State Pension DROP decision

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ofcmetz
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State Pension DROP decision

Post by ofcmetz » Wed Feb 06, 2019 2:18 pm

In 6 months, I'll reach a point in my pension at which time I'll have the option of participating in the Deferred Retirement Option Plan (DROP) or continuing along in the pension. If I do DROP, I'll lock my pension amount at that point in an amount equal to my annual pension amount will be deposited into a IRA like account for up to three years. While on drop, I would also not contribute the 9.5% ($7,000 a year) of base pay to my pension that I currently contribute. I did some math and think that it makes sense for me to skip DROP and continue along the normal pension path, but I'd like some bogleheads to look over my info and give suggestions and recommendations.

It should be noted that I would also just be eligible to retire and walk away at any point starting in 6 months.

At the time of DROP in 6 months:

Age: Him 40

Current Salary $73,800 (Police Lieutenant)

Annual Pension amount: $56,548 (This would be the annual amount deposited into the DROP account for 3 years).

Total economic value of DROP account after three years: $169,644 (3 years of pension) + $21,000 (three years of pension contributions) = $190,644

Annual Pension amount in 3 years if I don't do DROP: $68,998

Difference between pensions amounts: $12,450 a year.

I went to immediateannuities.com and valued the income stream of $12,450 a year at approximately $254,000.

Should I just compare the $254,000 to the $169,644 directly? The DROP money doesn't start earning interest until the 3 year period ends. Any thoughts, questions, and comments are welcome.

Thanks,
Last edited by ofcmetz on Wed Feb 06, 2019 2:51 pm, edited 1 time in total.
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Silk McCue
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Re: State Pension DROP decision

Post by Silk McCue » Wed Feb 06, 2019 2:33 pm

Does your pension have a COLA and if so how much?

Cheers

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ofcmetz
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Re: State Pension DROP decision

Post by ofcmetz » Wed Feb 06, 2019 2:50 pm

Silk McCue wrote:
Wed Feb 06, 2019 2:33 pm
Does your pension have a COLA and if so how much?

Cheers
It does have a form of COLA but not until the age of 62 and even then it's based on the funding of the COLA account balance (a separate account maintained by the pension to pay for COLA's).

So effectively, I'd be getting about 20 years of not COLA's. The wife and I save about 25% of our gross incomes toward retirement in addition to this pension, and we don't plan on drawing off of our portfolio until our late 50's. I figure at that point inflation will have eaten enough into the pension payout to make it necessary. I also plan on working at a second career.
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Miriam2
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Re: State Pension DROP decision

Post by Miriam2 » Wed Feb 06, 2019 4:13 pm

What are the spousal benefits for each way and would that factor into your decision?

I assume no inheritance benefits for kids either way - - -?

CarlZ993
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Re: State Pension DROP decision

Post by CarlZ993 » Wed Feb 06, 2019 5:57 pm

Our PD Retirement Fund at one point had a Retro-DROP (if you were at retirement age, you could retire as if you had 3 yrs prior but got to get all the contributions you made over the 3 yrs + interest) and then later added Forward DROP after I had retired (sounds like your program). I crunched the numbers & decided that lump sum in the Retro-DROP wasn't worth the loss of pension income (if I lived long enough; very healthy then & now). Afterward, the pension board determined that the Retro-DROP had a negative effect on the pension fund & they stopped it for all officers who hadn't reach their magic KMA date (able to retire right then). It seems that the Forward DROP appealed to those who hadn't saved much in the IRAs and/or Deferred Comp. I did. So, even if the option was available, I wouldn't have taken it.

The problem with retiring so young (I retired @ 51; 13 yrs ago) is inflation w/o COLAs. I am on our Pension Fund's Board of Trustees. COLAs are probably a thing of the past in our pension fund (last COLA 2007). Maybe it'll be better for your fund. You go 26 yrs w/o a COLA and have 3% inflation, your purchasing power has been cut in half. I counsel officers nearing retirement to have their ducks in a row: paid off debt, house, cars, etc. Also, I suggest that they be able to save some money in retirement for retirement. As money gets tight, you quit saving as much. You need more money... you use some of what you saved (after-tax mutual funds or savings/CDs). Eventually, you draw from your SS and/or IRAs.

