When planning retirement, not everybody is ready to leave the working life behind just because they’ve reached ‘normal retirement age.’ If you recognize yourself in this, you may not have to retire just yet. With the DROP (Deferred Retirement Option Plan), you have a solution that suits everybody.
Originally, the DROP was first made available in the 1980s and it was created by public employers for police officers, firefighters, and various other civil servants. Now, it has been expanded, and there are benefits of choosing this route.
For employees, they can continue building retirement funds even after they’ve maxed defined benefit plans. For employers, they keep hold of talented team members. Of course, you need to be careful of taxation and other pressures before making big retirement decisions.
What’s a Deferred Retirement Option Plan?
We know, DROPs seem complex and confusing from a distance. However, they’re very simple once you’ve taken the time to learn how they work. Rather than retiring and starting to draw benefits from a defined benefit plan, you can continue working.
How does this work? Well, the extra years of service aren’t added to benefit calculations. Instead, there’s a separate account into which the employer pays. Over time, this account earns interest, and it remains open while you work. Eventually, you will retire, and this is when you receive the amount (as well as whatever pension plans you have generated during your career!).
Often, we see people confused as to how the plan pays out, but it all depends. If we look at the FRS (Florida Retirement System) pension plan as an example, there are three options:
• Roll the funds over into a State of Florida Deferred Compensation account
• A lump sum
• Combination of the two
If you plan to go down this route, pay attention to the window that you have to register. For example, those in Louisiana need to enroll within 60 days of their retirement date. Once the plan is in action, participation lasts for a maximum of three years. On the other hand, the maximum is five years for workers in Florida. Research the rules in your state or talk to a financial expert.
Generally speaking, DROP plans apply to police officers, firefighters, teachers, and other civil servants.
How Much Will I Earn?
This all depends on your years of service, your annual salary, how long you’re in the plan, and the interest accrual rate. Our example below assumes the following:
• Police officer
• 55 years of age
• 25 years of experience
• Salary of $50,000
• Accrual rate of 3%
Multiply the 3% accrual rate by $50,000, and we get $1,500. From here, we multiply by your 25 years of experience to get $37,500. If you work for three years past your retirement date, you will have $112,500 ($37,500 x 3) in your DROP account by the end.
Benefits of Choosing a DROP Account
Employers – For employers, there’s one benefit that outweighs all others – they get to keep talented workers for longer. If we use teachers as an example, it’s an advantage to keep a stable workforce.
Employees – As a worker, there are two main advantages. Firstly, the accrual rate you enjoy with a DROP could be higher than in a defined benefit plan. Secondly, this is a way to boost retirement money even after maxing pension benefits.
Drawbacks to Choosing a DROP Account
Employees – Sadly, many workers miss the short enrollment window and lose out on the opportunity completely. Also, the lump sum that follows could lead to a higher tax bracket come filing season.
Summary
For those who have already maxed their defined benefit plan, a DROP is an effective way of building extra retirement money (especially if you still enjoy working!). As mentioned, the accrual rate is often more generous than in defined benefit plans.
Ultimately, we recommend speaking to a financial expert. If you aren’t careful with how the benefits are paid in the end, you will receive a heavy tax bill after taking a lump sum. Interestingly, you may be able to avoid the tax hit by rolling funds into a different qualified plan.
For those who are eligible for a DROP plan, read all the associated material before making a big decision. Also, think about how a rollover or lump sum could affect your taxes when retirement finally comes. If you need help, don’t be afraid to get advice!
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.
