The Pro Hockey Players Guide

To Financial Independence

by Adam Henry
by Adam Henry

Financial Advisor and Former Hockey Player

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Table of Contents

“The simple difference between a rich person and a wealthy person is that a wealthy person has sustainable wealth. In other words, a wealthy person will always be wealthy, whereas someone who is merely rich will only be so for a short period of time until the money is gone. ... Rich people only have money”

Tom Wheelwright

There’s a difference between being “rich” and being “wealthy”. Something I try to help players understand right from the beginning of our relationship is that generating wealth, and in turn financial independence, is simple, but not easy. In theory, with the income earned by the average NHL player, it shouldn’t be a challenge to retire with a bank account large enough to live free of financial constraints. In reality, without some education and guidance, there is potential for failure.

Definition

Financial independence is the status of having enough income to pay one’s living expenses for the rest of their life without having to be employed or dependent on others.

We’ve all seen the headlines of high-profile professional athlete’s who’ve gone bankrupt, and that’s certainly priority number one that we want to avoid. But moreover, my responsibility is to help players achieve a scenario where following their hockey career they will only work if they want to, not because they need to. This guide is a good place to start.

Part One: 4 To-Do’s After Signing Your Contract

1. Taxes

It’s no secret – The taxes you pay will drastically affect your overall wealth. That’s why I believe it is the best place to start for hockey players.

Depending on which country, province, or state that you play in, there are varying tax implications. Since most players spend the season in the jurisdiction where they play, and then return to their hometown to train for the summer, some strategic tax-planning should be implemented.

Here’s a few things to consider regarding taxes:

  • You pay taxes depending on where you reside, and not necessarily where you play.
  • Canada and the U.S. have different federal tax rates, and each province or state also has their own rates.
  • Your overall tax rate is the combination of your federal and provincial/state tax.
  • Some states in the U.S. have a Jock Tax, which means that you’ll owe taxes in some states when playing road games outside of your home state. *You’ll be required to file multiple state tax-returns, so keep in mind that it becomes costly to file your taxes annually.

Tax-Planning

If you’re a Canadian playing in the U.S., you can determine your residency for tax purposes based on the Substantial Presence Test as follows:

“You will be considered a United States resident for tax purposes if you meet the substantial presence test for the calendar year. To meet this test, you must be physically present in the United States (U.S.) on at least:

  1. 31 days during the current year, and
  2. 183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting:
  • All the days you were present in the current year, and
  • 1/3 of the days you were present in the first year before the current year, and
  • 1/6 of the days you were present in the second year before the current year.”

Example: In Manitoba, the highest earners landed in the 50.4% tax bracket for 2020, whereas in Texas the highest earners landed in a 37.0% tax rate (the difference is mostly because Texas has no state tax!).

 What if you spend your summers in Manitoba, but you play in a state that has no state tax? If you pass the substantial presence test, you will be considered a resident in the U.S. for tax purposes. In this example you could save approximately 13% in taxes – the equivalent of $130,000 if you earn a million-dollar salary!

* steps can be taken to ensure you’re a taxpayer in the jurisdiction with lower rates, but it is essential to consult a cross-border CPA to have it done correctly.

 

A note on taxes:

There’s a lot of media attention around the league that players who play in Canada are at a vast disadvantage because their after-tax earnings are far lower due to the higher tax brackets in Canada. Although this is true on average, there are some tax-planning strategies available to players domiciled in Canada that can ease the burden of these higher tax brackets. For example, a player can establish a Retirement Compensation Agreement with their club, which will provide critical reduction and deferral of their tax liability*.

Summary

Simply put, taxes will be the largest strain on your wealth by far. How much you owe in taxes can vary depending on where you play and how much you make. For now, just know that you’ll be paying AT LEAST 30% of your salary in taxes.

2. How Much Will You Actually Make

Now that you’ve got an idea of your tax liability, get an estimate of the hockey-related expenses that will be coming off your total earnings. These are expenses that you should factor in immediately, because there’s really no avoiding them. Here’s a few common expenses that you can expect to be paying:

  • Agent Fees
    • Agents are an invaluable asset to players, especially early on in your career. However, the expertise that they provide comes with a cost. On average, you can expect to pay your agent 2-3% of your pre-tax salary minus escrow.
  • Escrow
    • Escrow is withheld from your paycheck, and will only be returned to you once the NHL determines the realized revenue at the end of the season. It is crucial to understand that you may or may not get this money back. For example, in the 2018-19 season, approximately 13% was withheld for escrow during the season, and only 3% was returned to players once revenues were realized.
  • Union Fees
    • Players pay $30 per day during the season to the NHLPA union. For example, there were 252 days in the 2018-19 season, so $7,500 would go to the union.

