*UPDATE: Celebritynetworth.com retracted their statement about this annuity on Steve Young. The original annuity was never funded. That being said, the premise works the same. It is still a good idea to move some of your retirement risk from the market and your current company (pension, etc.) to an insurance company through an annuity.
You read that right. Steve Young, the guy that retired from the 49ers in 1999, will make more money this year than Colin Kaepernick. And to be clear, I’m not talking about endorsements or Young’s analyst contract, I’m talking about for playing quarterback. Colin Kaepernick’s current base salary is $840,000. Steve Young on the other hand will make $1 million this year. How could this be? I’ll give you a one word answer: Annuity.
You see, when Steve Young left BYU, he signed with the Los Angeles Express of the now defunct USFL. There was originally a bidding war between the Express owner J. William Oldenburg and the one and only Donald Trump (owner of the NJ Generals). Young signed a $40 Million deal with the final $36 Million being spread out of the next 40 years.
“After his bonus, Steve would earn just $200,000 in year one, $280,000 in year two, $330,000 in year four and $400,000 in year five. The remaining $30 million would be deferred over 37 years starting when Steve turned 28 and ending when he was 65 in the year 2027. The contract was backloaded, which meant that the payments would escalate to $1 million per year in 2014, then $2.4 million and eventually topping out at $3.173 million in the contract’s final years.”
So Steve Young will make $1 Million this year from a football league that no longer exists? Yep, his payout is not coming form the out of business league, but rather from an annuity from an insurance company. When Oldenburg won the bidding war from Young, he bought annuity to lower the total cost.
This same approach can be used for us regular folk today. First off, if you have a pension, it’s a good idea to hedge some of the risk of the payout from your company to an insurance company. Most plans offer the opportunity to roll some or all of the money out of the pension fund. What should you do with that money? Follow Steve Young’s lead and get your self a nice annuity payout.
What if you don’t have a pension? You can still hedge the risk of retirement by moving the risk from yourself (ETFs, stocks, mutual funds, bonds, etc.) to the insurance company (annuity with a guaranteed payout).