The “New” FRS DROP

there is no magic to DROP, the bulk of the DROP benefit is simply your own pension being returned to you after the 5 years.

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For those of you that were interested in entering the DROP, you might not want to give up so quickly because of the decrease in interest rates.  The rate reduction from 6.5% to 1.3% initiated by the Florida Legislature as of July 1 does not necessarily make the Deferred Retirement Option Program obsolete.  Certainly, it lowers the earnings, but, the biggest part of the DROP sum is not interest, but simply your pension payments accruing each month in the DROP account.  There seems to be some misunderstanding about these numbers.  It appears that those of you choosing to enter the DROP on or after July 1 will earn the lower 1.3% interest rate on your pension payments.  If you are already in the DROP, and once you begin the DROP, you will NOT have to make the 3% employee contributions!

Your DROP amount will not decrease by 70%, only the interest earned will.  As we discussed on our web page FRSOptions.info , there is no magic to DROP, the bulk of the DROP benefit is simply your own pension being returned to you after the 5 years.

When you enter the DROP, you technically retire and begin to receive your pension.  Since you are going to continue to work, instead of the pension checks coming to you each month, those checks are deposited in your “DROP account”, and interest is then added to it.  The monthly amount going into your DROP is determined by the same calculation as your pension, which is:  Years of service, multiplied by service credit (3% for special risk, or 1.6% for regular members.  The result is then multiplied by your Average Final Compensation, which is the 5 years of your highest earnings.  For example, you have worked 30 years, and average of your highest five years of compensation (your AFC) is $50,000.   Your calculation is 30 times 1.6%, times $50,000, or a pension of 48% of $50,000, or $24,000 per year – so you would receive $2,000 per month into your DROP account.  Each year, on July 1, you will receive an annual increase by whatever your Cost of Living Adjustment (COLA) is.

If you are a Florida Retirement System regular risk participant with an average final compensation of $50,000 per year and have your 30 years in, your pension would be $2000 per month ($50,000 times .48 divided by 12 months).  That is the amount you would be entitled to as a retirement benefit.  Instead of that check going to you, it is deposited into your DROP account.  After five years, at the current 6.5% interest rate, your DROP amount, that would be about $148,000.  Of that $148,000, approximately $127,000 is your pension contribution into the plan (which is unaffected) and the other $21,000 was the interest.

Calculating with the new interest rate of 1.3%, your DROP amount will be approximately $132,000. The $127,000 which is your pension contribution doesn’t change, but the interest earned drops to approximately $5,000.  You are losing about $16,000 worth of interest over the 5 years with the lower rate.  Instead of $148,000, you would now be getting approximately $132,000.  That is a decrease of less than13% over the 5 year period!

If you are a FRS special risk participant with an average final compensation of $50,000 per year and have 25 years in, your pension would be $3,125 per month ($50,000 AFC multiplied by (25 years of service times the 3% service credit).  After 5 years of DROP, and those pension checks deposited into your account, the 6.5% interest rate your DROP amount would bring your total DROP amount to be about $234,000.  Of that amount, approximately $199,000 is your pension contribution into the plan (which is unaffected) and the other $35,000 was the interest.

Calculating with the new rate of 1. 3%, your DROP amount will be approximately $206,000. The $199,000 which is your pension contribution doesn’t change, but the interest drops to approximately $7,000.  You are losing about $28,000 over the 5 year period.  Instead of $234,000, you would now be getting $206,000.  Again, the amount you accrue at 1.3% is a decrease of less than 13% if the rate were the original over the 5 year period)!

Please don’t get me wrong, it is less, BUT it is not a fatal blow.  That part of your nest egg may be cracked, but it isn’t necessarily broken!  If you believed the DROP was your best option before, it very well still could!  It would be wise to discuss this retirement option along with the other options with a trusted advisor.

Considering the legislators wanted to totally eliminate the DROP as of July 1, lowering the interest rate is simply not that bad, and the DROP will still be a nice supplement to your retirement.  We urge you to discuss this with a financial advisor that is knowledgeable about your situation and the Florida Retirement System and it options.

Projections used in this illustration are estimates.  Consult the Florida Retirement System for you actual amounts.

  • Guest

    Thanks for the info, but honestly, I think they are only going to come after us again next year. I am going to file my paperwork and start planning for a second career in five years.

  • Jay

    The DROP would still be considered a great deal even if they ELIMINATED the interest rate making it ZERO percent.

  • http://www.floridaretirementsystem.info FRS Options

    I urge you to secure the second career before you give up the one you have. You will not find benefits in the private sector to match the “reformed” benefits at FRS.