I suggest to players to assume that before they actually have a dollar to spend on themselves, they should plan to only have 40% of their stated salary (i.e., if you’re salary is $2 million, expect to only have $800,000 to spend). This a pretty conservative amount, but if you have more cash left over than you planned for, that’s a good problem to have!

3. Start Contributing to Your Investment Account

Yes, I’m suggesting you start investing before you make a spending budget. What we often see with young players is that they spend first and look to invest second with whatever is leftover. What typically happens is that they spend too much, and then there’s nothing left to invest.

If you can flip these two steps around – invest first, spend second – the difference 10-15 years down the road will be paramount.

My advice is to start with your Entry-Level Contract. Time is such a valuable resource when it comes to investing, and if you’re earning over $100,000/year at age 20, you should have some excess cash flow available to invest. Here’s a quick illustration as to how powerful it can be to invest early:

Let’s compare two players with identical careers:

  • They signed their entry-level deals at 18 following the draft.
  • Were rookies in the NHL at 20 and played out their Entry-Level Contracts.
  • Their following contract was for two years
  • They signed long-term contracts at 25.

 

The only difference between the two players is as follows:

Player #1 – Saves & invests $25,000 once he receives his first signing bonus and continues to do so every year until he signs his long-term deal. He then stops contributing and simply lets his investments grow.

Player #2 – Doesn’t save or invest any of his entry-level contract money. Instead, he waits until he signs his long-term deal. Starting at age 25, he invests $25,000 per year for the next 20 years.

Assuming all else being equal, no tax implications, and both players earn 8% per year on their investments, here’s how their accounts look at age 45:

*Tables above represent a hypothetical scenario with no tax implications and an 8% average return with no variability in returns year-over-year.

**Source: Adam Henry

The results are pretty staggering. The first player has only contributed $200,000 to his investment account, whereas the second has contributed $525,000, and their account balances are nearly the same! The above example represents the power of compounding, and it illustrates an essential concept:

  • The most valuable asset when it comes to investing is time. If you’ve signed an entry-level contract at 18 years old, you have a good amount of capital, and time is on your side from an investment perspective.

 

Hence, invest first before you start spending!

4. Build a Spending Plan

You’ve started from the top and worked you way through your taxes, hockey-related expenses, and you’ve started paying yourself first by contributing to an invest account. Now you’re ready to start allocating all your remaining income to your spending. You’ll have a great idea of what you can afford as far as a living situation, what car to drive, how much to spend when you’re out with the boys, and so on.

By working through these 4 steps, you’ll be able to live worry free because you’ll know exactly how much money you have available to spend without going under.

A couple things to consider:

  1. How is your contract structured? You’ll receive your “salary” during the season, which in a typical year is 26 weeks. You don’t receive a paycheck in the playoffs or the off-season, however there are bonuses that need to be considered. Are you being paid a large portion of your AAV in July via bonus, or is the majority of your contract paid being salary?
    1. IMPORTANT: When figuring out how much to spend, make sure you have enough to get you through the off-season as well. The last thing you want to do is to dip into your investment account or start filling up a line of credit because you’ve spent all your cash by mid-July.
  2. When budgeting, start with the important items such as living (rent/mortgage), car, food, and various other bills. Do you have enough cash to hire a personal chef, or will you do all the shopping and cooking on your own?
  3. Don’t forget about the fun stuff: nights out with your team, golfing, money on the board. These are the variable expenses that can start to pile on. With your schedule, you’ll have a lot of free time on practice days to do stuff, and a lot of it comes with a cost.
    1. IMPORTANT: You should enjoy every second of your pro hockey career because it won’t last forever, so let’s make sure we get organized and ensure we have enough cash to do so!

Part Two: Start Generating Wealth – Fill Your Three Buckets

Once you’ve gone through your four “To-Do’s” and have a firm grasp on your financial life, it’s time to start generating wealth. A great way to do this is to separate your investments into three buckets: Safety, Growth, and Dream.

A. The Safety Bucket

In this bucket you’ll want to put aside at least one-years’ worth of expenses. This cash should be invested in something super secure, like a money-market or fixed income investment. Think of this as your rainy-day fund (in the event something like a global pandemic occurs…), where your investments won’t be outdone by inflation and will be liquid if we need to convert to cash immediately.

