Florida Retirement System – Should I DROP? – Special Risk Participant

The Florida Retirement System added the DROP program to the Pension in 1998 as a way to induce employees to work longer. So, should I DROP???? MAYBE! Contrary to popular belief, the DROP is not the end-all for everybody.

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So … Should I Drop ????? for Special Risk participants.

Before we decide, let’s take a look at why we even have a decision to make. FRS added the DROP program to the Pension in 1998 as a way to induce employees to work longer. Prior to 1998, an FRS participant had no options – they retired and received a monthly pension check.  End of story!  FRS further expanded the range of retirement options in 2002 with the addition of the FRS Investment Plan. This change was significant! Now a FRS Participant has several different retirement options to choose from.  There is still the basic Pension, there is a combination Pension and the DROP (Deferred Retirement Option Program), and after 2002, a third alternative whereby you can participate in the FRS Investment Plan, and take control of how your retirement money is invested.  You also have a fourth option, which is to “roll the current value of your retirement into a self-directed IRA account at retirement.

Each choice has it’s own special characteristics.

A rollover allows you take control of your money, and it becomes your money, and it instantly increases your net worth by the total amount. (For a Deputy with 25 years in, this will average somewhere around $750,000). The rollover feature of the Investment Plan makes the DROP somewhat less attractive for many participants.

With the Investment Plan, employees can opt out of the pension plan at retirement, and transfer the entire value of the retirement benefit into the Investment Plan.  You then choose from a selection of investment options in order to manage your own retirement plan. The current value of your retirement plan is the amount of money that would be needed to pay you your pension for the rest of your expected life (IRS actuary table put that at around age 85) , an amount that could be substantial!!! The income can be affected by the value of the account, and more importantly, the value of the account goes directly to your spouse or children, or whomever you wish it to go to.  This is attractive to many.  With the Pension plan, any value goes back to FRS, and not to your family!

So, should I DROP????   MAYBE!  Contrary to popular belief, the DROP is not the end-all for everybody.  There are many important factors. Do you plan to promote soon or are you at the highest pay scale you plan to achieve? If you are promoting soon, you may want to wait to lock in that higher pension amount because of the increase in your base salary. Will you want to leave the job in 5 years? Some people are not ready to make this commitment. Once you choose to enter the DROP program, you will not be able to work more than 5 years longer, so you should be mentally prepared to retire. One of the most important is whether your benefits will grow more in the drop account, or in your pension account. It is likely there will be no financial gain in the DROP for most participants.  Therefore it might be better if you don’t DROP!

By not dropping you have several potential benefits;

* You may work as long as you like, and not the maximum 60 months.

* You may decide at the time of retirement to take a pension, a pension and lump sum, or a lump sum of the entire value.  It is fairly easy to select a combination pension and lump sum that would be no worse than the DROP benefit, and could be substantially better!

* You will still be eligible to gain retirement benefits from pay raises and promotions!

* You will gain 3% per year of service until you max out at 100%.  The Lump Sum value of higher pay at 90% is better than the Lump Sum value of 75% of your AFC five years ago!

* You will still be eligible for Active Duty Benefits that you lose in the DROP

* You continue to accrue credit for the Health Subsidy account that you lose in the DROP

Before the Lump Sum Rollover option was available, the DROP was attractive.  It was the only way to get a pension AND a lump sum.

Years of service and age have significant impact on how your benefits continue to accrue. If you DROP at 75% benefit, it is most likely not the best option.  If you can defer the DROP, and get a 90% benefit or more, the DROP is well worth it.  Anything in between requires a little math to be sure!  It is important to remember – from FRS’ perspective, there is no difference (the costs are relatively the same or less for FRS), which translates into no gain for you, and possibly a loss in most cases. In most cases, there is little or no financial gain derived from the DROP, rather retirement dollars are simply allocated in a different payout choice.  It does give an relatively younger employee who has “maxed out” their retirement benefit (you are eligible to defer the DROP) to earn additional benefits for retirement.  Any difference in the value of benefits can be calculated, and an educated determination of which option to choose can be made.  Each employee should make a determination based on his unique situation, and not presume any one method is better simply because it may be more popular.

Examples;

Example 1  –   DROP at 25 years.

