There are many things to consider when you are about to stop working and finally retire. The DROP program adds even more questions to factor into your retirement plan. We are here to help you understand what your options are and to help develop a retirement strategy that is individually tailored to your situation. Below are some of the questions that we receive on a regular basis:
Please Note: There are more questions that are not covered here and all of these answers may not pertain to your unique individual situation. Make an appointment to review your concerns on a one-on-one basis.
What is the DROP program?
When you enter the DROP program, you cease to accumulate length of service years toward your pension. You have actually “retired’ and started drawing your pension. You continue to work and be paid your salary and overtime, but you are also paid your pension every month which is set aside in a separate account. This is known as your DROP account . You can stay in the program for up to five years, but then at that point you must retire officially.
Should I enter DROP?
There are many things to consider when answering this question.Do you plan to promote soon or are you at the highest pay scale you plan to achieve? If you are promoting soon, you may want to wait to lock in that higher pension amount because of the increase in your base salary. Will you want to leave the job in five years? Some people are not ready to make this commitment. Once you choose to enter the DROP program, you will not be able to work more than 5 years longer, so you should be mentally prepared to retire.
What do I do with the DROP when I leave?
Since you cannot leave the money in the DROP account, you have basically three options. You can take a lump sum distribution, roll the money into your deferred compensation plan (457) or you can roll the money into a Rollover IRA. With the lump sum distribution, you will be forced to pay income taxes on the total amount. This is very important to consider because with the large amounts of money in the DROP account, it can lead to a significant tax hit. If you roll the money into deferred comp or an IRA, you can continue to defer the taxes and invest the money. Whether you use deferred comp or an IRA will depend on several things; including your age, how much flexibility you want with your investments, and the types of investments you wish to invest in.
What investments should I choose in my Rollover IRA?
This is a question that is unique for each and every one of you. Some people want to supplement their pension and invest in CDs, U.S. Treasury bonds, corporate bonds or income generating mutual funds. Others are interested in potentially greater risk/return by investing in individual stocks and mutual funds. Some would like to consider insurance features of variable annuities.
When should I come see you?
You should come to see me whenever you have questions. I can help discuss what your options are at the end of the DROP program, so you can have some peace of mind and rest knowing how the DROP money can work best for you. At the very least, you should come see me a couple months before you retire, so that we can establish a Rollover IRA and start filling out the required city paperwork to start the rollover process.