By Lee Sherman
It might come as a surprise to learn, that despite their seven-figure or more salaries, many athletes and other stars have gone broke over the course of their careers.
But think of it this way and it begins to make more sense. As lucrative as the contracts might be, celebrities are still independent with little or no job security. And because the nature of the sports, music, and acting careers they choose are short, they need to think more seriously about long-term financial planning.
Many celebrities earn the majority of their money when they are young. That can lead to frivolous spending that becomes a pattern that persists even when they are no longer at their peak. Even worse, many others succumb to temptations that can be their financial downfall. Financial planners strongly recommend against spending one’s newly earned wealth on expensive clothes and jewelry, eating out, fast cars, or a mansion.
While celebrities can earn as much in one year as the average person earns in a lifetime, they still need to save for retirement just like anyone else. Diversification is one strategy that works. Instead of making the mistake of thinking that either their career or their celebrity status will last, celebrities should consider using their money to invest in or start companies that can earn them dividends long after their career has come to a standstill. One prominent example is George Clooney who started a Tequila company called Casaamigos in 2013 and sold it to Diageo in 2018 for $1 billion.
In fact, for millennial celebrities like Ashton Kutcher, these kinds of investments have almost become standard business practice. He is perhaps as well-known these days as an angel investor as he is for his days on “That 70s Show”. The days when a long-forgotten actor ends up stuck doing late-night infomercials or a past-his-prime athlete becomes an insurance agent are seemingly behind us.
That said, even lesser athletes must deal with a few specific tax considerations others don’t. Athletes are levied withholding tax in the visiting state for income earned when on the road. While they will receive a credit in their home state for these taxes, it may not be enough to offset their own state’s higher taxes.
Because of this, celebrities should think carefully about where they establish their place of residence (keeping in mind that it is possible to maintain several homes). Athletes, in particular, might play for a team where taxes are high such as California but can keep more of what they earn by establishing residence in a place with no state taxes. And those huge signing bonuses? They are only taxed according to the law in the state where they reside.
Many of the lessons here can apply to you, even if the closest you get to a basketball court is your weekend pickup game. If you’ve recently come into some unexpected wealth and want it to last, it’s time to start planning for future success.
Lee Sherman is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Lee is an experienced journalist and editor with over 30 years of expertise with a significant history of writing in the personal finance and technology arenas.