You enter the DROP at 25 years of service,  and continue to work for the maximum 5 years in DROP.  The benefit is now $37,500 in pension income (locked in at the time of entering DROP based on AFC of years 20 thru 25), plus a DROP amount of approximately $225,000.

Example 2  –  Don’t DROP, work 5 more years.

You are a special risk FRS employee with 25 years of service, making an average final compensation of $50,000, and are 50 years old, would be eligible for a pension benefit of 75% (3% per year of service) or $37,500 per year. The Lump Sum value of your retirement will be close to $750,000.  If You choose NOT to DROP, and just continue to work another 5 years to age 55, the benefit would then be 90% of the average final compensation over the next 5 years,(which will most certainly be a higher AFC due to pay increases and promotions).  If we assume pay goes up by at only 3% per year, the pension benefit would be approximately jump to $48,000 per year (90% of AFC of $54,000).  That represents a starting benefit approximately 28% higher than the benefit of retiring at 25 years of service. More importantly, your Lump Sum value will be closer to $1,000,000.

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Example 3 –  Defer entering DROP, work

You have 25 years of service, but you are only 46 years old.  You defer the DROP until you are 52.  Now, at age 52, and 31 years of service, you enter the DROP.  Your pension benefit is nearing the “max-out’ point (100% of AFC) at which no further pension benefits could accrue.  He is now eligible to lock in a pension income of  93% of his AFC, which with 3% cola, would be approximately $59,000 per year – Plus he can now accrue 5 years of DROP money, now based on $55,000 AFC, which would be close to of $400,000 per year.

Example 4 –  Work as long as you wish.

Work as long as you wish.  At retirement Rollover the entire amount into an IRA, and have the freedom to choose more or less income, increase your net worth by the entire amount.  Take out lump sums as you need, or desire.  Protect your family at no additional cost or loss of benefit by giving them the balance at your death.  Have the freedom to take control of your future!  The Pension is a very safe, low risk and low return option.  By assuming a comfortable amount of risk for you, you might substantially increase you standard of living in retirement.

Obviously, there is not an option that is good for everyone.  While the pension is a good pension, and the drop may have some advantages for some people, it is essential that you sit down with someone knowledgeable about the options, and figure out which one is best for you.  Our experience is that the FRS web site, while comprehensive, may not be the most user friendly to navigate.  At FRSOptions, we are well versed in helping you navigate the site for your best advantage.

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  • http://www.floridaretirementsystem.info Mark Davy

    The first question most people ask us is “Should I Drop”? The answer is not so easy. Let’s do a scenario where you are in Special Risk, and are 46 years old with 25 years of service. You could DROP now, because you have your 25 year requirement in, but should you? You will have 75% of AFC as a pension, plus the DROP amount.If you defer the decision until you are 52, you will have six more years of service, so your pension amount would be 93% of an Average Final Compensation that will most likely be significantly higher than the AFC of six years prior. Plus, you can still DROP for five years at that point, and get an even bigger DROP payment based on your higher pension amount.Simple math shows your Pension will be at LEAST 24% higher, and your DROP amount will also be at LEAST 24% higher, even if you get NO pay raises. The best part is, you will exceed a 100% total retirement benefit! I would love to hear from someone giving some reasons to drop at 25 years with this scenario. It will be a great discussion!

  • http://www.floridaretirementsystem.info Mark Davy

    The first question most people ask us is “Should I Drop”? The answer is not so easy. Let’s do a scenario where you are in Special Risk, and are 46 years old with 25 years of service. You could DROP now, because you have your 25 year requirement in, but should you? You will have 75% of AFC as a pension, plus the DROP amount.
    If you defer the decision until you are 52, you will have six more years of service, so your pension amount would be 93% of an Average Final Compensation that will most likely be significantly higher than the AFC of six years prior. Plus, you can still DROP for five years at that point, and get an even bigger DROP payment based on your higher pension amount.
    Simple math shows your Pension will be at LEAST 24% higher, and your DROP amount will also be at LEAST 24% higher, even if you get NO pay raises. The best part is, you will exceed a 100% total retirement benefit! I would love to hear from someone giving some reasons to drop at 25 years with this scenario. It will be a great discussion!

