Deferred Retirement Option Plan (DROP)
Are you nearing the point when you are about to stop working and finally retire? The DROP program adds more questions to consider for your overall retirement plan. We will help you understand your options and develop a retirement strategy that is individually tailored to your situation.
What is the DROP program?
The DROP program stands for Deferred Retirement Option Plan. This program was designed to keep firefighters from retiring too early and put a strain on city resources to hire and train new recruits. Los Angeles City Fire Department and a few other departments across the country offer this program.
How does the DROP program work?
When you enter the DROP program, you stop accumulating length-of-service years toward your pension. You actually “retire” and start drawing your pension:
- You continue to work and earn your salary and overtime
- You are paid your pension every month, which is set aside in a separate DROP account
- Your pension payment is held with a guaranteed interest rate of 5% annually
- You can stay in the program for up to 5 years, then you must retire officially
When should I enter DROP?
You have many things to consider, including the following questions:
- Will you promote soon or are you at the highest pay scale you plan to achieve?
If you are promoting soon, you may want to wait and take advantage of the increase to your base salary, so you can lock in at a higher pension amount.
- Will you be financially ready to retire in 5 years?
Consider any outstanding financial issues, such as any debts you need to tackle or educational costs for your children before retiring.
- Will you be emotionally ready to retire in 5 years?
You may not be ready to make this commitment. Once you enter the DROP program, you will not be able to work more than 5 additional years.
- Should you work 2 additional years and enter DROP for 3 years, or just enter DROP for 5 years?
We’ll look at all the combinations together and help you create a plan that makes the most sense for you and your family.
What happens to the DROP account when I stop working?
You cannot keep your DROP account after you officially retire. You have three options:
- Take a lump sum distribution. When you choose this option, the entire amount will count as income that year and you will pay income taxes on this amount. This can lead to a significant tax hit, due to the size of most DROP accounts.
- Roll the money into your 457 Deferred Compensation Plan. This option allows you to continue to defer the taxes and invest funds.
- Roll the money into a Rollover IRA. This option also allows you to continue to defer the taxes and invest funds.
Choosing between your Deferred Compensation Plan and a Rollover IRA may depend upon your age, how much flexibility you want with your investments, how the fund is being managed and the types of investments you wish to make.
What investments can I choose if I rollover my DROP money to an IRA?
This will be unique for everyone. You can supplement your pension by investing in conservative products to limit risk from market-related issues, or look at options with potentially greater return and risk.
Through CUSO Financial Services L.P., we provide a variety of non-deposit investment choices including:
- Mutual funds
- US Treasury bonds
- Corporate bonds
- Brokerage CDs
- Fixed annuities
- Index annuities
- Variable annuities
We’ll review your situation, and create an overall financial plan that fits your goals and risk tolerance.
When should I schedule an appointment?
Come in early. Firehouse Financial Advisors will help you decide if it’s wise to enter the DROP program now, or wait. You can also review the options for your DROP money and decide what will work best for you when you exit the program. At the very least, come in a few months before you plan to retire.
Trust us to simplify the process and take all of your factors into consideration. We’re here to help!
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Before deciding to retain assets in an employer sponsored plan or roll over to an IRA, an investor should consider various factors including, but not limited to: investment options, fees and expenses, services, withdrawal penalties, protection from creditors and legal judgments, required minimum distributions and possession of employer stock.
*Non-deposit investment products and services are offered through CUSO Financial Services, L.P. (“CFS”), a registered broker-dealer (Member FINRA/ SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. The Credit Union has contracted with CFS to make non-deposit investment products and services available to credit union members. CFS does not provide tax or legal guidance. For such guidance please consult with a qualified professional.