DROP for Firefighters: How to Time Your Decision to Maximize Retirement

If you're a firefighter nearing retirement, you've probably heard about your department’s Deferred Retirement Option Plan (DROP). While DROP can be an excellent financial tool, timing and strategy are everything. Making the right decision about when to enter DROP could significantly impact your retirement income and overall financial security.

Here’s what you need to know—and how to decide when it’s best to start.

Understanding DROP: The Basics

DROP allows you to effectively "retire on paper" while continuing to work and earn a salary. Your pension payments are deposited directly into a DROP account during this period. Essentially, you stop accruing pension credits but accumulate a substantial lump sum in a separate account, often earning guaranteed interest.

For example:

• If your pension is $80,000/year and you enter a 5-year DROP, you could accumulate roughly $400,000 in your DROP account.

• If your DROP earns interest (often around 2-4%), your savings could grow even further.

However, DROP isn’t right for everyone—and entering it too early or too late can cost you.

Here’s how to determine the optimal timing based on your current situation.

When Should You Start Your DROP?

If You’re Well-Prepared Financially (and Close to Retirement)

When: Enter DROP as soon as you hit your maximum pension calculation (often between 25-30 years of service).

Why: If your retirement savings are already solid—such as fully funded 457(b) plans, Roth IRAs, or other investments—DROP is effectively an additional boost to your nest egg. Starting DROP early when your pension amount peaks ensures you’re maximizing the money you can accumulate before fully retiring.

Best Practice: Run numbers with your advisor to confirm your pension is maximized at this stage.

Example: Kevin, age 50, has 30 years of service and already maxed out his 457(b). His pension calculation won’t improve significantly if he keeps working. Entering DROP now lets him capture pension dollars immediately into DROP, growing them tax-deferred while continuing to earn a salary.

If You’re Partially Prepared Financially

When: Consider delaying DROP entry until your pension calculation reaches an optimal level or until your supplemental retirement savings catch up.

Why: If your savings still need a boost or you haven’t yet maxed your pension calculation, waiting 2–3 years could improve your final average salary, giving you a higher pension—and consequently, a larger DROP balance.

Considerations:

• Will additional years significantly increase your pension?

• Could extra time allow you to catch up on retirement savings?

• Is working a few more years realistic for your health and lifestyle?

Example: Sarah, age 49, has 25 years on the job. She hasn’t fully funded her 457(b) yet, and her pension calculation will rise significantly if she works 3 more years. By waiting, Sarah improves her pension and DROP contributions, providing a much more secure financial position.

If You’re NOT Financially Ready (Still Building Your Savings)

When: Hold off entering DROP until you’re sure your pension calculation is optimized and you've built additional retirement savings (401(k), 457(b), Roth IRA).

Why: Entering DROP locks in your pension. If your current pension calculation is low, you lose out on potential growth by entering prematurely. DROP is permanent; once you start, you can't go back to accruing additional benefits.

Considerations:

• Are you maximizing contributions to other retirement accounts first?

• Have you evaluated your monthly retirement income needs?

• Are you clear on your healthcare coverage strategy if retiring early?

Example: Maria, age 48, has 20 years of service but has only modest savings outside her pension. Entering DROP now would leave her with a lower pension for life and fewer savings at retirement. By waiting 5–7 more years, she significantly improves her financial picture, maximizing her pension payout and DROP potential.

Biggest DROP Pitfall: Taxes ("The Harley Fund")

Scenario: You accumulate $400,000 in DROP and decide to take a lump sum payment at retirement, thinking of it as your "Harley fund." Without proper planning, the IRS could claim 20–40%, significantly shrinking your payout.

• Avoid the Tax Trap: Roll your DROP into a qualified retirement account (IRA or 457(b)) to preserve your funds and manage tax liability strategically over your retirement.

Next Steps to Optimize Your DROP Decision:

• Run the Numbers: Calculate your pension with different DROP start dates. Understand your total benefits clearly.

• Consider Taxes Carefully: Develop a strategy with a professional to protect your DROP payout from tax pitfalls.

• Build a Comprehensive Plan: Your DROP decision should fit into your broader retirement strategy, including healthcare, lifestyle, and family security.

The Bottom Line: DROP is a powerful but permanent decision. Don’t go in blind. Understanding when and how to leverage DROP can secure your retirement, reduce stress, and protect the financial future you’ve earned.

Need guidance on making your DROP decision?

Carlson Planning specializes in firefighter retirement planning.

Schedule your complimentary Firefighter DROP & Pension Review to make sure you’re getting the most from your hard-earned retirement benefits.

Schedule My Free DROP Revieww

Disclosure:

This information is provided for educational purposes only and should not be considered financial, tax, or legal advice. Individual circumstances vary. Consult your financial, tax, or legal professional before making any retirement or financial decisions. Carlson Planning does not provide tax or legal advice.