  • http://www.floridaretirementsystem.info FRS Options

    Pretty much, any time you can bank your pension check, and continue to draw your pay check is a good deal regardless of the interest rate.

  • http://www.floridaretirementsystem.info FRS Options

    I don’t think their thoughts are as sinister as you think. Getting high priced employees out doesn’t help at the state level, because the state doesn’t pay them, therefore getting them out does not help the state budget. DROP was designed to KEEP experience workers on PAST the normal retirement age, which is why your are not even eligible to enroll in the DROP until you are “normal retirement age”. Things are rough out there, it is not personal, we all lost money on our houses, we in the private sector who still have a job are making less money. 1,000,000 Floridians have lost their jobs and can not get a new one. It could be worse.

  • http://www.floridaretirementsystem.info FRS Options

    I don’t think their thoughts are as sinister as you think. Getting high priced employees out doesn’t help at the state level, because the state doesn’t pay them, therefore getting them out does not help the state budget. DROP was designed to KEEP experience workers on PAST the normal retirement age, which is why your are not even eligible to enroll in the DROP until you are “normal retirement age”. Things are rough out there, it is not personal, we all lost money on our houses, we in the private sector who still have a job are making less money. 1,000,000 Floridians have lost their jobs and can not get a new one. It could be worse.

  • http://www.floridaretirementsystem.info FRS Options

    I have seen nothing that would change the additional 3 years. I believe you must apply for the extension, and it may get more difficult to have that granted.

    I suspect they will reconsider!

  • http://www.floridaretirementsystem.info FRS Options

    WAIT!!!!!

  • http://www.floridaretirementsystem.info FRS Options

    A few things. Lowering the interest rate on DROP will save the state money, I am not sure it will make them any. It reduces a liability, but it is a guaranteed rate, and actuarially is a liablility. Likewise, the 3% contribution saves your employer 3%, but doesn’t change anything at FRS. The state, counties, cities, etc. are all having to cut costs to reflect a significantly lower tax base, none of which has anything to do with solvency at FRS. Don’t confuse the state of Florida with the Florida Retirement System, they are entirely seperate financially. I suspect there is not a “cash cow” flowing into FRS or the State.

  • Todd

    Once again thank you for this website. Question: When a person enters the DROP they do not have to pay the FRS the 3% anymore because they are basically retired. Does the employer still make a contribution or do they cease also?

    Thanks!

  • http://www.floridaretirementsystem.info FRS Options

    Yes. I believe the employer contribution is based on payroll, nor DROP status.

  • http://www.floridaretirementsystem.info FRS Options

    The reality is, the rate should be close to bank rates, as it is just as safe, and short term. The 5 year Treasury bond is only paying less than 2%. The rate is fair, it was 6.5% in this environment that was out of wack. You may have a misconception of what that money is doing. As a liability, it is set aside for your use, and the interest is paid on top of that. If there were some sort of “profit”, it would simply go to the solvency of FRS, and reduce actuarially mandated contributions in the future. This is not some sinister conspiracy to screw you to the profit of someone else. This is FRS money for FRS member benefits, it goes nowhere else and to nobody else. It is a substantial savings, but you can’t collect compound interest when you cut costs, you can only collect it when you have surplus money. FRS, nor the public worker employers have surplus money these days.

  • http://www.floridaretirementsystem.info FRS Options

    The reality is it isn’t low so much as the 6.5% was extraordinarily high. The rate for 5 year treasuries is less than 2%, and in DROP, you can get out tomorrow, so the rate should be reflective of money market rates. You can’t reduce what you don’t have, so the DROP is not reduced, you just won’t accumulate as much. The difference between what you would have accumulated at 6.5% and what you will accumulate at 1.3% is about 13% of the total. Likewise, you can’t collect compound interest on cutting costs, only on surplus revenues. FRS does NOT have surplus revenues these days. While they are certainly sound, and financially secure, there is still a minor underfunding. More importantly, this is not some subversive plot to direct money to some nefarious place. All of the money that goes into FRS will ONLY go to pay benefits to members like yourself. These are measures to insure it remains solvent – the money CAN NOT and WILL NOT go over of FRS unless it is in a pension benefit check.

  • Brenda

    I would like to know why only a 1.3% rate on return of my Pension money when I enter Drop after July 1, 2011. Where is the State of Florida investing my Pension money to only get a return of 1.3%
    on my money. A Drop enrollee should have an option to to invest their money if they choose, in a better investment return than 1.3%.
    After taxes you will be receiving less than 1% on your return.
    I guess just like Social Security in which receive 0% interest on your money, the Federal Government and the State of Florida knows how best to spend & invest your hard earned retirement money.

