Pro athletes turn to annuities to fund retirement

Annuities, which are often misunderstood, can be an excellent way to fund the retirement of clients generating significant income over a short career.

Pro athletes turn to annuities to fund retirement
by Will Ashworth

Former NBA star Antoine Walker wishes he’d gotten an MBA before embarking on his 12-year career playing professional basketball. He reckons he’d have made better investment decisions which in the end might have prevented his bankruptcy in 2010, two years after hanging up his sneakers.

It’s a nice theory but an MBA doesn’t guarantee greater investment success. Sure, it might have helped Walker make better “life” decisions but that’s about it.

The real lesson from this cautionary tale is that annuities can be the answer for athletes and other high-income earners who generate significant sums of money in short periods of time. The NBA, where 60% of players go bankrupt within five years of retirement, sets aside 1% of basketball-related income (BRI) for welfare benefits and a post-employment annuity plan for its players.

With a new TV contract beginning in 2016, BRI is expected to reach $6.7 billion that year with 1% or $67 million earmarked for these specific player benefits. 

While in theory this is a good thing for players, it really depends on what type of annuity is bought. Speaking with Stan Haithcock, one of the biggest agents in the U.S. focused exclusively on annuities, he reminded WP that there are 15 types of annuities available and without knowing specifically which type the league’s using, it’s hard to know the net benefit to players.

Haithcock says four reasons exist to own an annuity: 1) principal protection; 2) income for life; 3) leaving a legacy; and 4) long-term care. Using the acronym “PILL” to remember them, Haithcock emphasized that “annuities are not investments.”

One player who’s used annuities to his advantage is retired star Shaquille O’Neill. Over his 19-year career he generated $292 million in total compensation. In retirement he’s projected to make as much as $1 billion from endorsements even after his career is long over.

Thanks to a wise agent who made him put $1 million annually into annuities from his rookie year onward, Shaq lives off the income the annuity generates with his endorsement income a legacy for his children.

While situations like Antoine Walker are unfortunate, Shaq’s scenario demonstrates how pro athletes and other prodigious earners can protect themselves against their own personal spending foibles.