If you’re in DROP, then you’ve decided to work for five more years and then terminate your service completely at the end of that term. Several deputies we work with have done a fantastic job of saving on their own for retirement. They’ve used their 457 Deferred Compensation plans, IRAs, Roth IRAs, brokerage accounts, and spousal accounts to do it. In short, they’ve used virtually every vehicle to get the job done. In a few cases, I’ve actually been able to report that they can retire early! Unfortunately, the good news creates an unforeseen problem. Now you’re faced with the knowledge you can quit today, do you? Here are your options.
You can do the obvious and stick it out. This can be tough to do in more ways than one. Your DROP account increases the closer you come to completing your five year period. Of course you might also be just one bad day away from terminating altogether. Knowing that you’ve saved enough to retire gives you options, but one of them is the ability to make a hasty decision.
You can leave DROP before your five years is complete, take the DROP money you’ve accrued and walk out the door. Be aware that the amount you receive from DROP isn’t based on a uniform earnings schedule and actually ramps up the closer you come to finishing the full five.
Finally, you can terminate employment, leave DROP early, forfeit the money you’ve accrued, and switch to the investment plan. This option may sound nuts to some people, but for others it makes a lot of sense. Those with whom we work that have chosen this option prefer to take control of their investment strategy to either outperform their pension benefit and Cost of Living Allowance or prevent the state from making cuts to their benefits during retirement.
Contrary to popular belief, you are not guaranteed to receive the same payment and COLA from your pension plan that has been projected for you by the system. Anytime the outstanding obligation of FRS to its participants is less than 100% funded, the state is able to make any changes to the program it deems necessary to maintain solvency, including, but not limited to, benefit reduction. Anytime a pension plan is less than 80% funded, it’s considered to be in in trouble.
"When the FRS is less than 100 percent funded, the legislature may reduce future benefits to lessen plan liabilities, or may raise employee contributions to increase funding. The legislature may make changes to FRS at any time."
The FRS rose from 1985 through 2000, but has steadily declined ever since. While the program remains over the 80% threshold, the 14 year downward trend presents a problem and has caused many to lose confidence that the system will continue to pay benefits at their expected rate. As more and more people retire on the FRS, the financial burden of making payments to these people increases. In order to keep up with the benefit demand, the system must make up the difference from investment returns and the contributions of employed participants.
The FRS fund has done well overall beating its investment benchmark, but the benchmark is custom made and able to be changed each year by state appointees. If we were to substitute the FRS benchmark with the S&P 500, the fund would be falling short. The reason for this is that your pension fund must be invested with less risk than the S&P 500 which seems to make sense, unless the funds don't make enough money to support the system.
Each of the options available to you during DROP has risks and rewards. Each need to be carefully considered. Be sure you’re getting all the pertinent information to help you make the best choice you can for yourself. Consult an independent financial advisor who works for you and acts as your fiduciary to help you analyze your choices. Call us today with any questions you might have.