Anyway, lots of things to consider. I do know that I was able to handle the job much easier once I did reach my KMA date. I went two years longer. Probably would have gone longer if my DW hadn't retired from the Sheriff's Dept and was having a blast not going to work. I got jealous. I crunch me numbers & decided to pull the plug the following calendar year for tax implications (both of us were able to cash in some vacation & sick time; me more than my DW).

Be safe.

A retired LT from your neighboring state.
Carl Z

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Re: State Pension DROP decision

Post by sergeant » Wed Feb 06, 2019 6:33 pm

Another retired Lt. here. Wow you guys get to retire young. We have to go to at least 50 but don't usually max out until 55. I'm in California. I worked for a PERS agency and DROP wasn't an option. What is the guaranteed interest rate after the 3 years? Any chance of a captain spot opening up for you? if yes, is it worth sticking around for? As it stands I agree that DROP is less desirable. Can you do the DROP for 3 years and then return to non-DROP status if you want to? Tell me about the second career? That could make me more prone to recommend leaving at such a young age with a non-COLA pension. Do you get medical in retirement? How well is the pension fund funded?

Edited to add: Do you participate in a 457b? Is there a match?
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Re: State Pension DROP decision

Post by ofcmetz » Wed Feb 06, 2019 8:26 pm

Miriam2 wrote:
Wed Feb 06, 2019 4:13 pm
What are the spousal benefits for each way and would that factor into your decision?

I assume no inheritance benefits for kids either way - - -?
The Spousal survival benefit is 75% of my benefit for her life if I was to expire before her. If both of us are gone kids would get that 75% until age 18. They are 11 and 13 right now.
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Re: State Pension DROP decision

Post by ofcmetz » Wed Feb 06, 2019 8:38 pm

sergeant wrote:
Wed Feb 06, 2019 6:33 pm
Another retired Lt. here. Wow you guys get to retire young. We have to go to at least 50 but don't usually max out until 55. I'm in California. I worked for a PERS agency and DROP wasn't an option. What is the guaranteed interest rate after the 3 years? Any chance of a captain spot opening up for you? if yes, is it worth sticking around for? As it stands I agree that DROP is less desirable. Can you do the DROP for 3 years and then return to non-DROP status if you want to? Tell me about the second career? That could make me more prone to recommend leaving at such a young age with a non-COLA pension. Do you get medical in retirement? How well is the pension fund funded?

Edited to add: Do you participate in a 457b? Is there a match?
Thanks for your comments and questions.

One reason I can retire so young is that I rolled about 100K from my 457b and 403b into the pension about 5 years ago to buy 5 years of Air Time credit. See the linked thread:

viewtopic.php?t=134082

I've been fully funding the 457b as well as a 403b ever since and between me and the wife have closer to 600K in our other retirement accounts.

My agency is smaller state agency, about 60 commissioned. There is a chief, one major, and two captains above me so not likely to get one of those spots as everyone seems to be too happy to stay forever here in the higher ranks. I'm in college right now finishing my degree in finance at the only major (football powerhouse) university here. I will more than likely work at something in that field when I retire after going to school for a few semesters full time.

My system allows one to return to normal contributing status after finishing the DROP. So yes that's an option. I'll get medical insurance in retirement at the same cost state employees pay now. My plan to deal with the loss in pension spending due to inflation was to let our portfolio grow for the first 20 years of my retirement and then tap into it as inflation eats into my pension income stream. My wife is a nurse and she plans on working at least another decade before hanging it up. House will be paid off in a 4 years so that will help.

Oh, the pension is about 70% funded. There is a law requiring it to be fully funded by 2029, but we will see.
Last edited by ofcmetz on Wed Feb 06, 2019 8:44 pm, edited 2 times in total.
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Re: State Pension DROP decision

Post by ofcmetz » Wed Feb 06, 2019 8:41 pm

CarlZ993 wrote:
Wed Feb 06, 2019 5:57 pm

Anyway, lots of things to consider. I do know that I was able to handle the job much easier once I did reach my KMA date. I went two years longer. Probably would have gone longer if my DW hadn't retired from the Sheriff's Dept and was having a blast not going to work. I got jealous. I crunch me numbers & decided to pull the plug the following calendar year for tax implications (both of us were able to cash in some vacation & sick time; me more than my DW).

