Many fire departments have a Deferred Retirement Option Plan (DROP). The DROP is an optional benefit that allows members to continue to work and earn a salary while accumulating a lump sum retirement benefit. When you enter the DROP, you stop accumulating length-of-service years toward your pension in exchange for receiving a tax deferred sum of money that can be rolled into your 457 or IRA.
The DROP also benefits your employer by providing a predictable turnover picture and encouraging you to work longer.
DROP programs across the country can vary, but let’s look at a common example using the City of Indianapolis.
If you’ve got 20 years on the job and are at least age 52, you’re eligible to sign-up for the 5-year DROP in the state of Indiana.
You cannot exit the DROP and then re-enter it – this is a once in a lifetime election!
Question: Is it better to maximize your pension benefit or your DROP benefit?
Assumptions: We’ll use 2024’s pension base for the Indianapolis Fire Department at $88,730, assume the maximum 3% cost-of-living allowance for the pension, and a conservative average of 5% growth on investments.
Person A decides to maximize their pension benefit and forego the DROP. They retire with 25 years on the job and an annual pension benefit of $55,013.
Person B signs up for the 5-year DROP with 20 years on the job. Their pension benefit is $46,140 and they receive a lump sum of $230,698.
Using these assumptions, Person B can create the same amount of income as Person A using their investments while having access to their DROP lump sum for liquidity and flexibility in retirement.
For a DROP taxation comparison, checkout this blogpost: https://www.firefighterfinancialadvisor.com/blog/drop-taxation
Chris Bauchle is a career firefighter with the Indianapolis (IN) Fire Department. He is a CERTIFIED FINANCIAL PLANNER™, holds a Master’s degree in Finance, and has served well over 100 firefighter families as a financial advisor.
More educational content can be found at firefighterfinancialadvisor.com, where you can subscribe to his quarterly newsletter and be notified of future FirefighterNation articles.
Firefighterfinancialadvisor.com is an affiliated entity of Chris Bauchle, a Wellington Wealth Strategies advisor. Advisory services are offered through Wellington Wealth Strategies, an independent investment advisory firm. Wellington Wealth does not offer tax or legal advice. This is intended for informational purposes only and shall not be construed as individual investment advice. Information obtained from third-party sources is believed to be reliable though its accuracy is not guaranteed, and Wellington Wealth makes no representation or warranty as to the accuracy or completeness of the information, which should not be used as the basis of any investment decision. Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of writing and are subject to change without notice.
