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, typically 3-8 years depending on the plan), 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 DROP, Texas TCDRS plans, various municipal police and fire systems, and some state teacher retirement systems all offer variants of it. The rules vary significantly: some plans limit DROP to 3 years, others allow 8. 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 approximately $348,800. That's the lump sum at exit.

At a 3% credited rate with the same pension and duration, the lump sum drops to roughly $322,000. At 1.5%, roughly $313,000. 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.

DROP credited rates across major plans

Florida's DROP rate declined from its historical 6.5% to a fixed 1.3% after the financial crisis, but switched to a variable rate in July 2023 tied to plan investment returns (1.3% floor, 9% ceiling). The current effective rate is approximately 4%. At that level, DROP is more competitive than it was during the fixed 1.3% era, though still below the old 6.5%. The guaranteed floor of 1.3% protects against poor market years, while the variable component lets participants benefit from strong plan returns.

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.

More significant: 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 20% for taxes upfront, which you'd have to make up from other funds.

On a $340,000 DROP payout, taking it as cash in retirement could mean $80,000 or more in federal tax in a single year depending on your other income. If you're already collecting a $60,000/year pension, adding $340,000 of DROP income puts you well into the 32% or 35% bracket. The rollover avoids that. Most public safety retirees who have other assets to live on roll the DROP balance to an IRA and draw it down over time.

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 roughly $337,000 in accumulated DROP balance. Retiring now and investing the $60,000/year pension payments at 6% over 5 years yields roughly $338,000 in invested pension payments, 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 significantly 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