Ep #163 - Bobby Bonilla Wasn't Crazy: A Financial Lesson in Delayed Gratification

What can a baseball contract teach us about financial planning? In this episode of AB Conversations, Adam and Ben break down the famous Bobby Bonilla Day story to explore the time value of money, the power of compounding, and the trade-offs behind every financial decision. From retirement savings and Roth conversions to paying off debt and planning for the future, learn how today's choices can create dramatically different outcomes down the road. 

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Transcript

[00:00:00] Adam Werner: Hi everyone, and welcome to AB Conversations, where we will help you CFP your way out of it. A podcast where you get into the minds of a couple certified financial planners on how we think and feel about everyday financial planning questions, and what should really matter most to you. A healthier financial life starts now.

So today we're gonna talk about an interesting date that has become fairly well-known in the sports world and in the financial planning world maybe. July 1st has come to be known as Bobby Bonilla Day. In these little segments of the world, we certainly pay attention to this or it comes across, you know, our emails every year kind of pointing to it.

But this episode is not about Bobby Bonilla, and for anybody listening thinking, "I don't know who the heck that guy is," we'll get there. He was a baseball player. There were some interesting contract details that happened at the end of his career, so we'll get into those exact details.

But where we're drawing it back to are those big lessons in financial planning, one of those just being the time value of money. The assumptions that we make around rates of return over time, inflation rates over time and a lot of times, I know we've talked about this in other podcasts for sure, financial planning often just comes down to trade-offs.

How much of today am I willing to trade for a better tomorrow, right? How, what am I foregoing now for flexibility maybe in the future? And money and time become dramatically powerful, you know, when you can kinda combine them into some planning ideas.

[00:01:36] Ben Haas: Yeah I love this because first of all, I'm a big baseball fan, so, like, the context of this, it excites me. But yeah, as a financial planning nerd We're gonna go into some of the math behind this because I think it just illustrates the time value of money and, as you said, some of the assumptions that we as planners are making for people that are asking us to project things out.

So let me just go through the story. Like I'll take that on here. We're going all the way back to 2000. The Mets, the New York Mets owed Bobby Bonilla close to $6 million at the end of his career and didn't want him to play for them anymore, right? They were just done. So they made him this offer that instead of paying him immediately the $6 million, they said, "We'll defer making any payments to you for the next 10 years.

We're gonna give you an 8% interest rate. And then beginning 10 years later in 2011, he would receive approximately $1.2 million every year for the next 25 years." Right? So we're in the middle of that. This guy's gonna get $1.2 million July 1st every year until 2035. So quick calculator math, this is the easy part.

Quick calculator math: instead of $6 million on day one, he's gonna get close to $30 million in payments, and most people laugh at the Mets now in hindsight, but I think this is where you and I can dig a little deeper into let's go through some of the math and understand, well, where were the Mets coming from in even making this offer, and where was Bonilla coming from and going, "You know what?

That sounds great to me"?

[00:03:12] Adam Werner: Yeah, and I think this is a situation where I'm imagining both sides probably felt good about the decision at the time, but there was a lot of assumptions being made, right? On Bobby's end, it was, "I'm willing to wait. Maybe I accumulated all of these earnings during my career, and maybe I didn't need this lump sum of income right now.

So maybe a way to provide for the future is I'll just spread these payments out. I'll defer them. Worry about that later," right? That makes sense from a planning perspective. And you could see how the Mets angle was, "Well, if we're gonna delay this is now money that we're going to be able to keep and invest and earn more on in this time period, and hopefully, if we can earn more than the promise to pay, we're all gonna come out ahead.

He's gonna get paid. He's gonna feel good. We're gonna get to pay him, meet our end of the contract, and hopefully end up with even more dollars in our pocket at the end of this transaction."

[00:04:05] Ben Haas: And I think that's where your comment earlier on the assumptions came into play, right? So let's, again, dig into the math here.

[00:04:12] Adam Werner: Mm-hmm.

[00:04:13] Ben Haas: That 8% that they were promising them was calculated. Like somebody on the Mets side went, "Well, okay, if we owe him $6 million today and we're gonna pay him 1.2 million over the next 35 years, def- deferrals, you know, for the first 10," 8% was the number they needed to make on that money to just break even.

