Everyone has likely heard of a 401k, but you may not be as familiar with The Bobby Bonilla Retirement Plan. Despite being a retired professional baseball player, Bonilla is certainly not a household name, but his decision to defer payment — with interest — on his earnings at the end of his career has made him somewhat of a celebrity in the financial planning world.
That’s because Bonilla has been receiving an annual payment of $1,193,248.20 from the New York Mets — and will continue to get it until 2035. So, how does this work if he hasn’t played for the team in 25 years?
Assembly’s profile of Bonilla’s strategy explains:
“Back in the year 2000, Bonilla was at the tail-end of his career. It was unlikely he’d make the Mets’ roster, but he still had $5.9 million in guaranteed money remaining on his contract. Bonilla, his agent and the Mets ownership agreed to a deal:
- Defer payment on the $5.9 million he was owed
- until 2011 (about 10-years into the future at the time)
- at an 8% interest rate
“The $5.9 million deferred until 2011, compounding at 8% interest, worked out to an annual payment of $1,193,248.20 each year from 2011 until 2035 — $29.8 million total.”
Smart, right? By simply deferring gratification (in this case, the outstanding debt owed to him by the Mets), Bonilla was able to more than quadruple his income.
However, the key here is the compounding interest. According to Ramsey Solutions, “Compound interest is the interest you earn from the original amount (or principal) of an investment plus any interest you’ve already made through that investment. Basically, you’re earning interest on top of interest.”
To that end, you may have heard some variation of a scenario comparing the results of different investment strategies. Essentially, it compares two people by showing how investing as early as possible — even if you stop investing completely a few years later — yields a better return than if you wait until your later years and then invest more at that time. That’s because the money invested by those who start early has longer to compound.
For example:
- Alex (starts saving at 25): Saves $5,000 per year for 40 years = $200,000 total contribution. Grows to $1 million at age 65.
- Ben (starts saving at 45): Saves $24,400 per year for 20 years = $488,000 total contribution. Grows to $1 million at age 65.
As you can see, while both Alex and Ben get to the same final number, Ben has to contribute 2.44 times more overall ($488,000 ÷ $200,000) just to catch up because he lost 20 years of compounding.
Getting back to baseball, more recently, a modern-day league star also made headlines for similarly deferring his salary (albeit without interest). Per USA Today:
“… [Los Angeles Dodgers star Shohei] Ohtani was deferring $680 million of his $700 million without interest, paying him $68 million a year beginning in 2034, and it was completely Ohtani’s idea …
“The way Ohtani saw it, he didn’t need the $70 million annual salary with his off-the-field endorsements.”
As you can see, if you haven’t already, now is the time to start engaging a financial advisor to ensure your money is working for you. Similarly, setting up a long-term trust for your children will guarantee that they save — and invest — their inheritance as opposed to risking spending it.
MeyerPink Law builds custom legacy plans that help provide the opportunity for your heirs to experience a healthy transition of money, but with the appropriate guardrails in place for their protection. Contact us at (209) 694-3085 or email [email protected] to get started.
