5-Year DROP Comparison

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 comparison of DROP taxation check out this blogpost: DROP Taxation