And I, I realize that sounds crazy, but that's the time value of money here, and ignore the fact that it's millions, 'cause I realize we're talking at, you know, scales here of mega stars in sports. But

[00:04:43] Adam Werner: Sure

[00:04:43] Ben Haas: They calculated that. That's all that needed to be made, 8%. They thought they could get more. That's all that this came down to, that on our own money, I can make more than that, and I read an interesting article on this.

If they had gotten 10% on that money starting on day one for the next 35 years, yes, they would've still paid out the $30 million that Bonilla is gonna get, but they wouldn't have broken even if they were getting compounding 10% rates of return. They'd actually have still 40, close to $50 million in their pocket, right?

They come out significantly ahead. So this was the risk they were willing to take, right? They're taking all the risk, but they were thinking to themselves, "Better for us to have this money, invest it how we want to invest it, accumulate more than we're promising, and we'll win." So he signed the contract.

[00:05:34] Adam Werner: Yeah. I don't know how far to get in, into the weeds on some of the issues that the Mets ended up facing.

[00:05:41] Ben Haas: Oh, go for it.

[00:05:41] Adam Werner: Yeah, as you said it they took all the risk here. They made a lot of these assumptions. Of course, you know, money needed to be spent on other players. There's the financial aspect of running the team.

This sequence of return risk, we all know that the early 2000s weren't exactly a fantastic time to be fully invested in stocks, right? You had the bubble, the bubble that kind of burst in, you know, 2000, 2001, and you had a really long period of not much returns during that first decade.

And meanwhile, the Mets ownership family, I don't know how many were involved, but they were investors of Bernie Madoff, who we know how that ended up. So not only did they maybe make assumptions based off of what they were being told by Bernie Madoff and their financial advisory team, but then come to find out that wasn't all legit anyway, and that money basically vanished.

So there was a whole cavalcade of events here that did not go in the Mets' favor. Which, fine, we're Phillies fans. Good for us.

[00:06:43] Ben Haas: Yeah, right. Yeah. So we can make this pivot now because I think the point in us bringing this to, to podcast land here is I know there are times when I can look at myself and go, "Okay I'm exuding the characteristics of the Mets here." Like I think I can make more on this or I'm willing to delay you know, making this payment out or something like that.

And there's certainly times where we as humans are much like Bobby Bonilla and go, "You know what? If this is guaranteed or this provides predictability to me, then that feels better than the opposite approach." So all of that to say, let's maybe just flip the script here. None of us are baseball teams.

I haven't made millions playing baseball, but we can probably put ourselves in the shoes and let's just bring this to everyday financial planning examples because they're abundant.

[00:07:34] Adam Werner: Yeah. The first one that pops into my head that kind of flows into this idea of the lump sum versus like that future income stream is a question we get asked by clients around retirement all the time if they have a mortgage. Should I just take a lump sum and pay it off?

And you can extrapolate that to any other financial asset. It doesn't have to be a home, it could be a car, it could be another property, it could be, you know, paying off, just paying out of cash for, you know, grandkids' education or something that would take a bigger lump sum.

There is the emotional and the psychological impact of not having debt.

Some people that we work with are just absolutely opposed to debt and owing anybody else interest. But there is, as we're, we keep calling it, it's that time value of money. We've referred to it as the golden goose that is laying your golden eggs, right? Your investment account is that golden goose, and in this instance, you may need to take a bigger chunk from that account to pay off the debt.

And would that have better served you leaving it invested, allowing it to grow and compound, meanwhile, maybe using a portion of that to accelerate maybe the mortgage pay down, but not the elimination. So sometimes it is that it's the trade-off. Am I better off assuming that I'm gonna earn a certain amount over time, and maybe I can grow these dollars at a much higher pace than the interest that I'm paying?

[00:08:57] Ben Haas: Yeah. So there's the Mets. The Mets win in that scenario.

I think we can clearly go to retirement savings if we want to think about the easiest financial trade-off that all of us make, it's I'm gonna save a dollar today for that to be more in the future. And I use this example every time I get in front of young students you know, the graduating class over at the high school.

