The Deferred Retirement Option Program (DROP): A Comprehensive Guide for Special Risk Employees

The Deferred Retirement Option Program (DROP) allows Florida’s Special Risk employees, such as first responders, to continue working while accumulating their pension benefits for up to 8 years (recently increased from 5). This guide will dive into the key benefits, and strategic considerations of DROP, to provide you with the knowledge to make informed decisions about your retirement.

Overview of DROP

With DROP, you are technically retired while still being employed by an FRS employer for up to 96 months. During this “deferral period,” your pension benefits accumulate in a separate tax-deferred DROP account and earn 4% interest annually. Once the deferral period is over, you must exit your FRS employer and within 60 days following your separation, must either take a lump sum distribution (taxed heavily) or roll the money over to a tax-deferred account.

For a more detailed explanation of how your FRS Pension Plan works and how to maximize your pension benefits before entering DROP, see Maximizing Your FRS Pension and DROP for Florida’s Special Risk Employees.

Benefits & Features of DROP

One of DROP’s biggest advantages is the enhanced financial security it provides, given that it offers you the flexibility of a guaranteed lifetime income (your pension) paid monthly AND the ability to accumulate additional pre-tax investment dollars that can be used to provide additional supplemental retirement income – a nice safety net in retirement or to leave a legacy to your heirs. 

Most retirees choose to roll the money over to a tax-deferred account, meaning you won’t pay taxes on them until you withdraw the money or become subject to Required Minimum Distributions (RMD’s) at age 72.

The amount of money you accumulate in your DROP is directly correlated to your pension benefits, so it is imperative that you a) maximize your pension and b) select the right pension option for your financial circumstances, in order to maximize your DROP benefits.

Eligibility: Who Can Enroll in DROP?

Eligibility for DROP varies by retirement system and employer, but common requirements include:

Strategic Considerations for Maximizing DROP Benefits

While this guide provides a foundational overview of strategies for optimizing your DROP benefits, these insights are only scratching the surface. For a deeper dive into the strategic side of things, be sure to check out this article, which includes more detailed examples, advanced strategies to help you fully leverage the benefits of the DROP program.

Timing Your Entry Into DROP

When you decide to retire and enroll in DROP, selecting the right termination date is crucial. For example, if you qualify for full retirement at age 55 after 25 years of service, with an Average Final Compensation (AFC) of $150,000 and an annual pension of $112,500, opting into the Deferred Retirement Option Program (DROP) allows you to accumulate your pension in a DROP account while continuing to work. Assuming a 4% annual interest rate over a 5-year DROP period, here’s how your savings could grow:

• Year 1: $112,500
• Year 2: $112,500 + 4% interest on $112,500 = $234,000
• Year 3: $112,500 + 4% interest on $234,000 = $361,680
• Year 4: $112,500 + 4% interest on $361,680 = $496,147
• Year 5: $112,500 + 4% interest on $496,147 = $637,993

By the end of the five-year period, you would accumulate about $637,993 in your DROP account, which can then be rolled over into an IRA or other retirement account to continue growing tax-deferred.

To demonstrate how timing can impact your total savings, let’s examine what happens if you take advantage of the additional 3-years now permitted for a total of 8-years:

• Year 1: $112,500
• Year 2: $112,500 + 4% interest on $112,500 = $234,000
• Year 3: $112,500 + 4% interest on $234,000 = $361,680
• Year 4: $112,500 + 4% interest on $361,680 = $496,147
• Year 5: $112,500 + 4% interest on $496,147 = $637,993
• Year 6: $112,500 + 4% interest on $637,993 = $786,513
• Year 7: $112,500 + 4% interest on $786,513 = $942,973
• Year 8: $112,500 + 4% interest on $942,973 = $1,107,592

By extending your participation in DROP to 8 years, your account balance could grow to approximately $1,107,592—a difference of nearly $500,000 compared to the 5-year scenario.

Note: These scenarios assume no Cost of Living Adjustment (COLA) for simplicity, although your pension would likely include one.

Maximizing Your Pension Benefits

To maximize your pension before entering DROP, consider strategies to increase your AFC, such as taking on higher-paying roles or additional responsibilities in your final years of service. Your pension benefit is directly tied to your AFC, so increasing your salary during this period can significantly boost your retirement income. For strategies on maximizing your pension benefits, refer to our previously mentioned pension max article here.

DROP and Your Taxes

Usually, DROP benefits are taxed as ordinary income when distributed. This applies whether you take the distribution as smaller payments over time (to hit your highest 5 years) or as a lump sum. Timing is important, as you may face early withdrawal penalties if you are under age 59½ when you withdraw (unless that distribution comes directly from DROP or from a 457(b) plan).

Here are some of the core factors at play that should be considered if your aim is to minimize tax impact:

The Bottom Line

The Deferred Retirement Option Program (DROP) is a popular plan selection among first responders in the FRS Pension Plan, as it provides an opportunity to enhance retirement income through a structured deferral of pension benefits. If you’re considering DROP or need help planning your retirement strategy, schedule a consultation with a retirement and financial planning expert to explore your options and optimize your benefits.

For additional strategies and detailed examples on how to create income off your DROP money, we recommend heading over to this article next: Maximizing Your FRS Pension and DROP for Florida’s Special Risk Employees.

WORK WITH DROP EXPERTS

We can help you make the most of DROP.

AWP has helped hundreds of first responder families minimize their taxes on their DROP benefits and navigate the financial planning involved with the DROP process. Schedule a consultation with us to see how we can help you make the most of your pension.

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