Tomorrow the National Football League will hold its 81st NFL Draft. The top 253 college players from across the country will be selected (sorry New England fans) over 3 days. However, the bulk of the media attention will be focused on the first round, Thursday night.
The very elite college players will be drafted to their newest, respective teams and be shipped off to cities around the country to begin their NFL journey. It is likely that we will see many of these players playing in Pro Bowls, winning Super Bowls, and earning lucrative contracts in the next 4-5 years. Malik Jackson, now of the Jacksonville Jaguars, just did two of the three back in February and March.
With all the excitement in the air, I felt like this was a perfect opportunity for a short case study on the time-value of money (not to mention how large sums of money can compound into enormous sums of money).
Tomorrow, it is likely either QB Jared Goff or QB Carson Went will be selected first by the now-Los Angeles Rams. Whichever quarterback is selected tomorrow will immediately be slotted into a guaranteed contract worth a total of $27.8 million dollars for 4 years (not bad, but certainly not as good as Sam Bradford has it the last time the Rams had the number 1 pick). Included in that is a signing bonus of $18.4 million dollars, which are dollars paid for just signing the contract.
Now, assume that the player selected simply said to himself (and wife), "we are never going to spend any more money than whatever our annual salary allows us (not as hard to do with salaries in the 7 figures), but we are going to do all of our lifetime investing at 22 and be done," what would his numbers look like.
Once the player pays his federal and state taxes (lucky him, California has the highest state taxes in the country) let's assume after everything he has 50% of his original signing bonus left over. He would have a little over $9 million dollars left. He chooses to put the money in a low-cost S&P 500 index fund (i.e. VFIAX-O, better known as the index fund Warren Buffett bet $1 million dollars to outperform hedge funds over a 10 year period and is winning) and simply reinvests all his dividends from 22 to his ultimate retirement age of 65.
Now, historically, the S&P 500 returns between right around 9-11% over long periods of time (30+ years). However, we will assume that because of the drag of dividend taxes (undoubtedly at 20% for someone in this player's income tax bracket) this fund returns 8% annually over the next 43 years. When you run these numbers, it would not be crazy if this player would find approximately $250 million dollars sitting in his account at age 65. Not to mention, it would be likely that these investments would be producing approximated $5 million dollars of dividend income each year (and growing). All of this in the year 2059, because of a one-time investment in the summer of 2016. Quite remarkable.
As a side note, if you are the last player drafted this year, pick #253 which is owned by the reigning Super Bowl Champion Denver Broncos, and chose to do the same thing (albeit a little more challenging with a "slightly" reduced salary to the #1 overall pick, you would still have nearly $800,000 from your one-time decision with a growing dividend income starting at $16,000 a year.
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