I may have shared this math in a prior podcast, but we're gonna go through it again. If you save $5,000 a year for 10 years, starting at the age of 25, so you've only saved $50,000, with that, like, six, seven, 8% rate of return, you will have more money at the time you're 65, having only saved for 10 years, than had you started saving $5,000 at age 35 and saved every year for 30 years.

So you saved 150, not 50, but you ended up with less money than the person that just started earlier. And that's just the best example that I can give of time value of money and how compounding over time really works. So I think, you know, this Bobby Bonilla to me and the whole, hey, the Mets thought that they could just have more, it sounds crazy to think that what they had on day one was going to pay all this money and then to give them even more.

But that is the financial planning example of the more I spend today, the less I have to save for later, and am I willing to make that trade-off or am I gonna make the savings now so that I know I can have more later? It's the simplest example, right?

[00:10:26] Adam Werner: Yeah. And maybe just building off of that, sometimes, another one of these examples is the retirement timeline for a lot of people, right? It's all about trade-offs. Do I increase my savings to hopefully maybe be able to retire a little bit earlier because now I have a bigger nest egg to rely on?

Maybe it's just the decision am I working an extra couple of years to essentially be able to save maybe a little bit more, and again, just provide an extra buffer in retirement? Sometimes it just comes down to withdrawal rates for my investments. Am I taking maybe a more aggressive withdrawal rate knowing that the trade-off is maybe this isn't gonna last as long?

But it's these levers that can be pulled, on that timeline. Again, everything comes with a trade-off. But as you were saying, you know, It's the time value of money. The longer that you can allow your funds to just cook, like work behind the scenes, do some of that heavy lifting, the better.

We actually deliver, quote-unquote, " a plan" to a newer client. When you actually look at those long-term projections, those numbers don't seem real because they are in future dollars, and we're talking 20, 30, 40 years into the future. It doesn't, it just doesn't seem plausible.

But here we are talking about something from the early 2000s, and how those numbers really do add up over long periods of time. It is the reality, even though it's hard to, it's hard to imagine sometimes.

[00:11:46] Ben Haas: Well, and we throw other financial planning things in here. We talk about, you know, the vehicle that is the Roth IRA and the ability to have compounding tax-free dollars versus compounding taxable dollars. But that, that fits this whole conversation on a trade-off too, because, you know, for people to get money into that Roth IRA, they're going to pay taxes today to reduce taxes later.

So that kind of fits this whole delayed gratification decision that people have for themselves.

[00:12:13] Adam Werner: Yep. Yep. Well, and another one too we run into is just the idea of how am I covering long-term care?

[00:12:20] Ben Haas: Oh, yeah.

[00:12:20] Adam Werner: Am I just mentally accounting for a portion of my investments, or am I truly buying insurance to offset some of that risk, right? I'm maybe paying more now to unload some of that potential negative outcome in the future onto an insurance company.

Am I creating this environment where, yes, I'm losing some of my cash flow today, but it's buying some future protection well into the future.

[00:12:44] Ben Haas: Yeah, and how we feel about those things. So, you know, kind of putting a bow on that before maybe we talk about why this is so hard, that is financial planning. We often use these words. It's all about trade-offs. But we have to do a as good a job as we can of not just living in the here and now, but having that one eye on the future.

So when we put these recommendations out there and we're asking you to sacrifice something today, it is because these things typically do lead to better outcomes in the future. But that's hard. It's really hard psychologically to make those decisions.

[00:13:14] Adam Werner: Yeah I think everybody listening to this probably feels that too, because I feel that, right? It's such a natural human thing, right? Delayed gratification is just not-- I don't think that's our baseline wiring, right? From caveman days it's survival, right? Now we're at a point where maybe we don't need to survive as much, but that instinctual, if I need or want this thing, then I'm, more often than not, I'm gonna go get it.

And when you're thinking of these really long timelines, it's just very hard to think of your future self into your current version of yourself. That is, maybe there are studies on this, that kinda show that future version of you that you're thinking about, it's not even you to yourself in this scenario, right?

