By KATHLEEN PENDER
San Francisco Chronicle
It would seem inconceivable if it didn't happen so often: highly paid celebrities and athletes going broke. Despite having one of the most lucrative careers in show business, Michael Jackson reportedly died $400 million in debt. Ed McMahon narrowly avoided foreclosure on his home before he died last week.
Actor Stephen Baldwin, former baseball slugger Jose Canseco and former basketball star Latrell Sprewell all lost their homes to foreclosure recently, and boxer Evander Holyfield is heading that way.
Actors and singers who have reportedly filed for bankruptcy in the past 20 years include "Sopranos" shrink Lorraine Bracco, Randy Quaid, Burt Reynolds, Kim Basinger, Gary Coleman, MC Hammer, Wayne Newton, Willie Nelson, Merle Haggard, Toni Braxton and La Toya Jackson (Michael's sister).
Pro athletes seem even more prone to financial loss.
Sports Illustrated estimates that 78 percent of former NFL players, within two years of retirement, are bankrupt or "under financial stress because of joblessness or divorce." Within five years of retirement, an estimated 60 percent of former NBA players "are broke." And at least 10 major-league baseball players fell prey to alleged fraudster Robert Allen Stanford, the magazine says.
For each failure, there is usually a reason: a lawsuit, illness, injury, divorce, unexpected tax bill or bad investment. Those are the same things that throw ordinary folks into bankruptcy, but celebrities face challenges most of us don't.
One is that their careers are highly uncertain and often brief. In the business world, it's fairly easy for someone with a seven-figure income to guesstimate future earnings, says Ken Naehu, a managing director of Bel Air Investment Advisors in Los Angeles.
"In the entertainment world, you can be very hot and then not. You can't spend like you will have a 20-year career at that type of earnings. Part of what an adviser is supposed to do is tell them what they don't want to hear: You have to invest and protect this money because it might be all you have."
Not all celebrities heed that advice. "Some people are not willing to accept the bad news: You can't live at this lifestyle. They say, 'I'll make money some other way,' "says Ken Anderson, a director in Los Angeles with wealth-management firm Aspiriant.
Sometimes they can.
"I know firsthand some celebrities in this town go on tour because they have to, not because they want to," Anderson says. "I've dealt with some athletes. When they ran out of money, they went to a baseball park and sold autographs for $10 or $20 a pop and that kept them out of the newspaper for being destitute."
Canseco recently appeared in a mixed-martial-arts match in Japan.
Along with their outsize incomes, celebrities also have enormous overhead: large homes, agents, managers, publicists, bodyguards, assistants and others who may or may not have their best interests at heart.
"In entertainment and sports, salaries are published. It's like winning the lottery. People come out of the woodwork trying to sell you things," says Ted Beck, president and chief executive of the National Endowment for Financial Education.
"Because you have achieved wealth based on talent, not business skills, you immediately become a target, especially if you are young. Trying to ferret out who is there to help you in a professional way is hard. You are inundated with people trying to share your success, not provide a service to you."
Beck, whose organization makes grants, has experienced this on a smaller scale himself. "I'm always amazed how suddenly popular I get at meetings. When people start saying, 'That was an intelligent comment,' I immediately check my wallet," he says.
Like any business with fixed costs, celebrities often have trouble cutting their expenses quickly enough when their income nosedives.
"If you are making $10 million a year, keeping $7 million after taxes, and you are spending pretty close to that, it won't take long for you to be out of money if your income stops but your spending continues for six months," Naehu says.
Some celebrities and athletes get into bad investments because they think their success on the stage or field will translate to other areas of life. "Having one sort of talent does not usually bestow all sorts of talents on a person," says Terrance Odean, a professor and behavioral finance specialist at the University of California-Berkeley's Haas School of Business. "You often find athletes and entertainers making poor investments because the skills and knowledge they needed to become athletes and entertainers does not include business skills."
Not all celebrities act this way. Naehu says that most of the celebrities his firm works with are more nervous or tentative than non-celebrities, either "because of their past experience or experience (of others) they know."
He also knows a few wealthy celebrities who grew up poor and continue to live well below their means.
What, if anything, can the average person learn from celebrity failures?
"It's important to insulate your lifestyle," Anderson says. "Take care of your personal needs with conservative investments you know are going to be there. Use riskier assets for the extras of life."
Copyright (c) 2009 Scripps Howard News Service