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Key takeaways
- Aaron Judge is in the highest tax bracket, paying 37% for Federal and 10.3% for New York State taxes. For him, tax considerations are very important. For every additional $1 he earns in 2022, he will have to pay $0.47 in taxes.
- It would be wise for Aaron Judge to have a municipal bond ladder, these work similarly to a CD ladder. The bonds pay a specific amount of interest over a specific term and have attractive tax advantages for people in high-income tax brackets.
- Here are six key areas of personal finance that are just as relevant to Aaron Judge as they are to you and your family.
Aaron Judge signed a one-year $19 million contract to play baseball for the New York Yankees in 2022. He then went on to break the American League record for home runs by hitting 62, the previous record stood at 61 since 1961. The season did not start on a high note, as Judge turned down a deal at the beginning of the 2022 season that was a seven-year $213.5 million contract ($30.5 million per year). This would have made him the highest-paid right fielder in all of Major League Baseball.
What would justify turning down a long-term deal with such a large salary? To put it simply, he thought he was worth more money. Now he will be a free agent, and it is rumored that he might get a $300+ million contract at the start of next season.
Judge’s salary was $19,000,000 this year, which amounts to $306k for each home run this year.
Breaking the home run record is a historic event in our national pastime. It was reported that Cory Youmans, the fan that caught the 62nd home run ball, could receive $2 million for the souvenir baseball.
Here are some personal finance considerations for Aaron Judge and his rather large salary.
How to play the personal finance game well
Here are six key areas of personal finance that are just as relevant to Aaron Judge as they are to you and your family.
Risk management
If Aaron Judge has an injury during the off-season, the likelihood of securing a $300 million contract would be in jeopardy. He will want to protect himself with personal insurance to hedge that risk.
In a similar fashion, if you’re married with a house and a child, you would be well served to consider a term life insurance policy. This will protect your ability to pay for your house and the upbringing of your child in the event you’re unable to provide for them. It’s a low-probability item, but it’s basic risk management. Protect your family, as Aaron Judge will protect his future contract, and future earnings of course.
Cash management
It would be wise for Aaron Judge to have a municipal bond ladder, which works in a very similar way to a CD ladder. The bonds pay a specific amount of interest over a specific term and have attractive tax advantages for people in high-income tax brackets.
With the rise of interest rates over the past few months, you can now find savings accounts paying interest over 2.4% and CDs with interest rates over 3%. If you have cash on hand, you are not stuck with getting near 0%, as we have experienced for many years.
Investment management
A $19 million salary is a lot of money for anyone, including Aaron Judge. He could a very full life on his salary alone, but instead, he will earn more over his lifetime making investments, and letting his money work for him. He has plenty to work with in order to diversify his wealth for the long term. It would be fair to assume this will include some equities, bonds, real estate, and private placements.
A good strategy would be to own some mega-cap individual growth companies that do not pay large dividends and could grow over time. Having a sizable portion in tax-advantaged municipal bonds, income producing real estate and a few private placements.
Retirement planning
Major League Baseball players do have a pension that will provide additional retirement income once they turn 62, but that should just be icing on the cake for the modern ballplayer, let alone a megastar like Judge. With high-income earners, there are sophisticated ways they can plan for retirement since they are often phased out of pre-tax benefits for commonly used vehicles.
For most American retirees, it’s important to consider how you will receive your income once you retire. Will you have a pension, a 401k, income from other investments? How much will your monthly expenses be in retirement? Will your income sources be enough to cover your expenses? If there is a projected gap, you will need to address that. There are three main levers you can pull: save more now, find investments that earn more, or retire later.
Tax planning
Aaron Judge is in the highest tax bracket, making tax considerations very important. He’ll likely pay 37% of his income toward Federal taxes and 10.3% toward New York State taxes. For every additional $1 he earns in 2022, he will have to pay $0.47 in taxes to Uncle Sam. It is common to seek tax-advantaged vehicles that do not have standard income tax rates. A few common sources are municipal bonds, individual growth stocks, and preferred shares with preferred dividends.
Everyone needs to do some strategic tax planning to work smart with their specific tax situation. Are you taking advantage of pre-tax, tax-deferred choices like 401ks and IRAs? Should you have a ROTH IRA and/or consider backdoor conversions?
Estate planning
Aaron Judge does have exposure to estate planning issues with his level of net worth. Currently, an estate over $12.06 million would have to pay 40% in estate taxes. Most Americans do not have an estate tax liability but they still need to get some estate planning documents in place.
A common estate planning need for Americans that own a home is a living trust to avoid probate for their heirs. Also, a will and a durable power of attorney for health care matters, money, and children are regular items that get addressed while completing a living trust. This is not just for the jet set anymore.
The bottom line
Aaron Judge is playing baseball very well, and it’s likely he’ll get a record-breaking contract for the 2023 season. To play the game of personal finance well, both for Aaron Judge and for you, the above six areas of focus are very important. We can’t all hit 60+ home runs, but we can try to win with our personal finances.
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