  • http://www.floridaretirementsystem.info FRS Options

    I suspect if you look around, you will not find a better rate that is as riskless as the DROP rate, guaranteed by a state for 1.3% that you can cash in at any time. This is not invested money, this is a guaranteed rate of return on a DROP savings type account for your pension money to be deposited into. In the private sector, it would be the equivalent of a money market, and we don’t think you will find one for 1.3% or higher. There are no taxes due, as it remains in your pension, so you get the full 1.3%.

  • http://www.floridaretirementsystem.info FRS Options

    If you are special risk.

  • http://www.floridaretirementsystem.info FRS Options

    Yes, you will get COLA for the 28 years in, as a percentage of your total years in. Say you work 2 more for 30 years total, you will get 28/30, or 93.3% of 3%, or 2.79% COLA

  • http://www.floridaretirementsystem.info FRS Options

    I don’t know of any bank that will pay 1.3% on risk-free, short term money.

  • T3364

    so you are saying if i have 25 yrs in special risk and i drop after july 1 2011 I will still recieve 3% COLA

  • http://www.floridaretirementsystem.info FRS Options

    For the 25 years, but not for any time you put in after July 1.

  • Cubangem

    When will FRS make the changes online so we can figure out our new DROP account figures? 

  • http://www.floridaretirementsystem.info FRS Options

    I don’t have a clue, but probably not before it is signed by the Governor and becomes law, which would be around May 31.

  • Anonymous

    Okay…as a teacher I just go some bad news from my retirement contact  at the County Office.  The FRS showed I could retire – enter DROP on 6/1/2011 with 30 years  according to my info on their web site.  They did an audit after I filed my papers and now they tell me the earliest I can DROP is July 1st if I work in June (I am).  Am I losing out on the current interest rate?

  • http://www.floridaretirementsystem.info FRS Options

    Unfortunately, if you are not IN the DROP by June 30, I think you will get the lower rate.

  • Anonymous

     Thought so.  Sorry to ask you this but this lead balloon just fell in my lap today and I am not a happy camper!
    So if I hold off and work 2 more years and get 32 years in and them DROP, I will increase the multiplier by 3.2 percent on an AFC of 74K.  I will be paying 3% of my gross to the FRS during that those 2 years (Approx. $4,500 ) and get a slight reduction in my COLA.  Can you tell me where I would be with my pension and DROP value if I say in 5 years? 

  • http://www.floridaretirementsystem.info FRS Options

    You would actually get .0165 per year service credit, you get a bonus after 30 years, and it goes forall years. Your DROP at 74k, 2ith 32 years at 74K will be around $210,000 after 5 years (the loss is about 28K). Your pension amount will go up by about $4,000 per year, so it seems it would be worth it to stick around.

  • Anonymous

     Thanks for the info.  I really appreciate the help!

  • JGM

    Please explain to me if the COLA is stopped for 5 years until 2016,  how that affects my income.
    I have 29 years of service and will go into the DROP on November 1, 2012.  MY AFC will be $42,000.

  • http://www.floridaretirementsystem.info FRS Options

    You will get 3% credit for 29 years, and no credit for the last year (service after July 1, 2011) so your COLA will be approximately 2.9% per year for the rest of you life, including your time in the DROP.

  • http://www.floridaretirementsystem.info FRS Options

    I do not believe you will be able to come back, and most likely not into the DROP program. When you enter the DROP, you effectively retire, and start to collect your pension (which is what funds DROP). DROP allows you to work for up to 60 months, but does not entitle you to 60 months. Since you are already recieving retirement benefits when you begin the DROP, it would seem if you go back to work you forfeit any further FRS benefits.

  • http://www.floridaretirementsystem.info FRS Options

    What is wise Joe, is to determine whether you can afford to retire on the benefits you will have if you go into the DROP now, or if you should simply continue to work until you can. Without knowing what your situation is, or your finances, that is a tough call. If you are able to retire with your DROP benefit and retirement funds, then going in now while you can get the 6.5%, and eliminate the 3% contribution makes sense. The otherside is, don’t go into it simply to get the better rates. Make your plans based on when you can afford to retire.

  • Joe

    When you receive the Lump Check from FRS at the end of the 5 years of DROP, will taxes be reduced at the time that you received  the check?

  • http://www.floridaretirementsystem.info FRS Options

    If you choose to recieve a check for your lump sum, taxes will be assessed as if the entire amount of the check you recieve is “normal income”, and will be added to any other income you have in that year. We would recommend you roll the DROP benefit into an IRA, thereby preserving the tax deferred status until you withdraw it, and then only withdraw each year what you need.

