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Opinion: Money lessons from Bobby Bonilla’s steal of a multimillion-dollar deal
Published: July 24, 2017 3:39 p.m. ET

Boy, did Bobby Bonilla outplay the New York Mets. The retired third-baseman struck a deal with his former team at the end of his career to defer his final year’s salary payment ($5.9 million) in 2000 for 10 years in exchange for 25 annual payments of $1,193,248.20 beginning in 2011, according to ESPN.

Bonilla just collected his seventh payment on July 1, better known to sports fans as Bobby Bonilla Day.

In other words, the Mets got the use of Bonilla’s capital for 35 years. For that use, they owed Bonilla a reported 8% annually on his capital, and the math checks out when we work backwards from the payout period to the deferred or “growth” period, starting in 2001.

In order to generate 25 annual payments (2011-2035) of $1.193 million, assuming an 8% return, you need to start with $12.738 million. And in order to get from $5.9 million to $12.738 million in 10 years (2001-2010), you need to grow the $5.9 million at 8%.

Now, seven years into the payout period, and 17 years or almost halfway through the entire deal, how has Bonilla done?

Splendidly.

That’s because if Bonilla had taken his $5.9 million payment and invested it in the S&P 500 SPX, -0.04% , he would have earned around 1.4% annualized through 2010. In other words, the $5.9 million would have become $6.8 million. And for $6.8 million to generate an annual payment of $1.193 million for 25 years it has to earn 17.3% annualized — a completely unrealistic expectation.

If Bonilla had put that final payment into, say, the Vanguard Balanced Index Fund VBINX, +0.03% (a 60% stock, 40% bond portfolio), he would have achieved a 3.6% annualized return for the first decade, giving him $8.84 million in 2010. At that rate he’d need a 12.8% annualized return to generate his $1.193 million payment. Another unrealistic expectation.

It’s true the stock market is up like gangbusters since 2009, but the S&P 500 has still produced only a 4.5% annualized return from 2000 through 2016. The Mets must have really wanted the use of Bonilla’s $5.9 million, because, at a rate of 8%, they paid dearly for it.

http://www.marketwatch.com/story/lessons-from-bobby-bonillas-steal-of-a-multimillion-dollar-deal-2017-07-10?siteid=YAHOOB