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What is Deferred Retirement Option Program?

As an employee of a state or local government, you may have a unique option available to you. You may be able to drop at least some of your retirement assets into another investment bucket. Many state and local governments have recently adopted Deferred Retirement Option Programs, which are commonly referred to as DROP plans. A DROP plan is a plan that allows any employee covered by the state or local government’s pension plan to begin taking early retirement benefits from your pension plan account without terminating your employment until some future date; a date that may be as far away as five years into the future.
Your employer can tell you if you are eligible to participate in a DROP plan. This option is generally extended to every employee who is (1) covered in the pension plan and (2) either eligible for retirement (based on years of service and age) or has accumulated the maximum benefit available under the pension plan. If you are eligible for your DROP program, you may have an important decision to make; a decision that may impact your income in your retirement years. The DROP plan option allows you to continue to earn a salary and, at the same time, take a more active role in planning for your retirement goals.
In a traditional pension plan, your retirement benefit is based on a fixed formula. DROP plan retirement benefits are typically based on a fixed 5% rate of return. Neither retirement benefit is based on the performance of your underlying investments, which could be a concern. Different retirement goals require different investment plans and a fixed-income only approach may not be the best plan. This is especially true if a growth component is important to achieving your retirement goals.
Having a DROP plan adds flexibility, it may allow you to roll your pension benefit to an IRA where you may select from any number of investment options and may modify your asset allocation when appropriate. This means you may select from different investments that are more suitable based on your needs in view of your retirement goals.
It also means that the value of your retirement benefit is not fixed. It will be equal to the value of your investments. Therefore, it is important to become informed as to how a fluctuation in the value of your investments may impact your retirement goals. For assistance in evaluating the advantages and disadvantages of your DROP plan or for information on how a fluctuation in the value of your retirement savings may impact your retirement plan, please contact your Financial Advisor for an appointment.
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