  • http://www.floridaretirementsystem.info Mark Davy

    The first question most people ask us is “Should I Drop”? The answer is not so easy. Let’s do a scenario where you are in Special Risk, and are 46 years old with 25 years of service. You could DROP now, because you have your 25 year requirement in, but should you? You will have 75% of AFC as a pension, plus the DROP amount.
    If you defer the decision until you are 52, you will have six more years of service, so your pension amount would be 93% of an Average Final Compensation that will most likely be significantly higher than the AFC of six years prior. Plus, you can still DROP for five years at that point, and get an even bigger DROP payment based on your higher pension amount.
    Simple math shows your Pension will be at LEAST 24% higher, and your DROP amount will also be at LEAST 24% higher, even if you get NO pay raises. The best part is, you will exceed a 100% total retirement benefit! I would love to hear from someone giving some reasons to drop at 25 years with this scenario. It will be a great discussion!

  • http://www.floridaretirementsystem.info Mark Davy

    The first question most people ask us is “Should I Drop”? The answer is not so easy. Let’s do a scenario where you are in Special Risk, and are 46 years old with 25 years of service. You could DROP now, because you have your 25 year requirement in, but should you? You will have 75% of AFC as a pension, plus the DROP amount.
    If you defer the decision until you are 52, you will have six more years of service, so your pension amount would be 93% of an Average Final Compensation that will most likely be significantly higher than the AFC of six years prior. Plus, you can still DROP for five years at that point, and get an even bigger DROP payment based on your higher pension amount.
    Simple math shows your Pension will be at LEAST 24% higher, and your DROP amount will also be at LEAST 24% higher, even if you get NO pay raises. The best part is, you will exceed a 100% total retirement benefit! I would love to hear from someone giving some reasons to drop at 25 years with this scenario. It will be a great discussion!

  • http://www.floridaretirementsystem.info Mark Davy

    The first question most people ask us is “Should I Drop”? The answer is not so easy. Let’s do a scenario where you are in Special Risk, and are 46 years old with 25 years of service. You could DROP now, because you have your 25 year requirement in, but should you? You will have 75% of AFC as a pension, plus the DROP amount.
    If you defer the decision until you are 52, you will have six more years of service, so your pension amount would be 93% of an Average Final Compensation that will most likely be significantly higher than the AFC of six years prior. Plus, you can still DROP for five years at that point, and get an even bigger DROP payment based on your higher pension amount.
    Simple math shows your Pension will be at LEAST 24% higher, and your DROP amount will also be at LEAST 24% higher, even if you get NO pay raises. The best part is, you will exceed a 100% total retirement benefit! I would love to hear from someone giving some reasons to drop at 25 years with this scenario. It will be a great discussion!

  • http://www.floridaretirementsystem.info Mark Davy

    The first question most people ask us is “Should I Drop”? The answer is not so easy. Let’s do a scenario where you are in Special Risk, and are 46 years old with 25 years of service. You could DROP now, because you have your 25 year requirement in, but should you? You will have 75% of AFC as a pension, plus the DROP amount.
    If you defer the decision until you are 52, you will have six more years of service, so your pension amount would be 93% of an Average Final Compensation that will most likely be significantly higher than the AFC of six years prior. Plus, you can still DROP for five years at that point, and get an even bigger DROP payment based on your higher pension amount.
    Simple math shows your Pension will be at LEAST 24% higher, and your DROP amount will also be at LEAST 24% higher, even if you get NO pay raises. The best part is, you will exceed a 100% total retirement benefit! I would love to hear from someone giving some reasons to drop at 25 years with this scenario. It will be a great discussion!

  • Frank Rodriguez

    Just recently found your web site because of all the pending bills calling for reducing and modifying the FRS pensions. As a 29-year FRS special risk member with the Miami-Dade Police Department, I am in total agreement with your view points and I am forwarding your website and letter writing recommendation to all my collegues. I have two and years left to finish in DROP. I totally agree with your statement that “with the added risks of this job, the promised pension is not an entitlement , it's an obligation.” I have a friend with 29 years on who is contemplating going into DROP now rather than later in case negative changes are made in July 2010. I've advised him to read your site. Thanks

  • Frank Rodriguez

    Just recently found your web site because of all the pending bills calling for reducing and modifying the FRS pensions. As a 29-year FRS special risk member with the Miami-Dade Police Department, I am in total agreement with your view points and I am forwarding your website and letter writing recommendation to all my collegues. I have two and years left to finish in DROP. I totally agree with your statement that “with the added risks of this job, the promised pension is not an entitlement , it's an obligation.” I have a friend with 29 years on who is contemplating going into DROP now rather than later in case negative changes are made in July 2010. I've advised him to read your site. Thanks

  • http://www.floridaretirementsystem.info Mark Davy

    Frank,

    I appreciate your input, and sharing it with your colleagues.  I am certainly not an expert on political maneuvering, but find it irritating that these potential changes are on the slate, and those affected are not even notified.  While I am sure the unions will take up the fight, I believe the rank and file needs to be heard as individuals.  Spread the work, and contact your legislators!!! 

