Who Wants To Be A $1.2 Millionaire?

Now that all of the confetti has settled from the far reaches of Pirate Nation and the jubilation quiets from the signings of Gerrit Cole and Josh Bell, it’s time to consider the cold, hard fact….”Wow, the Pirates spent a ton of money on this draft!”.  By all estimates around $17.2 million, which would be a new draft record for any team at any time.

Cole and Bell are set for life even if they never make the major leagues (which would be a bitter disappointment for the Pirates, the players, and fans) and collect their major league salaries.  Cole received $8M dollars as a straight signing bonus and Bell received $5M.  But what about someone like Clay Holmes, the Pirates’ 9th round pick that signed for $1.2M and set a record for his round in the process?

Not to cite Holmes in particular, but can you be set for life on JUST the $1.2M bonus that he received?  Let’s take a look:

Let’s say a player’s agent….I mean…advisor…takes 5% of his gross bonus.  That’s $60,000 right out the door.

The player should conservatively set aside 40% for tax purposes in an account that will stay safe.  Taking 40% off of the gross $1.2M is $480,000.  Coupled with the advisor fee that is $540,000 that he will not enjoy.

That still leaves him with $660,000 in his account.  Not that we would ever wish this upon a player, but let’s assume that this player plays ball for 6 years and never makes it.  He doesn’t make a 40-man roster and enjoy the increased pay while in the minors ($32,500 the first year on it, $65,000 the second year, and $97,500 the 3rd year).  He just played for the indentured servitude wages of $1,000 per month for 6 months each year for 6 years.

So now this hypothetical player realizes after 6 years that it’s not going to happen for his baseball dreams.  He’s 25 years old and can’t do his preferred profession.  Now what?  Could he coast on his remaining bonus?

Let’s say that the player took the remaining $660,000 from his bonus and had invested it in a vehicle that gave him 5% interest compounded annually.  At the end of his 6 career that amount would have grown to $884,463.  This number makes the HUGE assumption that the player never touches one Canadian Peso’s worth of his original bonus and is able to live off of others somehow.

If this player, at the age of 25, decides he wants to “retire” from working altogether and withdraw a semi-comfortable $50,000 per year but keep the remainder in this account earning 5% compound interest annually what happens?

January 1st – withdraw $50,000 from the $884,463.  Balance $834,463

December 31st – add interest at 5%.  New balance $876,186

January 1st (2nd year of “retirement”) – withdraw $50,000.  Balance $826,186

December 31st (2nd year of “retirement”) – add interest at 5%.  New balance $867,495

So you can see that is a fairly hold-steady around the starting balance between the withdrawal and the interest accrual.  Again, these are fairly basic assumptions that the player will be content and able to leave a lifestyle on $50,000 per year.  There would be temptations to blow some of the money, give some to family, fend off new-found leaches, etc.

There would also be the chance, more reasonably, to purchase a new house completely in cash and never have a mortgage payment.  As someone who just last week purchased a new home, that is a rather appealing proposition to me at this point.  The same theory holds true for purchasing a car or two with no future payments.  Even if the player were to purchase a $400,000 home and two cars for $80,000 upon his “retirement” there would still be $400,000 left in his account.

The bottom line is that a player in a similar situation to Holmes may not be set for life, but they can definitely live comfortably on the remnants of the original signing bonus.  With some self-restraint and good financial advice, of course.

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2011 Draft Recap: Don’t Draft Me

  • Anonymous

    Congrats on the new house

  • Anonymous

    This brings to mind two basic financial tenets:

    1.  Take care of your money, and it will take care of you.
    2.  If you’re actively considering the purchase of a back-up Escalade, you may want to glance back at #1.

  • Anonymous

    You’re really big on getting people 5% APY. I would love to find somewhere to make 5%.

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