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What Bobby Bonilla's deferred comp deal teaches us about paying off your mortgage early, Part 1


source: https://deskgram.org/explore/tags/bobbybonilladay

Bobby Bonilla hasn’t played baseball since 2001, but from 2011 through 2035, the Mets pay him $1,193,248.20 every July 1st.

Why?

They owed him $5.9 million for the 2000 season but didn’t want him on the team. Instead of paying him that year, the Mets negotiated a deferred contract with Bonilla and his agent, deferring that $5.9 million with an 8% interest rate attached, beginning payments on July 1, 2011, meaning the money will grow at 8% from 2000-2011 at which point he will begin to collect on an 8% annuity.

In other words, instead of paying Bonilla $5.9 million in 2000, the Mets promised him nearly $30 million from 2011-2035.

Were they crazy? No, not at all, although in this case it’s easy to look in the rearview and say it wasn’t the right financial decision. The Mets owners, the Wilpons, had a lot of their money invested with Bernie Madoff, who was supposedly claiming he could get 10+% returns every year. We all know how that story ends.

But let’s look at their financial logic more closely.

Deferring money freed up $5.9 million for the Mets in 2000. Let’s say they chose to invest that salary with their boy, Bernie Madoff.

From 2000-2011 that $5.9 million was supposed to grow, according to Madoff, at a “conservative” 12% rate of return, which looks like this:

By 2011, when they started to pay Bobby Bonilla, the original $5.9 million should have grown to nearly $22 million.

Even if Madoff wasn’t as good as the Mets hoped and only returned 9% from 2011-2035, here is what 2011-2035 looks like in the Mets' eyes:

The deal was a no-brainer for the Mets: Bonilla was no longer in the clubhouse, they didn’t have to pay him for a decade, and they could use his salary to make nearly $95 million.

If only Madoff wasn’t a crook.

Instead of using fictional returns from a criminal, let’s look at what they could have done investing in the S&P index over the same time.

Jan 2000 - Dec 2011, 0.5% S&P return

Now, instead of a $22 million balance when they begin paying Bonilla, they only have about $6.2 million to work with. Keeping it invested in the S&P, let’s see what the deal looks like to date, 2011-2017, using historical S&P returns of 13.75%:

This deal isn’t looking so good for the Mets. An 8% payout is too high.

Let’s say the S&P continues at an average of 6.5%, which is considered appropriate in the industry.

Bad deal for the Mets, great deal for Bonilla. But I don’t think their logic was wrong.

They got swindled. They trusted Madoff, and he was a crook. Deferred money deals can net clubs a lot of money.

The Mets went wrong attaching an 8% interest rate, not deferring Bonilla’s contract to be paid over time.

Check out part two where I explain my opinion by comparing Bonilla’s deal to your home mortgage.

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Investment advice offered through Beck Bode, LLC, a fee-only Registered Investment Advisor in the Greater Boston area.