As a first responder in Florida, your retirement benefits under the Florida Retirement System (FRS) are vital to your long-term financial security. The FRS Pension Plan, the Deferred Retirement Option Program (DROP), and your 457(b) plan each offer unique benefits, and with the right strategies, you can maximize your retirement income. Here’s a detailed guide, complete with specific examples, to help you make the most of your FRS benefits.
Maximizing Your FRS Pension Plan
The FRS Pension Plan provides a defined benefit, meaning your retirement income is based on a formula that considers your years of service, salary, and age at retirement. For Special Risk employees, such as law enforcement officers, firefighters, and paramedics and certain civilian support personnel with the special risk designation, the formula is particularly advantageous.
Example: Calculating Your Pension Benefit
Let’s say you are a law enforcement officer who has worked for 30 years and you’re considering retirement. Your Average Final Compensation (AFC)—the average of your highest five years of salary—is $150,000. As a Special Risk employee, your percentage value per year of service is 3%.
The pension benefit formula is as follows:
- Benefit = Years of Service × AFC × Percentage Value
For a 30-year career:
- Pension Benefit = 30 years × $150,000 × 3% = $135,000 annually
If you decide to continue working beyond the 30-year mark, every additional year you work increases your benefit by another 3% of your AFC, to a maximum of 99%.
Maximize Your AFC = Maximize Your Pension
To maximize your pension, aim to increase your salary during your final years of service. The calculation is based on the State’s Fiscal year from July 1 to June 30th each year (for your highest 5 years, and it doesn’t matter if they are consecutive).
Consider taking on higher-paying roles, overtime, or specialized assignments that boost your annual salary. Since the AFC is based on your highest earning years, these strategies can significantly impact your final pension calculation and in turn drive your annual lifetime pension up.
It’s worth it to put the extra time in, you’ll reap the rewards for the rest of your life.
Leveraging DROP for Maximum Benefits
The Deferred Retirement Option Program (DROP) is an excellent tool that allows you to begin accumulating retirement benefits while still working. Here’s how you can use DROP to your advantage.
Example: Timing Your Entry into DROP
If you reach full retirement eligibility at age 55 with 25 years of service, a $150,000 AFC, and an annual pension of $112,500, entering the DROP (Deferred Retirement Option Program) allows you to accumulate your pension in a DROP account while continuing to work. With a 4% annual interest rate during the five-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
Note: This example assumes no COLA (or Cost of Living Adjustment) for simplicity purposes in the illustration which your pension would likely have.
At the end of five years, you would accumulate approximately $637,993 in your DROP account, which can be rolled over into an IRA or another retirement account for continued tax-deferred growth.
Let’s consider an example with an 8-year time horizon to illustrate how timing your DROP entry can affect your overall retirement savings. If you delay entering DROP by three years (starting at age 58 instead of 55), here’s how the same pension would accumulate over an extended 8-year DROP period:
- 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 DROP period to 8 years, your DROP account balance could grow to approximately $1,107,592—a difference of nearly half a million dollars compared to the 5-year period.
Example: Post-DROP Retirement Income
Using a conservative withdrawal rate of approximately 4% (which also assumes you have a moderate risk tolerance and a diversified portfolio) this could provide an additional income of $25,519 annually while still maintaining and growing the $637,993 investment account.
Which means in this scenario your income would increase from $112,500 annually + $25,519 in investment income or $138,019 annually… Or you can just receive your pension and allow your investments to grow until Age 72 when you have Required Minimum Distributions (RMD’s).
Enhancing Retirement Security with a 457(b) Plan
The 457(b) plan is a tax-advantaged retirement savings plan available to public employees, including first responders. Here’s how you can use this plan to further boost your retirement income.
Example: Maximizing Contributions
In 2024, the contribution limit for 457(b) plans is $23,000, with an additional $7,500 catch-up contribution allowed if you are over 50. Let’s assume you are 50 years old and have been contributing to the plan for several years. There is also a 3 year catch up provision that would allow you to defer up to $46,000 (2 x $23,000 or the normal limit) per year during each of those final three years of employment.
If you contribute $30,000 per year for the next 10 years, with an average annual investment return of 6%, here’s what your balance could look like:
- Year 1: $30,000 + 6% interest = $31,800
- Year 2: $30,000 + 6% interest on $61,800 = $65,508
- Year 3: $30,000 + 6% interest on $95,508 = $101,239
- Year 10: Your balance could grow to approximately $408,401
Utilizing No Early Withdrawal Penalties
Unlike 401(k) or IRA plans, 457(b) plans do not impose an early withdrawal penalty if you retire before age 59½. This feature is particularly beneficial for Special Risk employees who often retire early. You can start withdrawing from your 457(b) plan as soon as you retire, providing immediate income to support your early retirement lifestyle.
Note: this is applicable to Traditional 457(b) plans, not Roth Programs inside of 457(b) plans which allow you to access the cost-basis (the money you contributed) prior to age 59 ½ as long as the account has been opened for 5 years, but the gains are subject to a 10% early withdrawal penalty if accessed prior to age 59 ½.
Selecting the right Spousal / Pension Option: Pros vs. Cons of FRS Pension Options
The Florida Retirement System (FRS) Pension Plan offers four payout options for retirees, each with its pros and cons. For those who prioritize the highest monthly benefit, Option 1 (Single Life Annuity) may seem appealing but comes with no survivor benefits. On the other hand, Options 2, 3, and 4 provide varying levels of survivor benefits, with Option 2 offering a guaranteed 10-year payout, and Options 3 and 4 providing lifetime benefits to a spouse or dependent at 100% or 66 2/3%, respectively. While these options reduce the monthly benefit, they offer valuable peace of mind for loved ones. Explore the pros and cons of each option in this article.
Balancing Financial and Lifestyle Factors
While maximizing your financial benefits is top of mind, you should also consider lifestyle factors when planning your retirement. Here’s how to approach this:
- Health Considerations: If you’re in good health, you might choose to work longer to further increase your pension and DROP benefits. However, if you have health concerns, it might be wiser to retire earlier to enjoy your retirement years while you’re still active.
- Family Dynamics: Consider your family’s needs. If you’re caring for aging parents or want to spend more time with grandchildren, retiring earlier might provide the flexibility you need. Balancing these responsibilities with your financial goals is key to a fulfilling retirement.
- Personal Fulfillment: Work provides structure and a sense of purpose. Some first responders find it challenging to transition from the high-paced, mission-driven environment of public safety to retirement. Consider gradually reducing your work hours or transitioning to a part-time role before fully retiring.
Conclusion: Achieving a Balanced Retirement Strategy
By understanding the nuances of the FRS Pension Plan, strategically utilizing DROP, and maximizing your 457(b) contributions, you can build a robust retirement plan tailored to your needs as a Special Risk employee. Combining these financial strategies with thoughtful consideration of your health, family, and personal fulfillment will help ensure a retirement that is both financially secure and personally satisfying. And – the AWP Team will help you sort through the complexities!