Be safe.

A retired LT from your neighboring state.
Thanks for the comments. Seems there are quite a few LT bogleheads on this site. :sharebeer Lucky you in having a DW who also got a pension. I keep telling my wife she should of worked for the state as a nurse as all she has right now is her 401K and the promise of social security one day. Hope things are going well for ya'll in retirement.
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Re: State Pension DROP decision

Post by sergeant » Wed Feb 06, 2019 9:45 pm

ofcmetz wrote:
Wed Feb 06, 2019 8:38 pm
sergeant wrote:
Wed Feb 06, 2019 6:33 pm
Another retired Lt. here. Wow you guys get to retire young. We have to go to at least 50 but don't usually max out until 55. I'm in California. I worked for a PERS agency and DROP wasn't an option. What is the guaranteed interest rate after the 3 years? Any chance of a captain spot opening up for you? if yes, is it worth sticking around for? As it stands I agree that DROP is less desirable. Can you do the DROP for 3 years and then return to non-DROP status if you want to? Tell me about the second career? That could make me more prone to recommend leaving at such a young age with a non-COLA pension. Do you get medical in retirement? How well is the pension fund funded?

Edited to add: Do you participate in a 457b? Is there a match?
Thanks for your comments and questions.

One reason I can retire so young is that I rolled about 100K from my 457b and 403b into the pension about 5 years ago to buy 5 years of Air Time credit. See the linked thread:

viewtopic.php?t=134082

I've been fully funding the 457b as well as a 403b ever since and between me and the wife have closer to 600K in our other retirement accounts.

My agency is smaller state agency, about 60 commissioned. There is a chief, one major, and two captains above me so not likely to get one of those spots as everyone seems to be too happy to stay forever here in the higher ranks. I'm in college right now finishing my degree in finance at the only major (football powerhouse) university here. I will more than likely work at something in that field when I retire after going to school for a few semesters full time.

My system allows one to return to normal contributing status after finishing the DROP. So yes that's an option. I'll get medical insurance in retirement at the same cost state employees pay now. My plan to deal with the loss in pension spending due to inflation was to let our portfolio grow for the first 20 years of my retirement and then tap into it as inflation eats into my pension income stream. My wife is a nurse and she plans on working at least another decade before hanging it up. House will be paid off in a 4 years so that will help.

Oh, the pension is about 70% funded. There is a law requiring it to be fully funded by 2029, but we will see.
I read your other thread. If I were in your shoes I would go to DROP. Work it for the 3 years. During that 3 years I would continue to go to school for career #2. Continue to max your 457b and DW's 401. If one of the dinosaurs above me retired I would go for the promotion and go back to regular duty for the higher pay years to increase what my pension is based on and get a couple more years of service credit. With a wife that is an RN, low debt level, decent other savings, LCOL, and a potential new career I think that whatever you do it will turn out well.

I was an OT nut my whole career and you sound like you get your fair share. Some guys become dependent on it to pay the bills. I used it for the kids college funds and vacations. Try to wean yourself off it as you get closer to retirement. You can take the DROP as a lump sum when you retire right?
Lincoln 3 EOW!

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Re: State Pension DROP decision

Post by ofcmetz » Wed Feb 06, 2019 11:23 pm

sergeant wrote:
Wed Feb 06, 2019 9:45 pm
I was an OT nut my whole career and you sound like you get your fair share. Some guys become dependent on it to pay the bills. I used it for the kids college funds and vacations. Try to wean yourself off it as you get closer to retirement. You can take the DROP as a lump sum when you retire right?
Hey Sergeant, thanks for the thoughts and comments. Yeah, when you finish DROP, it transfers to you as a lump sum.

