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You may not know this if you do not follow baseball closely, but July 1st is unofficially known as “Bobby Bonilla Day”.
Who on earth is Bobby Bonilla?
Well, Bobby Bonilla played 16 seasons in the big leagues. He had an excellent career. He was named an all-star 6 times, won a championship, and was even the highest paid player in Major League Baseball for 3 seasons from 1992-1994. Talk about impressive.
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However, he has become lesser known for his career accomplishments and better known for his paycheck. He has received $1,193,248.20 every July 1st since 2011 by the New York Mets. And, he will continue to receive that until 2035, when he’s 72 years old.
How does a major league player get paid until he’s 72?
After the 1999 baseball season (yes almost 20 years ago), the Mets released Bobby Bonilla. However, they still owed him $5.9 million on his outstanding contract. Bonilla’s agent, Dennis Gilbert, who was also an insurance agent who knew the ins and outs of annuities, offered the Mets a deal. Instead of Bonilla receiving the his $5.9 million, Bonilla agreed to defer his payment until 2011, when he would receive 25 payments of $1.19 million, ending in 2035, for a total payment of $29.8 million.
Fred Wilpon and a Ponzi Scheme
The Mets owner, Fred Wilpon, thought this was a wonderful deal as he was making 12-15% on his money through the wealth management firm that he invested in, Bernard L. Madoff Investment Securities LLC.
Yes, Bernie Madoff. The same guy who is in jail for perpetrating a ponzi scheme on his investors.
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$300 Million
While you may think that Fred Wilpon must have lost a ton of money investing with Bernie Madoff, you would be wrong. Wilpon and his family made more than $300 million with Madoff.
It’s rare that someone would benefit so much off of a Ponzi scheme when they aren’t the one actually running it. However, attorney Irving Picard did sue Wilpon on behalf of the victims of Madoff’s investment scandal. The settlement was for $162 million.
In the end, Wilpon still made $138 million. That doesn’t seem fair, but hey, what do I know?
Quick side note: Did you know that Bernie Madoff didn’t get caught for his Ponzi scheme until December of 2008, when one of his sons turned him for fraud? In fact, in 1999, financial analyst Harry Markopolos tried to replicate Madoff’s return and couldn’t. He reported this potential fraud to the SEC in 2000, 2001, and 2005. However, the government ignored him.
I don’t know how many complaints they receive a day, but that seems like an obvious failure to do their due diligence if somebody alerted them on 3 separate occasions.
Anyway, if you’re interested in reading more about this fascinating story, check out No One Would Listen: A True Financial Thriller.
Now back to Bobby Bonilla.
Sportswriters love to tease the New York Mets for having Bobby Bonilla still on the payroll. They find it comical that the Mets have to pay Bonilla $1.19 million, every year until 2035. These writers love to gloat that Bobby Bonilla will be paid $29.8 million over the life of this annuity, when the Mets could have gotten off the hook for only $5.9 million back in 1999.
However, as astute financial readers, you know that these baseball writers are not thinking about everything that they need to.
As we know all know, future dollars do not hold the same worth as current dollars. There is a reason that the Mets owner wanted to hold on to the $5.9 million dollars at the time. He probably assumed that he could grow that amount to exceed the $29.8 million that he would owe Bobby Bonilla in the future.
Here’s a quick chart to show you how much that $5.9 million could be worth in 2035, if Bobby Bonilla had received it and invested it in the stock market with an 8% rate of return.
$5.9 Million Salary Invested
Yes, you are seeing that right.
That $5.9 million invested would be worth over $101 million in 2035. Essentially, Bobby Bonilla could have passed up $72 million dollars by taking an annuity instead of taking a lump sum.
Instead of these sports writers poking fun at the New York Mets, they should be praising them. That was quite an astute financial move on their part nearly two decades ago.
I saw his name on FB and the headline that the Mets have to pay him every year. I didn’t bother clicking on the link and instantly thought he had the better end of the deal. After learning about the background and ofcourse, your chart, it’s clear he would have been wealthier if he received the lump sum and invested it.
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Thanks for stopping by SMM!!! It’s always interesting what the headline says and what actually transpires 🙂
Not sure I’d agree with the analysis here. $5.9m would have grown to $94m after 36 years at 8% p.a. ($101m after 37 years, but 2035 vs. 1999 is 36 years unless one assumes that the contract went from Jan 1, 1999, to December 31, 2035). But the $1.19m cash flows between 2011 and 2035 would have also grown to $87m at that same 8% return. In fact, at a very slightly lower rate of return, 7.58% you’d have the cross-over where the two are the same. If you’d assumed a lower discount rate, which is customary in this situation, the deferred payment plan would have been much, much better, ex-ante. Say, if you had applied a 6% discount rate, roughly in line with long-term bonds at that time, the deferred plan did look better from an accounting and net present value point of view.