You’ll also want to explore some life and disability insurance with these funds. NHL contracts are guaranteed, meaning that you’ll receive your full contract even if you’re injured while playing. However, consider the following scenarios:

  • You’re a top-6 forward in the final year of your current contract. Based on your performance and age, and because you’re a pending UFA, you’re poised to sign a big ticket in the off-season. Unfortunately, a fluke accident occurs, and you are seriously injured late in the season. Your injury will prevent you from playing hockey moving forward and do not sign another contract.
  • What if you’re injured outside of NHL action (i.e., playing soccer with some friends in the offseason)?

The NHL insurance does not necessarily protect you from these events, so it may make sense to explore additional coverage. Keep in mind that not all insurance companies provide coverage for professional athlete’s so you’ll need your agent or financial advisor to provide guidance on which products may or may not make sense for you.

In summary, your safety bucket is there to provide peace of mind. In a worst-case scenario event, such as a career ending injury, you’ll have some protection and will be able to land on your feet.

B. Growth Bucket

These will be your long-term investments. Money that you will stow away and not need until after your playing career ends. With these funds we are seeking growth, and since we will not need to access this money for a very long-time, we can adopt more volatility.

Your growth bucket is where you’ll hold investments like stocks, bonds, and private alternatives. Depending on your age, and how close you are to retiring (or achieving your goals), you may have more stocks than bonds, or vice versa.

There are literally thousands of investments available, and you can tailor a portfolio that makes sense for your specific needs & goals. There are also plenty of “get rich quick” investment opportunities available, especially for high earners like pro athletes. It is so crucial to have a basic understanding of the difference between market volatility, and speculative risk. Consult an investment advisor if you feel overwhelmed with this process.

C. Dream Bucket

This is the fun stuff. After you buy your mom something special (because that’s the first thing you should do), you’ll likely have a long list of fun things you’d like to buy or spend money on. Instead of going wild and buying everything with your first bonus, let’s take a calculated approach, and only buy these items once the funds in our dream bucket are sufficient.

  • There’s no need in my opinion to take on debt for depreciating assets (i.e., vehicles). So, let’s ensure we purchase these fun things with cash once we have it.

Using the strategy of saving before making major purchases on material items can have a drastic effect on your wealth long-term. Although it can be incredibly tempting, if you can be patient and avoid taking on bad debt throughout your career, you can retire far wealthier by avoiding having to service high-interest debt along the way.

Part Three: The Three Most Important Criteria to Achieve your Goals.

1. Build Habits Early & Review Them Often

Don’t wait too long to start building good financial habits. Get organized early on in your career for two reasons:

    • The average NHL career is very short (5 years).
    • Your career could be over far earlier than you plan for.

Building good habits like the ones I’ve outlined in this guide will get you started in the right direction. However, it isn’t enough to set it and forget it. Review these items as things in your life change such as changing teams, starting a family, or signing a new contract.

2. Invest Properly

I explain to players the following motto: If you’re playing in the NHL, you’ve won the lottery, both in income and lifestyle. Since you’ve already won the lottery once, you do not need to try and win it again with your investments! Make smart investment decisions and stay away from get-rich-quick opportunities. 

  • The media loves to talk about Bitcoin millionaires, Reddit streamers who bought their yachts with GameStop stock, and so on. Although there are stories like this, there are also horror stories of people squandering their millions by taking on unnecessary risks.

Build a diversified portfolio of stocks (low-cost ETFs), bonds, private alternatives, and real estate. Re-balance annually so that you’re never too overweight in any particular asset class.

Tip: Start simple with a traditional portfolio of stocks and bonds. As your net worth grows, start diversifying into other assets like real estate, private equity, and private debt.

The fact of the matter is, if you can avoid the speculative media that garners attention, diversify, and invest for the long-term, you can retire happy and wealthy, ignoring the noise along the way.

3. Trust Your Support Team

If you’re anything like I was when I played, you’re likely hyper focused on one thing: Hockey. That’s what is required in today’s game to have success.

If that’s the case, you’ll require support in contract negotiations, law, taxes, investments, etc. Surrounding yourself with good people that you trust is paramount.

The relationship you have with your financial advisor should be no different than the relationship you have with your agent. It is all about trust, and if you do not trust someone, do not have them manage your finances. You should feel comfortable calling your advisor and asking questions about anything that relates to money, as often as you see fit. 

About Adam

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Disclaimer

Adam Henry is a Winnipeg based Financial Advisor and Retirement Specialist with Harbourfront Wealth Management. His specialty is working with pre-retirees and retirees who are looking for retirement, investment, & tax advice.

The views expressed are those of Marc Sabourin, Certified Financial Planner, and Investment Advisor and not necessarily those of Harbourfront Wealth Management Inc., member of the Canadian Investor Protection Fund, an IIROC regulated firm.

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