DROP Retirement Calculator

How DROP works mechanically

When you enter DROP, you officially "retire" for pension calculation purposes. Your pension benefit is calculated based on your years of service and salary at that moment, and that number freezes. Every month going forward, an amount equal to your calculated pension payment gets deposited into a separate DROP account that earns a guaranteed credited interest rate set by your plan.

You keep working, keep drawing your salary, and keep accruing nothing toward your pension formula. Your paycheck continues. Your DROP account grows. When you actually leave employment (at the end of the DROP period, which your plan caps), you collect the full lump sum from the DROP account plus start receiving your monthly pension.

DROP is most common in police, fire, and teacher pension systems. Florida's FRS, many municipal police and fire systems, and some state teacher retirement systems offer versions of it. The rules vary a lot, including the maximum length. Some lock the pension benefit at entry; some allow salary-based recalculations. Read your specific plan's DROP provisions before modeling any numbers.

The math: what a DROP account actually accumulates

The lump sum at exit is the sum of monthly pension payments credited to the account over the DROP period, compounded at the credited interest rate. The calculation is essentially the future value of an annuity.

Example: pension of $5,000/month ($60,000/year), 5-year DROP, credited rate of 6% annually. The future value of $5,000/month deposited for 60 months at 0.5%/month (6% annual, monthly compounding) is about $348,850. That's the lump sum at exit.

At a 3% credited rate with the same pension and duration, the lump sum drops to about $323,200. At 1.5%, about $311,300. The rate has a real but not dramatic effect at 5 years. At 8 years, the gap between 6% and 1.5% grows much wider.

Find your plan's credited rate

Each system sets its own DROP rate and maximum length, and legislatures change them. Some plans credit a fixed rate, some credit a share of fund returns. We don't publish a rate table because these numbers go stale. Your plan's DROP election form or member handbook states the current rate and cap; use that number, not one from a news story.

The frozen benefit trap: what DROP costs you

The moment you enter DROP, your pension formula stops updating. No more service credit. Salary increases during the DROP period don't improve your final pension. If your system uses a final average salary formula and you would have received a 4% salary increase at year 4 of a 5-year DROP, your pension is based on the salary at DROP entry, not the higher salary you retired with.

Bigger risk: some DROP programs freeze your COLA eligibility. If your plan provides a COLA based on years of service past the DROP entry date, you may lose years of COLA credit by being in DROP. A plan that provides a 1% COLA per year of service past 25 years, and you enter DROP at 25 and work 5 more years, might not credit those 5 years. Over a 25-year retirement, that COLA difference compounds into a meaningful income gap.

Check three things in your plan document before entering DROP: (1) whether salary changes during DROP affect the pension calculation at all, (2) whether COLA accruals continue during DROP, and (3) whether there are any benefit enhancements (like enhanced multipliers at specific service milestones) that you'd miss by locking in early.

Tax treatment at exit

The DROP lump sum is taxable as ordinary income in the year received unless you roll it over. A direct rollover to a traditional IRA or eligible retirement plan defers the tax entirely and keeps the money growing. An indirect rollover (you receive the check and deposit it yourself within 60 days) still works, but the plan withholds income tax up front and you'd have to make up the withheld amount from other funds to roll over the full balance.

Take a $340,000 DROP payout as cash on top of a $60,000/year pension and you report $400,000 of income in one year, much of it taxed at 32-35%. The rollover avoids that and lets you draw the money down over several years.

DROP vs. just retiring now

The comparison isn't just about the DROP interest rate. It's about total compensation: salary earned during DROP plus lump sum accumulated versus pension payments you'd have received starting now plus what you could invest them.

If you're a firefighter making $95,000/year with a $60,000/year pension and a 5-year DROP at 5%, staying in DROP yields $475,000 in salary plus about $340,000 in accumulated DROP balance. Retiring now and investing the $5,000 monthly pension payments at 6% for 5 years yields about $348,850, but you're also not earning the $95,000 salary. The salary continuation during DROP is the most powerful part of the case for staying in, not the DROP interest rate itself.

Where DROP loses: when the pension would grow a lot by working longer outside DROP. If your plan's formula gives you 2.5% per year instead of 2.0% past 25 years, entering DROP at 25 and staying 5 more years means 5 years at the lower multiplier. Retiring at 30 years without DROP gets you 5 years at 2.5%, which may produce a higher lifetime pension than the DROP lump sum compensates for.

Frequently asked questions