    Mark

    If not a fan on facebook, please consider joining, as the newest posts come up there and on twitter regularly.  FRSOptions on both!

     Mark A. Davy

    SouthBay Investment Group, llc
    665 S. Orange Avenue, Suite 4
    Sarasota, Florida  34236

    941-951-1977
    941-952-1937 (fax)

    ________________________________

  • http://www.floridaretirementsystem.info Mark Davy

    Frank,

    I appreciate your input, and sharing it with your colleagues.  I am certainly not an expert on political maneuvering, but find it irritating that these potential changes are on the slate, and those affected are not even notified.  While I am sure the unions will take up the fight, I believe the rank and file needs to be heard as individuals.  Spread the work, and contact your legislators!!! 

    Mark

    If not a fan on facebook, please consider joining, as the newest posts come up there and on twitter regularly.  FRSOptions on both!

     Mark A. Davy

    SouthBay Investment Group, llc
    665 S. Orange Avenue, Suite 4
    Sarasota, Florida  34236

    941-951-1977
    941-952-1937 (fax)

    ________________________________

  • Joe Jacobson

    I have only 7 1/2 years in the FRS and am not of retirement age. I missed moving my retirement to a self-directed IRA when I left the employer. Is there any way to get it transferred without going back to work for a FRS-qualified employer? Thanks, Joe.

  • http://www.floridaretirementsystem.info Mark Davy

    Sorry, unless you go back to an FRS employer, it is stuck there until you reach
    retirment age (60 if regular risk, 55 if special). If you are leaving FRS
    employment and you are vested, it is essential you move to the Investment Plan
    prior to your last day of employment.
    Mark A. Davy

    SouthBay Investment Group, llc
    665 S. Orange Avenue, Suite 4
    Sarasota, Florida 34236

    941-951-1977
    941-952-1937 (fax)

    ________________________________

  • Patrickleary48

    I have a friend that was employed by hillsborough county board of education,he lefted and at that time removed his monies from the retirement system.Now he has been rehired and wants to go back into the retirement system

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

    It will be tough for that to happen.

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

    I believe you will have 6 weeks to make a decision AFTER we know what is going on. If you intend to work past 60, I would guess it makes sense just to keep plugging away and make the decision at retirement age. With 21 years, your pension will most likely not be enough to retire with, so keep in mind DROP will mandate you retire at 60.

  • Cindy Klopfer

    I will have 30 years of service with FRS in Oct. 2016. I am trying to find out if I retire with a straight pension verses DROP what my monthly pension check difference will be. Also is going into DROP of any great benefit to me.

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

    When you enter DROP, your pension freezes, and for the next five years (or however long you are in DROP) the monthly pension check goes into your DROP account, and interest is applied. Net/net, your pension upon completion of DROP will be less than had you simply worked five more years, but you will have a nice lump sum of money to supplement your pension. DROP is a pretty good deal! The pension amount is determined by multiplying your service credit (at 30 years it is 1.5%) for each year of service (1.6 times 30 = .48% of your AFC (highest five years of income averaged out), so if you AFC is $50,000, then your Pension would be 48% of $50,000 – or $24000 per year. If you continue to work another 5 years, you would get 1.68% times 35 years, or 58.8% of your AFC. So you would get 58.8% of your highest five years pay averaged out. If it is still $50,000, then your pension would be $29,400. That is an increas of 22.5% (assuming no pay raises). Should you opt for five years in the DROP (at $50,000 AFC), then after the DROP you would get a pension of $24,000 per year, plus a DROP amount of somewhere around$130,000 or so. You would be trading the extra $5,400 in annual pension, for the lump sum of approx. $130,000. Obviously these numbers are not exact, but simply to give you an idea of the differences. We hope this helps.