At first glance, Shohei Ohtani’s $700 million, 10-year deal with the Los Angeles Dodgers is nothing short of a Ruthian blockbuster, topping all other free agent pacts.
Upon closer inspection, however, factoring in the ravages of compound inflation and Ohtani’s unprecedented agreement to defer massive sums of interest-free cash, the deal is still a record breaker — but one that’s probably more in the neighborhood of $462 million in current value, financial planners told NBC News on Thursday.
“That $700 million is a big headline number,” said certified financial planner Colin Gerrety, vice president and client adviser at Glassman Wealth Services in Vienna, Virginia. “But at the end of the day, it’s going to be worth less just with inflation, and the fact that it’s essentially an interest-free loan to the team.”
Ohtani, 29, ended one of the most closely followed free agent courtships in baseball history on Saturday, announcing that he’d be leaving the woeful Los Angeles Angels in favor of the perennial pennant-contending L.A. Dodgers.
The deal was originally reported as a $700 million, 10-year deal, which drastically tops all previous MLB contracts in terms of total compensation and average annual value.
But then it emerged days later that Ohtani’s deal included unprecedented deferrals in which the Dodgers would pay him only $2 million per year for 10 seasons, followed by $68 million annual payments in the following decade.
The MLB minimum wage, for the most untested minor leaguer fresh to the bigs, will be just $740,000 in 2024. The Dodgers estimated 2024 payroll should come in at about $250 million. The team has made deferred salaries a central strategy to their efforts to sign veteran stars, win now and spread liabilities down the road.
Star outfielder Mookie Betts will have $120 million coming to him from 2033 to 2044, following his current deal to play for L.A., while first baseman Freddie Freeman has $57 million put on hold until 2028-40.
The interest-free loan is aimed at keeping the Dodgers’ payroll loose and open for more free agents to come to Chavez Ravine.
“It’s a remarkable contract that we’ve never seen anything like before,” said financial planner Christopher Woods, the founder of Silvis Financial in Charlotte, North Carolina. “I’m a calculated risk taker. I’m not looking for complete certainty. But I feel like for something like this, I would much prefer more money up front.”
The 12-month inflation rate in November stood at 3.1%, the Labor Department announced this week. The Federal Reserve hopes long-term inflation will dip under 3% and be closer to 2%.
If the rate of inflation is 3% through 2043, the end of the Dodgers’ payments to Ohtani, then his total before-tax pay would be about $462 million in 2024 value, with that final payment of $68 million worth only about $38.77 million in current buying power.
That 3% estimate, of course, could be wildly low — or high.
Inflation reached a pandemic-era peak of 9.1% in June 2022, its highest rate since November 1981.
And on the other side of the spectrum, annual inflation was consistently less than 2% for much of the 2010s.
Woods said he’s still floored by the Ohtani-Dodgers deal and couldn’t imagine ever advising a client to take so little up-front compensation.
“If that’s the only way you do it, maybe you consider it. But no, I wouldn’t advise this,” Woods, who sits on the Financial Planning Association’s Advisory Council Executive Committee, said. “There are so many variables and unknowns about the future. There are just so many uncertainties. You don’t know the tax rates in the future or if inflation runs up again.”
It’s been estimated that Ohtani makes at least $40 million a year in endorsements, so covering annual expenses isn’t exactly a concern.
For him, the decision to sign the deal with the Dodgers had more to do with earning things on the field than off.
“I’m not sure how long I’m going be able to play the game so I did prioritize winning,” Ohtani told reporters in L.A. on Thursday. “That’s at the top of my list and will probably never change.”
Marley Jay and Miguel Almaguer contributed.
Source: | This article originally belongs to Nbcnews.com
