Exiting the Deferred Retirement Option Program (DROP) is a major milestone for Florida Retirement System (FRS) participants, but it also brings important financial decisions that can shape your long-term retirement security. After years of accumulating pension benefits in your DROP account, the transition from employment into retirement requires careful planning to ensure you make the most of your savings and align your benefits with your financial goals. To help you prepare, here are key financial decisions before exiting DROP that all participants should consider. 

1. Decide How to Handle Your DROP Payout 

One of the biggest financial decisions you’ll make when exiting DROP is what to do with your lump sum payout. You have several options, and each comes with different tax and financial planning considerations. 

• Rollover to a Qualified Retirement Account – Rolling over your payout to a 403(b), IRA, or other qualified account allows your funds to continue growing tax-deferred. This option helps spread your tax liability over time by controlling how much you withdraw annually. 

• Take a Lump Sum Payment – Receiving your payout as cash gives you immediate access to funds, but the full amount is subject to federal income tax. This could push you into a higher tax bracket. 

• Combination of Both – You can roll part of your payout into a retirement account and take the remainder as a lump sum for immediate needs. 

Consider Your Immediate Needs and Long-Term Plans 

Evaluate whether you need some of your DROP funds right away — for home improvements, paying off debt, or medical expenses — or whether keeping the funds invested for future income better aligns with your goals. 

2. Review Your Pension Payment Option 

When you entered DROP, you selected one of four FRS pension payment options. This choice determines how much income you receive each month and whether your spouse or beneficiary will receive benefits after your passing. 

Before you exit DROP, review your selected pension option to make sure it still fits your goals. While you typically cannot change your selection after you retire, understanding how your choice fits into your broader retirement income plan can help you coordinate other sources of income more effectively. 

3. Plan for Taxes on DROP and Pension Income 

Your DROP payout, monthly pension payments, and other retirement withdrawals will all contribute to your taxable income. Understanding how this affects your tax bracket and overall liability can help you make smarter distribution decisions. 

Tax Considerations: 

• DROP Payout Taxes – Unless rolled into a qualified account, your payout is subject to federal income tax. 

• Pension Income – Monthly pension payments are taxed as ordinary income. 

• Social Security Taxes – Depending on your total income, a portion of your Social Security benefits may be taxable. 

Working with a financial professional can help you develop a withdrawal strategy that helps manage your tax liability over time. 

 4. Evaluate When to Claim Social Security 

Some DROP participants exit the program before they’re eligible to claim Social Security. Others may qualify right away. Deciding when to start your benefits can significantly affect your overall retirement income. 

• Claiming Early (Age 62) – Provides lower monthly benefits but may help cover expenses if you need the income right away. 

• Waiting Until Full Retirement Age (66-67) – Provides a higher monthly benefit and reduces the risk of your benefits being subject to reductions if you continue to work. 

• Delaying Until Age 70 – Increases your monthly benefit significantly, which can improve your long-term income security. 

Consider how your DROP payout, pension, and personal savings fit into your plan to determine the optimal Social Security claiming strategy. 

5. Assess Your Health Insurance Options 

Once you exit DROP and leave FRS employment, your health insurance situation may change. If you’re not yet eligible for Medicare at age 65, you’ll need to determine how to cover your healthcare needs. 

Common Options: 

• Continue Coverage Through Your Employer (if eligible) – Some FRS employers offer retiree health coverage. 

• COBRA Coverage – Temporary continuation of your employer plan. 

• Marketplace Health Insurance – Coverage options through state or federal marketplaces. 

• Medicare Enrollment – If you are 65 or older, you can enroll in Medicare, with options for supplemental coverage if needed. 

Understanding these options before you leave helps ensure there are no gaps in your health coverage. 

6. Review and Update Your Estate Plan 

Your DROP benefits, pension, and retirement savings are all part of your legacy. Before you exit DROP, make sure your estate plan reflects your current wishes and financial situation. 

Key Updates to Consider: 

• Review Beneficiary Designations – Confirm they are accurate for your DROP account, pension, and retirement accounts. 

• Update Your Will and Trusts – Ensure your documents account for all assets, including your DROP benefits. 

• Consider Trusts for Asset Management – If you want to provide structured distributions to heirs, you might want to explore trust options. 

• Review Powers of Attorney – Make sure your financial and healthcare documents are up to date. 

7. Develop a Post-DROP Spending and Investment Plan 

Once you exit DROP, you’ll need a clear plan for how your DROP payout fits into your broader investment strategy and how much you can safely spend each year. 

Key Considerations: 

• How much income you need from investments each year. 

• Balancing withdrawals with investment growth to maintain savings longevity. 

• Planning for major expenses, such as home repairs, medical needs, or helping family members. 

Having a clear post-DROP plan helps you stay on track financially while maintaining flexibility for changing needs. 

How BENCOR Supports Your DROP Transition 

BENCOR has been helping Florida public employees navigate DROP and retirement planning for nearly 30 years. Our team understands the unique decisions participants face before exiting DROP and can help you develop a financial strategy that fits your goals. Whether you’re evaluating payout options, reviewing your pension, or preparing for taxes and healthcare costs, BENCOR offers personalized guidance to help you make informed choices. 

Final Thoughts on Financial Decisions Before Exiting DROP 

The transition from DROP into full retirement requires careful financial planning to align your benefits, savings, and income sources with your long-term goals. By reviewing your payout options, tax considerations, healthcare coverage, and estate plan ahead of time, you can create a smooth and confident transition into retirement. 

If you’re preparing to exit DROP, you’ll need guidance and resources designed specifically for Florida Retirement System participants. Please schedule a free consultation with our team at BENCOR DROP support today to learn more.