The trade a DROP asks you to make
A DROP gives you a pile of cash in exchange for a smaller pension for the rest of your life. Say you could retire today on $3,000 a month. With a five-year DROP, about $180,000 in pension payments goes into your account, plus interest, while you keep drawing your salary. When you leave you get that account and a pension that still pays $3,000.
If you skip the DROP and work the same five years, your pension keeps growing. Each extra year adds your multiplier times your salary, and raises lift your final average. In our default example that is $110 a month per year, so you would retire on $3,550 instead of $3,000. The $550 difference has to make up for the lump sum before keeping on working comes out ahead, and the calculator finds that age.
When a DROP tends to win
A DROP looks better when the interest credit is generous, when your plan has a low multiplier so extra years add little, when your salary has stopped rising, or when you expect a shorter retirement. It also helps if you want a lump sum to pay off a mortgage or bridge to Social Security without touching your own savings.
Working on without a DROP looks better when your multiplier rises with age or service, as in plans that reward 30 or more years, and when you expect a long retirement or want the largest possible survivor benefit for a spouse. Our DROP guide covers the rules that vary by plan, including what happens if you leave early.
Questions
What is a DROP?
A Deferred Retirement Option Plan lets you lock in your pension, keep working, and have your monthly pension deposited into an account instead of paid to you. When you leave, you collect the account as a lump sum or rollover and start your monthly pension.
Why does the pension stay smaller with a DROP?
Your pension is fixed on the day you enter. The extra years you work during the DROP add no service credit and no salary growth to the formula, so the monthly benefit after you leave is lower than if you had simply kept working.
Is the lump sum taxed?
It is taxed as ordinary income when you take it in cash. Rolling it into an IRA or your employer’s 457(b) or 403(b) defers the tax until you withdraw it.
Which plans offer a DROP?
Florida FRS, Louisiana, Arkansas, Oklahoma and many city and county police and fire systems are well-known examples. Rules on length, interest and COLAs differ, so use your own plan’s numbers in the calculator.