Big DROP changes

 by Glenn J. Downing, MBA, CFP®         

On June 5^th of this year Gov. DeSantis signed into law some major changes – upgrades - to the Deferred Retirement Option Program.  The main points are these: 

DROP extended to 8 years

Beginning July 1^st the DROP term has been extended from 5 years to 8.  Previously only certain instructional employees could extend DROP to 8 years; now it is widely available.  If someone is currently within the 5-year DROP timeframe, that employee can now extend the 5 years to 8. 

Interest Credited increases to 4%

The interest paid on funds in the DROP account increases from 1.3% to 4% on July 1st.  This is an increase in interest crediting for all funds in DROP accounts across the board – even for those currently in DROP. 

Health Insurance Subsidy increases

The subsidy paid to retirees for health insurance purchases increases from $5 per year of service to $7.50 per year of service, to a maximum of $255/month.  Doing some quick division, the health insurance subsidy does not increase after the 34^th year.  The retiree can use these funds to pay for any sort of health insurance, whether from one of the exchanges or a Medicare supplement plan. 

What’s DROP?

Just a quick refresher – the DROP option is available to most participants in the Florida Retirement System.  The participant retires, but keeps working, thereby double-dipping.  While working, the participant earns the usual salary.  But as a retiree, he or she also draws the pension benefit, which is paid into a DROP account, now earning 4% interest come July 1st.  The pro here is that for an employee without much savings, the normal salary paid into a DROP account over 5-8 years can easily total several hundred thousand dollars of savings at DROP’s end, which will roll over to an IRA.  The con:  upon DROP entry, the pension benefit is frozen, and the normal pension benefit calculation formula will no longer apply.  The pension will increase only by usual COLA adjustments. 

Careful financial planning is needed

Everyone retiring from the FRS needs to do some careful planning - Am I better off without DROP, because then I'll have a higher pension for the rest of my life?  Or Am I better of in DROP, because there's no way I could otherwise accumulate such a large lump sum?  Where's the sweet spot?

Questions?  Thoughts?

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