As far as OT goes, I've seen so many get themselves in the position where they needed it to pay for debt and house payments, and other toys. I've used it to save, pay down my house, and some really nice vacations.
Never underestimate the power of the force of low cost index funds.

inbox788
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Re: State Pension DROP decision

Post by inbox788 » Fri Feb 08, 2019 4:29 pm

ofcmetz wrote:
Wed Feb 06, 2019 2:18 pm
Annual Pension amount: $56,548 (This would be the annual amount deposited into the DROP account for 3 years).

Total economic value of DROP account after three years: $169,644 (3 years of pension) + $21,000 (three years of pension contributions) = $190,644

Annual Pension amount in 3 years if I don't do DROP: $68,998

Difference between pensions amounts: $12,450 a year.

I went to immediateannuities.com and valued the income stream of $12,450 a year at approximately $254,000.

Should I just compare the $254,000 to the $169,644 directly? The DROP money doesn't start earning interest until the 3 year period ends. Any thoughts, questions, and comments are welcome.
What are your plans beyond 3 years? Do you begin receiving the $69k pension in 3 years, even if you keep working elsewhere? Would you be financially restricted (benefits significantly curtailed) from working for the state? How many years of service do you have and when does the pension max out?

Are you saying you can't invest the DROP account funds until after 3 years and you don't receive any interest at all in this program?

How does a increase in pay or promotion impact retirement pension amount?

If you haven't maxed out retirement service years and salary, the program doesn't seem to make much sense. If you're young enough, it does allow you to take more chances investing yourself aiming for a higher return, but it's more risky too. Otherwise, I don't see why you'd choose it. BTW, can you leave the funds in the DROP account or do you have to deal with the potential tax issues in 3 years?

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Re: State Pension DROP decision

Post by ofcmetz » Sat Feb 09, 2019 8:25 am

inbox788 wrote:
Fri Feb 08, 2019 4:29 pm

What are your plans beyond 3 years? Do you begin receiving the $69k pension in 3 years, even if you keep working elsewhere? Would you be financially restricted (benefits significantly curtailed) from working for the state? How many years of service do you have and when does the pension max out?

Are you saying you can't invest the DROP account funds until after 3 years and you don't receive any interest at all in this program?

How does a increase in pay or promotion impact retirement pension amount?

If you haven't maxed out retirement service years and salary, the program doesn't seem to make much sense. If you're young enough, it does allow you to take more chances investing yourself aiming for a higher return, but it's more risky too. Otherwise, I don't see why you'd choose it. BTW, can you leave the funds in the DROP account or do you have to deal with the potential tax issues in 3 years?
Thanks for the questions, I'll try to answer them now.

In 3 years, I'll probably be a full time college student for a few semesters to finish my undergrad in finance. Then I will seek employment in that field or just live the FIRE life while volunteering.

My pension is at a point that I would receive it immediately upon separation from employment. I can't work for this state and still receive it though. The 69K is the amount I'd get and immediately receive in 3 years.

Yes, the DROP funds can't be invested or earn interest until after the 3 years and it ends, which makes it much less desirable. Right now my pension is based on a highest continuous five year average pay so a raise or promotion do affect it. In DROP everything is paused and promotions and raises don't count towards that average.

Yes, you can leave funds in DROP until 70.5 years old where they are subject to the same rules as a 401K.
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Re: State Pension DROP decision

Post by Carl53 » Sat Feb 09, 2019 8:54 am

The 69k is the pension in three years if you do not do DROP and, work the next three years or not work?

The 58.5k pension is what you receive if you retire in 6 months and if you choose it could go into DROP for 3 years.

Do you also pay into the SS retirement?

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Re: State Pension DROP decision

Post by ofcmetz » Sat Feb 09, 2019 10:33 am

Carl53 wrote:
Sat Feb 09, 2019 8:54 am
The 69k is the pension in three years if you do not do DROP and, work the next three years or not work?

The 58.5k pension is what you receive if you retire in 6 months and if you choose it could go into DROP for 3 years.

Do you also pay into the SS retirement?
That is correct. 58.5K if I retire in 6 months and as I keep working it goes up for the next three years after that to 69K. Although I would have the option of leaving at anytime.

