Golden sports stars, gold vs. canned tuna

Q: How would you advise young sports stars turning pro (or any other young people of modest means who suddenly receive great wealth) to manage the wealth they are about to receive? What would be the wisest way to manage it?

— M.B., Houston

A: The hardest thing for gifted athletes to understand is that their lifetime income — the income they can rely on — will be only a fraction of what they are paid as professional athletes.

They also tend to complicate their lives by using credit to buy cars and houses when they can, and should, pay cash.

The problem is similar to what we all face.

In life, it takes a very large portfolio to replace a small paycheck.

To be independently middle class, with $50,000 a year in investment income from a portfolio that is 50 percent stocks and 50 percent bonds, you'd need about $1.4 million.

Good reason to keep that day job.

Recently, I put the career-to-date earnings figures for Dallas Stars hockey player Mike Modano, about $32.5 million over five years, into the consumption-smoothing financial-planning software used in a recent column series.

It computed that Mike could depend on a real lifetime income of about $900,000 a year and would have a bit over $600,000 a year to spend after taxes.

This assumed heavy-duty saving during his playing years, a portfolio that grew to just under $20 million in real dollars, and an 8 percent annualized investment return.

It also assumed that he never worked another day in his life, and that he lived to 95.

The figures are based on lots of very benign assumptions: That he lives at that standard while the money is pouring in, that he doesn't buy a car every week, that he doesn't take marital advice from Britney Spears, and that he doesn't succumb to the multitude of brilliant advisers who will, for a hefty chunk of his income, make his tax bill disappear while earning supernatural returns.

Living on $900,000 a year doesn't make anyone a candidate for The New York Times' 100 Neediest List.

The hard part of professional athletes' lives will be psychological, not financial.

Also, Mike may have a long career after he's left professional sports behind.

But the big message is that professional athletes have to live on a small fraction of what they earn if they want to avoid a major financial comedown later, when they are no longer in their game.

Q: Given the risks we face (the size of our national debt, the percentage of foreign holders of that debt, the level of household debt, our culture of spending rather than saving, the rising cost of entitlements, the rising cost of energy, and the unknown risk of financially disruptive terrorist attacks), there seems to be a possibility of a monetary breakdown.

Some people respond to this by owning a small reserve of gold or silver coins.

They don't do this as an investment but as a personal safety measure.

Do you see any merit in this?

— W.W., Nashville, Tenn.

A: In a financial crisis large enough to be called a monetary breakdown, it's doubtful that the local supermarket would be doing business as usual for those with gold and silver coins.

Those who are really worried about an economic breakdown should think about what they need to have on hand if they can't buy things in stores.

They need to think New Orleans after Katrina.

The need won't be gold and silver coins.

It will be for a good supply of nonperishable food, access to a supply of potable water, and whatever else is necessary to keep body and soul together until television resumes its normal programming.

Questions about personal finance and investments may be sent to Scott Burns at The Dallas Morning News, P.O. Box 655237, Dallas, TX 75265; by fax at 214-977-8776; or by e-mail at scott@scottburns.com. Questions of general interest will be answered in future columns.