“I’ve always believed in my ability on the field. Once I earned that contract, I knew we needed the right advisor to help make sure we did the right things off it.”
After being a late-round NFL Draft pick, our client spent the early part of his pro career on minimum salaries that were game-to-game and non-guaranteed. In his third year, he inked a long-term contract for more than $25 million. Married with two young children, his parents are still together, and his wife’s mother is a widow.
Desires to help family members and making aspirational purchases need to fit inside a long term plan that will allow the client to live off of his portfolio for the rest of his life.
The first objective with the client was to make certain that decisions were not rushed. It is completely natural for a person who has suddenly come into a large amount of money to immediately purchase things that they have dreamed about for their entire life. It was imperative that we establish a cooling off period and a system for the timing of these purchases.
Once the contract was signed, it was important to get a cash flow projection based on the terms of the contract. We carved out a piece of the signing bonus for those aspirational purchases, but made sure that there were enough assets left to put to work to build the passive income stream needed to support his lifestyle.
A key reminder for the client was that homes, cars and other large asset purchases usually come with larger ongoing ownership and maintenance costs. It was important to be sure to include those costs in the ongoing budget. In addition, any ongoing assistance to family members must be included.
After the budget was determined, we needed to design an investment plan that would conservatively produce enough income to provide for the monthly expenses and keep up with inflation.
The first objective was to come up with an appropriate asset allocation of equities, fixed income, real estate and cash based on the client’s income needs and risk tolerance. We set minimum and maximum allocation targets for each asset class to give us flexibility to make changes as dictated by the markets and the client’s situation.
For the fixed income portion of the portfolio, we constructed a 20-year ladder constituted of tax-free municipal bonds. This gives the client income that is not federally taxed and provides liquidity with bonds maturing each year. The laddered approach will also reduce interest rate risk.
As for the equity slice of the portfolio, our focus was on building a portfolio of blue chip individual stocks that have long histories of paying dividends. We also began selling call options against the individual stock positions in order to increase the income from the equity portfolio. We used ETFs for international and small cap exposure.
Prior to signing the contract extension, the client had a term life insurance policy and a basic will. Now that there were significantly more assets involved, a deeper estate plan had to be established. Permanent insurance and college savings funds were both put into place. In addition, the will was updated to ensure that the long term care needs of their parents would be protected.
The results of the plan are that we staggered some of the large purchases to match the timing of the cash flows as well as to make certain that a large portion of the assets were put to work early. We have also continuously tracked the monthly spending versus the monthly portfolio income to show the client how it will look after his career is over.
By securing the estate plan and breaking down the budget and portfolio income projections into trackable and easy to read reports, the client is able to track his progress on an ongoing basis to make certain that he stays on track to reach his goals.