What is DROP?
The Deferred Retirement Option Program (DROP), is a program which allows you to retire and begin accumulating your retirement benefits, without terminating employment. While participating in DROP, your monthly retirement benefits remain in the Trust Fund, earning tax-deferred interest, while you continue to work (but you do not earn additional service credit for retirement). When your DROP participation ends, you must terminate all employment with your employer. At that time, you will receive payment of the accumulated DROP benefits, and begin receiving your monthly retirement benefit (in the same amount as determined at retirement). For many this is the “best of both worlds,” providing both a guaranteed lifetime benefit and a lump sum to be invested by the member after DROP ends.
Potential Advantages of DROP Participation:
DROP allows you to simultaneously earn a salary and a retirement income, which offers you an opportunity to accumulate an additional tax-deferred “nest egg.” It can:
1. Provide additional financial security for your retirement if your DROP accumulation is rolled over into an eligible retirement plan. The interest you earn on your DROP “nest egg” may be more than enough to replace the value of your lower retirement benefit (which will be less because you stopped earning retirement service credit when you retired and entered DROP).
2. Provide an inheritance to someone who is not eligible for a continuing benefit under the retirement system. This is possible if you spend only the interest earned and/or limited amounts of the principal of your “nest egg” during your retirement. Careful estate planning will help to insure the proper usage of your DROP accumulation after your death.
3. Provide a financial basis for you to start a new business, make a major purchase, pay off your debts, or return to school and change your career. Before using your DROP “nest egg” for such plans, make sure you have adequate resources to insure your financial security during retirement.
Participating for the full DROP period offers the greatest financial gain from DROP for most people. However, if your current salary greatly exceeds other years calculated in your average final compensation (AFC), you may wish to compare estimates before deciding upon your period of DROP participation. First, estimate your benefits if you work for an additional period of time within your limitation period and participate in DROP for a shorter period of time. Compare that to an estimate of your benefits if you participate in DROP for the full period.
For many, even short periods of DROP participation can offer sufficient financial advantages to justify serious consideration.
Potential Disadvantages of DROP Participation:
1. You plan to retire and you do not want to continue working.
2. There will be a negative impact on your Social Security benefit if you stop working after DROP but before you are eligible for Social Security. (You retain your Social Security coverage while participating in DROP, provided you had Social Security coverage when you entered DROP.)
3. Your total future monthly income will be lower if you spend your DROP accumulation instead of investing it to replace the amount you would have earned by participating in the normal retirement plan for up to 5 more years.
Click Here for the Drop Rules .