We don’t participate or contribute in social security.
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Re: State Pension DROP decision

Post by inbox788 » Sat Feb 09, 2019 12:55 pm

ofcmetz wrote:
Sat Feb 09, 2019 8:25 am
Right now my pension is based on a highest continuous five year average pay so a raise or promotion do affect it. In DROP everything is paused and promotions and raises don't count towards that average.

Yes, you can leave funds in DROP until 70.5 years old where they are subject to the same rules as a 401K.
Sounds like a good place to keep the funds tax deferred, so you don't have to actively look for a new place to keep them, but if you wind up using it, you may want to verify there are good low cost index funds in the program and/or look for ways out.

One figure that may indirectly impact the pension calculations is the employer contribution that's not seen, maybe up to another 9.5%. But that didn't account for the big difference in pension over 3 years (68,998/56,548 = 22% increase -- you can't afford not to keep working!). I'm guessing the lower salary 4-5 years ago used in the calculation accounts for the rest of the difference. How does the forward calculation make future adjustments? Flat salary vs estimated increases using average or past growth vs actual contract rates and are they similar enough or very different?

I'm guessing if you look forward next 3 years (years added) vs. 3-5 years ago (years dropped), there will be a substantial difference, so DROP doesn't make sense for you. It would make more sense for those that have peaked out salary and were fairly sure there wouldn't be a promotion increase.

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Re: State Pension DROP decision

Post by ofcmetz » Sat Feb 09, 2019 6:20 pm

inbox788 wrote:
Sat Feb 09, 2019 12:55 pm

One figure that may indirectly impact the pension calculations is the employer contribution that's not seen, maybe up to another 9.5%. But that didn't account for the big difference in pension over 3 years (68,998/56,548 = 22% increase -- you can't afford not to keep working!). I'm guessing the lower salary 4-5 years ago used in the calculation accounts for the rest of the difference. How does the forward calculation make future adjustments? Flat salary vs estimated increases using average or past growth vs actual contract rates and are they similar enough or very different?

I'm guessing if you look forward next 3 years (years added) vs. 3-5 years ago (years dropped), there will be a substantial difference, so DROP doesn't make sense for you. It would make more sense for those that have peaked out salary and were fairly sure there wouldn't be a promotion increase.
Thanks inbox.

Yeah, I got a few raises (a 10% and a few smaller ones) these last two years that aren't totally filling the five years that average, but will be over the next 3 years. The higher average that it will be calculating on does make quite a difference it seems. Our multiplier is 3.33% per year times that five year average. What you are stating is kind of what I thought, that I can't afford not to work and that a 22% increase pushes the decision towards not doing DROP.

I think DROP probably makes since for those who have been topped out in their pay range for years and aren't having a changing 5 year average like I am. There are possibilities of more raises as well that I didn't price into my numbers as they are unknown amounts.
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Carl53
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Re: State Pension DROP decision

Post by Carl53 » Sat Feb 09, 2019 6:55 pm

Almost half of the 22% is due to the three more years. 3 X 3.33%. That is why it is difficult to bail when you see how much one more year adds.

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Re: State Pension DROP decision

Post by furnace » Sat Feb 09, 2019 9:31 pm

ofcmetz wrote:
Wed Feb 06, 2019 8:38 pm
I'm in college right now finishing my degree in finance at the only major (football powerhouse) university here. I will more than likely work at something in that field when I retire ...
How about starting a personal website for the brave men and women in blue (BlueCoatInvesting.com or GunningforRetirement.com) :sharebeer

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Re: State Pension DROP decision

Post by ofcmetz » Sun Feb 10, 2019 2:19 pm

furnace wrote:
Sat Feb 09, 2019 9:31 pm
ofcmetz wrote:
Wed Feb 06, 2019 8:38 pm
I'm in college right now finishing my degree in finance at the only major (football powerhouse) university here. I will more than likely work at something in that field when I retire ...
How about starting a personal website for the brave men and women in blue (BlueCoatInvesting.com or GunningforRetirement.com) :sharebeer
Haha, good names for sure. Unfortunately my experience is that too many cops use the fact that they are getting a pension to not save any thing else or at most very little towards their retirements. I could be way off here but when the subject of retirement comes up at work it’s almost exclusively about “the pension”.
Never underestimate the power of the force of low cost index funds.

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