When you buy through our links, Insider may earn an affiliate commission. Learn more.
People often envy movie stars and athletes for earning millions of dollars in a short amount of time, but their money stories aren’t always as glamorous as they seem. In fact, Kiplinger reported that 78% of athletes fall into severe debt or bankruptcy just two years into retirement.
Financial advisor to Hollywood stars and sports legends Eszylfie (pronounced ez-the-fee) Taylor says, “One of the challenges that athletes have in particular is they make 80 to 90% of their earnings in a two-year, five-year, maybe 10-year window, if they’re lucky. And that money has to last forever. “
While we picture celebrities living a life of luxury, Taylor says, “I say all the time an athlete or an entertainer actually has to be more disciplined than the average professional worker.”
Here are the five biggest mistakes that athletes and entertainers make when it comes to making their big paychecks last.
1. They don’t have an end goal in mind
Taylor says one of the biggest mistakes that athletes and entertainers make is not having an end goal in mind. “You gotta start with the end in mind. If you aim at nothing, you’ll hit it with amazing accuracy,” he says.
For example, if he’s working with a 25-year-old athlete with a five-year contract, his first question is, “How much money would you like coming to you every year, from 30 years old for the rest of your life to be comfortable? “
His client might then say, “I think if I had $ 250,000 per year, I’d be OK.” Next, Taylor would say, “OK, you need $ 5 million for the next 20 years. What can we do over the course of your five-year contract to get $ 5 million in this coffer?”
Here are a few questions Taylor asks his clients to help them identify their end goal:
- Where do you want to be in 10 years? And why?
- At what age do you want to retire?
- What’s your risk tolerance?
- What are your investment objectives?
2. They don’t understand their sustainable withdrawal rate
The sustainable withdrawal rate is the amount of money you can pull from your retirement savings each year to make it last throughout your retirement without running out of money. Generally, experts recommend the 4% rule, which states that retirees can withdraw up to 4% of their retirement savings in one year of retirement, though new research finds the 4% rule might be outdated.
Taylor says, “If I’m making $ 2 to $ 3 million a year, I don’t care about spending $ 1,000 at a restaurant. I don’t care about buying 2,000 pairs of shoes because I’m making that much money. But the real challenge is sustainability. It’s something that plagues not only athletes and entertainers but the common man and woman as well. The question is, what percentage of my money can I draw each year? “
3. They become hands-off with their own money
Another common mistake that athletes and entertainers make is trusting their team so much to take care of everything that they become hands-off with their money.
Taylor says, “Yes, you need an accountant. Yes, you need your attorney. Yes, you need your agent. I believe in hiring smart people and having them around to guide you and provide insights to you. I mean, I have relationships with athletes and entertainers that I’ve never met because I’ve only dealt with their business managers. “
He adds, “I always appreciate it when the talent is actively involved in that process because I feel good about it. Not that they’re just signing on the dotted line, but they’re actively having their input and questions considered as well. “
4. Some invest too aggressively in others’ projects
Every client is different, but Taylor says some clients tend to go to extremes when handling their hard-earned cash. Some athletes and entertainers jump at every opportunity to invest in others’ projects with the promise of cashing in big.
He adds, “I would say, generally, I find two polar opposites. I find people who are like, ‘Yep, I’m funding this, got this restaurant, got this club, this recording studio,’ like so aggressive.”
5. Others become too scared and spend frugally
On the other hand, Taylor says he also meets athletes and entertainers who are very conservative with their earnings.
He says, “I’ll meet people and ask, ‘Can you explain to me why you have $ 20 million sitting in your checking account?’ Because they’re so scared. They heard so many horror stories that they’re just like, ‘I’m not doing anything.’ “
Taylor says that 80% of his famous clients tend to go to the extremes, while 20% of them find a happy middle ground between investing wisely and spending frugally.