  • DaileyBiLanco

    This new DROP, at what age do you need to be to go into drop?

  • DaileyBiLanco

    This new DROP, at what age do you need to be to go into drop?

  • http://www.floridaretirementsystem.info FRS Options

    The age requirements did not change. For regular members it is age 62 or 30 years of service, for special risk age 55 or 25 years of service.

  • http://www.floridaretirementsystem.info FRS Options

    The age requirements did not change. For regular members it is age 62 or 30 years of service, for special risk age 55 or 25 years of service.

  • Djg1752

    I am sorry I don’t buy into any of this.   You take a state job and work it for almost twenty years then a new governor comes in and takes money from your pension plan and I am suppose to be thankful.  If I worked this job in the private sector I would be make 20,000 more but I chose the state for the benefits now that I have ten years left I get the bomb dropped on me and I am suppose to think it’s not bad.  Let’s take 10% for all the legislatures.  You can’t compare Florida to other states when we are ranked 48th in the lowest paid law enforcement sector.   I am not taking middle management.  I am taking officers, investigators for DCF, and supervisors.  The private sector would never hire warm bodies, however, that is mostly what the state attracts because of it’s low pay.  Why are we ALWAYS hiring DCF investigators and corrections officers????

  • http://www.floridaretirementsystem.info FRS Options

    Without arguing any of your points, the comment Jay made is correct. The lowering of the interest rate does not negate the fact that the DROP program is still good. Of all the changes made by the legislator, lowering the interest rate on DROP to a more realistic rate in this environment is the only one that made sense.

  • Mjn51

    Thank you for that article I think it will be beneficial to  many that were not able to DROP before the reduction in interest

  • Wingspread4

    Hi,

    Thanks for all the good information.
    My DROP will end 11/1/2014. I still feel young and energetic, love to work,  and don’t want to stop working. It used to be that one could stay out a month, then come back to work, but on a year to year, non tenured contract. Now, it is 6 months. Do you see any changes coming up with that, considering the shortage of qualified teachers we have in FL?

  • http://www.floridaretirementsystem.info FRS Options

    If we had to venture a guess, re-hire rules will get even more strict.

  • stall59

    I hope this is not a dumb question.  I am not eligible for the 5-year DROP, but I keep wondering  who was funding the 6+%  risk-free investment since 2008?   Was it a line item in the budget….or was it a company holding the DROP funds who is listed in our most current offerings from the Bureau of Deferred Compensation?  If the latter, I sure would like to change to that company for my monthly contributions.  Thanks.

  • http://www.floridaretirementsystem.info FRS Options

    We presume you are referring to what used to be the 6.5% interest earned on one’s pension payments that go into a DROP account (the rates is now 1.2%)? The interest was paid by the FRS Trust Fund, which held the money for DROP participants. Deferred Compensation is not an FRS benefit, but offered by state employees outside of FRS. Unfortunately, you don’t have a choice as to who your contributions go to – they only go to FRS, in either the Pension Plan or the Investment Plan, whichever you are enrolled in.

  • Darla407

    Unfortunately the rules won’t allow DROP after 30 years of service.

  • http://profile.yahoo.com/BPZKBQNQ7OEAR6OTR5QGCLKJ6E Glammis

       I have two questions about drop lump sum payout.
    I know if you take a lump sum before age 55 you get a 10% penalty tax.
    Unless you are qualified public safety. then it is age 50.
    I am a correctional officer, is this what the IRS considers “qualified public safety”?
      I have read no 10% penalty  if you separate AT age 50 and also “the year you reach age 50”. 
       I am 50 in June 2013  but may have to leave in march for health reasons. 
    I understand the rollover provisions for drop, but the lump sum payout 
    tax provisions are vague.  thank you in advance.

  • http://www.floridaretirementsystem.info FRS Options

    It is a bit tricky. We are not qualifed tax experts and can therefore not give tax advice. As we understand it though, distributions from a qualified pension plan to “qualified public safety” personel can be exempt from the 10% early distribution penalty, but only if the distribution comes from the Pension Plan. If you roll the lump sum value of your pension over to the Investment Plan, it will not be considered a distribution from the “Pension” plan, and will most likely be subject to the penalty. Likewise for DROP, if you take a distribution from the DROP plan, it is considered a qualified pension plan, and it can possibly avoid the 10% penalty, but you still incur taxes. If you roll your DROP account to the Investment Plan or an IRA, it is no longer in the “qualified” pension plan, and distributions will be subject to the 10% penalty. We would recommend you seek counsel from a tax expert or CPA before you make any moves, and confirm what your individual tax situation will be.