When it comes to DROPs (Deferred Retirement Option Plans), it’s one of the rare systems that actually benefits all parties. You work for a longer amount of time and pass the average retirement age, and then the employer will reward you with an annual lump sum. Since the money goes into an account, it earns interest while continuing to work and help the company. When you eventually retire, you get the money (plus interest).
If you’re just hearing about DROPs for the first time, allow us to explain everything you need to know!
What’s a DROP?
Short for Deferred Retirement Option Plan, this is a system that allows employers to keep workers who would otherwise retire. Of course, the main concern with working past retirement is increasing the pension benefit amount. Therefore, with this system, the employer puts an amount into an account every year.
When retirement finally comes, the individual gets their established pension benefits, this lump sum, and any interest accrued while still working. For the employer, they keep talent for longer without worrying about pension payout. For the employee, they get a larger retirement benefit.
For the most part, DROPs are designed for public sector workers and are utilized by teachers, police officers, firefighters, and others. The reason for the public sector dominance is two-fold:
• Private companies rarely offer pension plans today
• Government employers were the ones to introduce this system originally
To summarize, DROPs are for those who want to continue working past normal retirement age (and where employers are happy to keep said employees). Additionally, it’s for somebody who has a fixed pension or another defined benefits retirement plan.
How are DROP Benefits Calculated?
In truth, each DROP can vary because they come from various employers. We’ve laid out some of the things that play a role in the benefits calculation process:
Interest and Payment Amount – Every employer is different, and so they will explain how much you’ll receive, how it earns interest, and how the account works in this regard. Although not in all cases, most cases will see individuals earn the same amount as they would in normal retirement benefits.
Length of Participation – Next, most employers will offer a participation limit so that you aren’t in a DROP indefinitely. Generally speaking, this is four years across the United States. However, some employees get seven years.
Taxes and Dispersal – When you retire, DROPs will pay your account in full; the actual payment system all depends on the employer, though. While some will pay in installments, others will pay a lump sum (and this has an impact on tax). Therefore, bear this in mind when making financial decisions.
Disability, Health, Workers’ Compensation, and Other Benefits – When considering a DROP, it’s essential to remember that you may be classified as ‘formally retired’ even though you’re still working. Sadly, this will affect the status of some benefits like health and disability.
When it comes to DROP plans, we know that they can seem confusing and frustrating, yet the calculation is quite simple in most cases. As a police officer, you might be ready to retire after serving for 30 years. If you earned $60,000, the DROP plan might offer an accrual rate of 2% for four years. Multiply the 2% rate by your $60,000 salary and multiply the result by your 30 years of service. You should get $36,000, and this is what you receive in a single year. At the end of four years, you could have $144,000 sitting in your DROP account.
DROPs vs. Defined Benefit Plans
When we say, ‘defined benefit plan,’ most people will immediately think of a pension plan. Here, the employer makes a promise to pay a certain amount to the employee during retirement. With a defined contribution retirement plan, the employer payments are made into a retirement plan during employment as opposed to during retirement.
For a defined benefit plan, the calculation includes the length of service. The longer you work for the employer, the higher the benefits (and you’ll enjoy your loyalty upon retirement). If you choose to work until 68 rather than 65, you’ll have three more years of benefits – you might recognize this system with Social Security.
With a DROP, it works differently. If you work past the retirement age, there are no additional benefits from the employer. Depending on the plan, they will pay a lump sum into an account that earns interest instead. As long as you carry on working, this continues. Again, your benefits will start as soon as you retire. Don’t worry, you’ll get the full value of the DROP account (along with any interest earned along the way!).
Conclusion
Unfortunately, making decisions for retirement isn’t easy. Before anything, you need to weigh up the benefits and drawbacks. If necessary, you can even talk to a financial professional who will consider your needs and tailor a plan for your finances. There are certainly some benefits to a DROP plan, but continuing to work isn’t always the best decision for everybody.
For many, it’s a case of calculating the amount they have before retirement. If this is the case for you, don’t forget 401(k) accounts and IRAs.
To finish, we want to provide two top tips for planning retirement. Firstly, use a Social Security calculator because this will tell you how much you’ll receive from this source. While most people can’t live off Social Security alone, you shouldn’t ignore the amount entirely.
Secondly, you don’t need to feel alone during this process. As mentioned, there are financial advisors ready and waiting to help. They have experience and will have worked with people like you before, so take advantage of this. If all goes to plan, you’ll get the luxurious and relaxing retirement you deserve!
Contact Information:
Email: [email protected]
Phone: 8139269909
Bio:
For over 30-years Flavio “Joe” Carreno of The Retirement Advantage has been a Federal Employee Retirement System specialist (FERS) as well as a Florida Retirement System specialist (FRS) independent advocate. An affiliate of PSRE (Public Sector Retirement Educators), a Federal Contractor & Registered Vendor to the Federal Government, also an affiliate of TSP Withdrawal Consultants. We will help you understand your FERS & FRS Benefits, TSP & Florida D.R.O.P. withdrawal options in detail while recognizing & maximizing all concurrent alternatives available.Our primary goal is to guide you into retirement with no regrets; safe, predictable, stable, for life. We look forward to visiting with you.
Disclosure:
Not affiliated with the U.S. Federal Government, the State of Florida, or any government agency. The firm is not engaged in the practice of law or accounting. Always consult an attorney or tax professional regarding your specific legal or tax situation. Although we make great efforts to ensure the accuracy of the information contained herein we cannot guarantee all information is correct. Any comments regarding guarantees, safe and secure investments & guaranteed income streams or similar refer only to fixed insurance and annuity products. Fixed insurance and annuity product guarantees are subject to the claimsâ€paying ability of the issuing company. Annuities are long-term products of the insurance industry designed for retirement income. They contain some limitations, including possible withdrawal charges and a market value adjustment that could affect contract values. Annuities are not FDIC insured.
