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Old 06-23-2014, 11:16 AM
41 posts, read 29,536 times
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I am employed by an employer where I am enrolled in a defined benefit pension plan. In about eighteen months, I will be eligible for "normal" retirement because I will be 60. At that time, if all goes well, I will be eligible to continue working or I will have the option of entering into a deferred retirement option program (DROP). If I continue working, I will gain another year of work with a multiplier of 2.75% to ultimately increase my pension benefit; however, I must contribute 11.6% of my income toward the pension plan. If I enter into DROP, my pension will be calculated at the salary and with the number of years (about 23 years) I have in the plan at the time I enter the DROP program, and the system will consider me to be a retiree even though I may still choose to work for up to 5 more years. During those up to 5 years, I would still collect my salary, my contributions to the pension plan would cease, and my pension benefit would be effectively held in an account for me, accruing a 3% COLA each year. At the end of the up to 5 years, I would have the money in the account available to me to either reinvest or to have distributed over a period of time. Two questions:

Did anyone ever deal with this type of issue and what did you choose, and why?

Does anyone have a recommendation as to what type of financial or retirement planner might be able to advise me on this matter? I am having difficulty working out the pros and the cons of my choices.

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Old 06-23-2014, 01:17 PM
Location: Florida -
8,760 posts, read 10,832,098 times
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My wife was a School Administrator and was eligible for DROP, but, we 'did the math' and decided that she would need the entire last 5-years in order to lock-in a significantly larger pension and COLA. (Largely because she got some really significant raises during her last few working years). Because of that, she decided NOT to enroll in DROP, but, instead to allow her retirement/pension/raises play-out in their normal path. That has worked-out far better for her/us than going into the DROP program.

With a 2.75 multiplier, you may be in a similar situation (?). DROP often seems attractive on the surface, but, it's important to calculate the longer short and long-term financial impact.
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Old 06-23-2014, 08:48 PM
Location: Los Angeles area
14,018 posts, read 17,726,438 times
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My pension system did not have any DROP option; in fact this is the first time I am hearing about such a thing and I find it very interesting.

Provided I understood the OP's explanation correctly, it seems to me the DROP program allows a very generous "double-dipping". One is retired but one continues to work at full salary. The pension is not paid out immediately but held in an account and then paid to the employee after five years. It seems to me quite a few years would be required to "break even" by foregoing the five years worth of pension in order to get a higher pension later. Did I get it right?

Sorry to take up the space here, as I don't know enough to offer any advice. I just found the concept interesting.
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Old 06-24-2014, 04:02 PM
41 posts, read 29,536 times
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Escort Rider, I think you got it right from my post. To put it bluntly, for the first 20 years of my employment, my pension is based on 20 years x 2.6% of my salary. For each year of employment after 20 years, the multiplier is 2.75% (up to a maximum of 80% of salary which is about at the 30 year mark.) I doubt that I would be able to reach the 80% mark. The ideal would be to reach the 80% and then enter the DROP program for 5 years because that maximizes the amount that I would be able to receive, but I don't think that is realistic in my case. As has already been pointed out in this thread, the question is how much higher my pension benefit would be based on continuing to accrue additional years at 2.75% as opposed to entering the DROP (due to my age and years of service, the earliest I could do that would be when I would have 23 years in the system (20 x2.6% and the rest at @.75%). The advantage of participating in DROP is to get access to a lump sum amount, if needed, and also my pension would receive a 3% cola for each year I am in the DROP -- before actually leaving employment. In addition, by entering the DROP, I would gain access to the 11.6% of my salary that I am currently contributing to the pension plan because those contributions would cease. Although some people could probably figure out the financial pros and cons of this situation out, I admit that I am somewhat confused and am wondering whether some kind of financial planner might be helpful -- though I do not have one that I currently use and wonder what type might be best?
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Old 06-24-2014, 05:29 PM
547 posts, read 740,524 times
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My wife went through this. It was an easy choice to enter DROP because at the time her multiplier was 6.something %.
The first thing I would advise is to take anything you learn from the internet with a grain of salt. After all free advice is worth what we pay for it. Saying that I do think reading about choices and options is a good thing.
Do you have someone in your HR that can advise you? My wife had a printout that showed her earnings per pay period. When the times came that she wondered how she would survive another day, she would look at that printout.
Other advice would be to sign up for the full five years. It is my understanding that you could still leave at any time. But if you said you would work 1 year in drop, after that year you would be done.
Are you currently investing through your employer? We were also fortunate to have not only HR, but the investment company she made contributions to.
We also had to invest / roll over her drop check. Otherwise there would be a substantial penalty. One of her co workers took cash, and paid a huge penalty.
Finally, find a financial planner you can trust and let them guide you. Talk to a few. Ask co workers in the same situation. It will be your turn to do the hiring.
FWIW We went with Edward Jones.
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