DROP Retirement Calculator
A Deferred Retirement Option Plan lets you keep working while your calculated pension accumulates in a separate account at a guaranteed rate. The lump sum can be substantial, but whether DROP beats retiring now depends almost entirely on that credited interest rate.
How this calculator works and the math behind itThe real tradeoff in DROP
DROP looks attractive on paper: keep collecting your salary while your pension stacks up. But the pension credit stops accruing the day you enter. A police officer entering DROP at 25 years earns no additional service credit for those 3-5 extra years. If they would have hit a benefit milestone at 28 years -- say, a different multiplier -- they miss it.
The interest rate is the deciding factor. Florida's DROP once credited 6.5% -- nearly risk-free at a rate better than most bonds. Plans that dropped to 1-2% change the math entirely. At 1.5%, you could retire, invest the first five years of pension checks in a balanced portfolio, and likely do better. At 6%, DROP wins almost every time.
Tax treatment at exit matters too. Rolling the lump sum directly to an IRA avoids immediate ordinary income tax on what may be a $200,000-$400,000 payment. Taking it as cash triggers a potentially large tax bill in a single year. Most financial advisors who work with public safety retirees recommend the rollover unless you have a specific need for the cash.
Frequently asked questions
What is a DROP plan?
You keep working while your calculated pension accumulates at a guaranteed rate in a separate account. At exit you get the lump sum plus your regular monthly pension. Service credit and salary changes no longer affect your benefit during DROP.
What interest rate does DROP earn?
Varies by plan. 2-6.5% is the typical range. Florida once paid 6.5%, now pays much less. Check your plan's summary plan description for the credited rate -- this number drives whether DROP is a good deal.
Does my pension keep growing during DROP?
No. It freezes at the amount calculated when you entered DROP. You earn salary + DROP contributions, but the underlying pension formula gets no additional service credit.
How is the lump sum taxed?
As ordinary income unless you roll it into an IRA within 60 days. A direct rollover avoids any immediate taxation. On a $300,000 DROP payout, the tax bill from taking cash can easily exceed $80,000-$90,000 depending on your bracket.
Is DROP better than retiring now?
Depends on the credited rate vs your expected investment returns. At 6%+, DROP wins. Below 3%, it's often better to retire, start pension payments, and invest them. The calculator above shows the total compensation comparison.