That's somebody else. I joke about this all the time. We say this. That's Adam's problem tomorrow. Like, current Adam is making this decision. I'll worry about that later. And that's, that is the reality for a lot of people. We do have this, like, current bias or, like, the present bias where today certainly feels more valuable than tomorrow because we know that tomorrow is not guaranteed.

Anything can happen in the future. So there is a level of that bias that kind of factors into a lot of these discussions.

[00:14:25] Ben Haas: And we all do it. I mean, you and I do it, and we can sit here and say, "Oh, we're financial planners, and we know the right thing for people to do." But that's the thing. Knowledge isn't the problem. It's our human behavior. And there's nothing there's nothing innately wrong with that. It is just the necessary to slow down and really make sure, especially the bigger the decisions are, that we are being thoughtful about all of it.

Studies, you know the studies. The marshmallow experiment's my favorite with little children. You could put one in front of them and say, "You can eat this now, but if you can just wait a little bit, I'll give you two." And studies show children can't do it. And it's not fair to pick on children because I think as adults we do that, right?

[00:15:04] Adam Werner: Oh my God. Yeah.

[00:15:05] Ben Haas: I want the marshmallow. Yeah, I may be able to have two later, but one sounds good now, so I'll take it.

[00:15:12] Adam Werner: Yeah, and so one of the things that we talk about with planning, and we've said it now how many different times in this conversation, it's all about trade-offs. So sometimes when we're dealing with maybe a big decision like this for a client that has more weight, like you said, there's not necessarily a right or wrong.

It may just be understanding what those trade-offs may look like. And I may say, or I'm the client in this instance, "I'm okay doing this now. It's not the delayed gratification because I'm accepting that this potential outcome, I'm okay with that. That is a trade-off that I am willing to make."

And sometimes that's some of the hardest part of making big financial planning decisions is I don't even know how to quantify what that outcome could look like the trade-off that I'm making.

So I think our value a lot of times is bringing to the table, if this is the decision somebody's facing, being able to kind of lay out all of those different variables, all of the different assumptions that go into it, so that the person can feel that I'm Bobby Bonilla in this instance, is getting advice from somebody, I would imagine, to say, "If you took this contract the way it is written, here's what that would look like."

The trade-off being, but you're not getting five point nine million today that now you could invest or you could do whatever you'd like with. But it all comes down to that. It comes down to the trade-offs that fit for that situation, and just making sure someone has enough information and education to just make a confident decision for themselves.

[00:16:33] Ben Haas: Dude I love it. That was a perfect way to wrap this up. Really was. I'm thinking about how to even put a bow on that. It is just it's, it's balance, right? And I know we talk about this too. None of us are guaranteed tomorrow. There needs to be a balance between living for today and living for tomorrow, and I'm even thinking as you're talking about that, a lot of times if people are making spending decisions, they're not.

They're not, and I know I do the same thing. I'm not thinking about what that isn't providing me later in life. So the whole point here is that if there's a heck of a lot of clarity in this type of contract situation, then yes, it looks very easy to go which one feels better. A lot of this is gray, so it's our job and it's, I hope all the listeners out there, it's their job.

Just pause, take a deep breath, think about it from all these different angles. You don't have to be the Mets. You don't have to be Bobby Bonilla. Sometimes there's a go-between but just be really thoughtful about it, 'cause time, value, and money, wow. It's just big numbers. Bigger than you imagine.

[00:17:32] Adam Werner: Yeah. It can have huge impacts over that long period of time.

[00:17:35] Ben Haas: This was fun. Talking baseball on a financial planning podcast. It only took 170 episodes.

[00:17:41] Adam Werner: Yeah we'll see if we get any positive or negative feedback. You guys talked about baseball way too much.

[00:17:46] Ben Haas: Yeah, we'll see. We'll just move to basketball. All right. Till next time.

[00:17:50] Adam Werner: Thank you. Bye 

 Hey everyone, Adam and I really appreciate you tuning in. Please note that the opinions we voiced in the show are for general information only, and are not intended to provide specific recommendations for any individual. To determine which strategies or investments may be most appropriate for you, consult with your attorney, your accountant, and financial advisor, or tax advisor prior to making any decisions or investing. Thanks for listening.