taken out of your January paycheck)

Pro Tip #4

Any marketing and endorsement money you make will typically be 1099 income (no taxes withheld). Make sure you put enough of that income aside for quarterly estimated tax payments, and consider funding a SEP IRA with some of that income. As a ‘business owner’ you’re allowed to put away more pre-tax dollars for retirement—saving yourself money and getting a tax deduction for it.

You’ve spent so many years investing time and effort into honing your skills. Don’t let something unexpected derail it all now. Start preparing.