But it gets even better (or worse?): Not many investments yielded 8% between 1999 and 2011. The stock market returned less than 1% p.a.: S&P500, dividends reinvested, Dec 1999 to Dec 2011. So, not only ex-ante but also ex-post, Bonilla’s strategy was the correct one!
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Thanks for the indepth analysis ERN!!! Looks like I should have dug down a little further to flesh this one out. Thanks for keeping me honest 🙂
In addition to ERNs comments I must point out, in a world where most celebs blow their money the day they receive it, an annuity might not have been a bad idea anyway. Some people need to protect their future from themselves.
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That’s a great point as well!!! Too many celebrities blow through their money way too quickly. I think I read that Allen Iverson has a clause in there as well to receive money when he’s 50.
MSM — Appreciate the post, enjoyed thinking about it. What would I do? 5.9MM at once or 29.8MM over 36 years …
I’d probably take the annuity as well — not because it’s the best possible return as you pointed out, but because it’s a great risk-adjusted return. The issue to me is risk. I’m assuming the annuity was more or less a lock, so he guaranteed himself a lot more money with almost no risk attached.
And in the end, that’s the issue I have with any analysis comparing a certain investment to an assumed 8% stock return. If that stock return were magically risk free, everyone would be borrowing money at 3% and sticking it all in the S&P500. As it happens, Bonilla has made nearly the same return as the S&P500 since the start of this deal (give or take $3MM), with a large difference in risk.
Just my 2 cents, I’d love to have this decision!
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Thanks for sharing!!! I’m essentially doing that with the government, taking a guaranteed pension over a potential more lucrative private sector job making more money. Hopefully it pays off for me 🙂
Bobby Bonilla…UGH!! As a lifelong Mets fan just seeing his name gives me a headache. There was a book written about his time with the Mets called “The Worst Team Money Could Buy.”
I think EarlyRetirementNow makes a great point above. You have to consider what the regular payments could have grown to in order to compare apples to apples. Add in the fact that they get to break their fans hearts and have terrible press written about them once a year makes it even worse.
Mike @ Budget Kitty recently posted…How Often Should You Wash Jeans?
Hahaha…it must be miserable seeing Bobby Bonilla’s name in the news every year. The Mets are going to deal with that for the next 15 years as well…ouch 🙂
As a baseball fan I know all too well about this story. Bonilla didn’t live up to his expectations with the Mets and had a better career when he played with Barry Bonds and Pirates in the early 90s.
I would have taken the lump sum because like you said when you invest all that money it would have grown to over $100 million(assuming 8% rate of return) but Bonilla and his lawyer just saw the raw numbers and thought it would be better to spread out the payments. Either way, I would have loved to be in Bonilla’s position receiving that type of dough
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Hahaha…I’m right there with you Kris!!! I wouldn’t mind having that type of money to make a decision with 🙂
Instead of just $5.9 invested lump sum in Year 1, can you provide a comparison between that and $1.19 M invested every year? Using the same 8% assumption, I’m certain $1.19 invested annually for 25 years beats $5.9 invested in Year 1.
Bonilla was part of tremendous outfield in Pittsburgh with Barry Bonds and Andy Van Syke. He benefited greatly from hitting in front of Bonds. He never achieved the performance levels he did in Pittsburgh because he never played again with a player of Bonds’ talents (this was pre-PED too).
Very true!! Losing Van Slyke and Barry Bonds made a tremendous impact on Bonilla. Having those type of players protecting you can greatly alter the pitches that you see 🙂
I’m still convinced 1.19 M invested annually for 25 consecutive years beats 5.9 M invested in year #1.
I personally would have taken the money as an annuity, specifically for the reasons others have mentioned. In case I blow the money one year or two, at least I have guaranteed payments coming in, so the annuity helps protect me from myself. I’m fine with not making the most money, as I also won’t be losing it all too quickly either.
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Hahaa…there is something to be said knowing that you have a safety net to provide you money the rest of your life 🙂
This is an apples to oranges comparison, because you’re assuming he just sticks the $1.1m in the bank every year but that he would have invested the $5.9m. What if he invested the $1.1m every year? He’d have gotten x, then x-1, then x-2, etc. number of years of getting the same returns, which would have to add up to quite a bit of money along the way.
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Good example of the power of growth through investing, despite sometimes trying circumstances. Baseballers seem to do better than singers. If you’re 75 and still doing concerts because you love doing them, that’s great. If it’s to pay the bills that could have been covered by investing in a reasonable portfolio, that’s kind of sad.
I remember Bobby Bonilla, but this is the first time I heard this story. I know the guy can hit home runs but this is that one home run or grand slam of his life. He really hit this one long ….to 72 years old. The guy is a baseball player and not a finance person. He knows what’s best for him.